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The Fall Of Credit Suisse

The president of the largest Swiss bank received a distress phone call last week. On the other end were three senior Swiss officials, delivering an ultimatum.

For Switzerland, the stakes were enormous. Its economic model and national identity, nurtured for centuries, were built around the security of world riches. It was about more than a single bank.

It was Thursday, just 24 hours into the intensifying banking crisis, and Credit Suisse was hemorrhaging deposits. The 167-year-old domestic institution appeared days away from failure. To keep it going through the weekend, the central bank was on track to triple its $50-billion-plus lending facility.

U.S. and British regulators called on their Swiss counterparts to ensure that they did not allow Credit Suisse to crash the world markets. 

Finance minister Carin Keller-Sutter, Central Bank chief Thomas Jordan, and Financial Supervisory Authority chief Marlene Amstad all called Colm Kelleher, the chairman of UBS, to lay out two options:

Buy out Credit Suisse, with no way of fully understanding its massive, complex balance sheet—or let it collapse into an extended debacle, which UBS executives themselves feared might destroy Switzerland’s credibility as a center of global banking. On WhatsApp, Swiss diplomats asked one another nervously if they should transfer deposits out of Credit Suisse.

After a flurry of frenetic calls and a government-arranged meeting in Bern, UBS agreed to absorb Credit Suisse’s $3.2 billion. To close the deal, the government, which had promised in the wake of the 2008 crisis to never again use government funds to bail out the banks, rushed in with emergency legislation to do just that.

The quick collapse of Switzerland’s second largest lender has roiled financial markets, adding a global dimension to a banking crisis that erupted on the west coast of the United States with the collapse of Silicon Valley Bank. 

It is far from clear whether the Swiss have completely contained the damage. Having two top banks is seen as the failsafe for maintaining Switzerland’s standing on global markets.

Forced marriage left it with just one, and has shook up the average Swiss person and his or her belief in the country’s economic and political model.

The Central Bank and Finance Ministry, and the Finma, the Swiss financial regulator, did not comment further than to issue a public statement. Swiss bankers and officials involved in the negotiations, and Swiss and other Western diplomats, provided details about the bailout.

This Alpine country has always seen itself as Europe’s unique case: a neutral facilitator, and an otherwise discreetly run democracy, its banks offering discreet safe havens for distant investors and the wealthiest people on earth.

Its banking system is five times larger than its GDP, larger than that of most economies. UBS, combined with Credit Suisse, has a balance sheet that is twice as big as Switzerland’s economy. For years, Switzerland’s exceptionalism has been chipping away.

After 2008, the United States passed laws that required Swiss banks to hand over the details of American customers to the Internal Revenue Service, dealing a hammer blow to its banking secrecy. 

Relations with the European Union, the biggest power surrounding the landlocked Alpine country, are stressed after Switzerland pulled out of long-running talks about binding it closer to the trade group.

It is struggling to protect its 200-year-old policy of neutrality in the face of Russia’s war with Ukraine. Moscow put Switzerland on its list of “unfriendly countries”  last year after the landlocked country, under pressure from its larger neighbors and the Biden administration, joined the EUs sanctions on Vladimir Putin and his closest allies.

By the same token, it refused to give permission to Germany, Spain, or Denmark to export Swiss military hardware to Ukraine, sparking debate about whether Switzerland’s embrace of neutrality is hurting its reputation in Europe. 

The country, once an indispensable negotiating ground where major powers agreed on conflict resolutions, has been marginalized by Turkey as a mediator of the Ukrainian conflict. Decades of economic and diplomatic relations with Russia have gone cold in Moscow, but become liabilities in the West.

Businessmen and politicians used the lender to underwrite Swiss railway lines, digging tunnels across the Alps to link the mountain-ringed country to the rest of Europe. Stretching back into the days of Nazi gold, Credit Suisse has held cash from suspect clients along an A-list list of billionaires, sovereign-wealth funds, and families.

In a 2014 settlement with the US Department of Justice, the bank paid $2.6bn and admitted that its bankers had delivered cash by hand and destroyed documents to aid Americans hiding undisclosed wealth.

A banker in London took bribes to secure loans in Mozambique. Another falsified clients signatures and lost them hundreds of millions. More recently, Credit Suisse lost over $5 billion in 2021 when Archegos Capital Management, a family-owned firm, went bankrupt, marking the beginning of the fall to UBS. 

Through scandals, Swiss banks, including Credit Suisse, have continued to maintain the image of strongholds of the wealthy. Credit Suisse’s latest leadership team includes a number of people who joined it from UBS, including chairman Axel Lehmann and CEO Ulrich Korner.

They made new commitments to cleaning up the mess, people with knowledge of their thinking said, and saw returning Credit Suisse to health as a kind of state service. Even after raising $4 billion in capital late last year to undertake deep restructuring, Credit Suisse was trading at only 20% of its book value. Customers pulled $120 billion out of the bank last fall.

Near Credit Suisse, in downtown Zurich, executives from UBS were getting ready in case they were called upon for assistance. For years, executives and UBS management consultants have been mapping out scenarios, and what UBS would ask of the government, as a preventative measure. It had been Switzerland’s problem child before.

The result of a merger between Swiss Bank Corp. and Union Bank of Switzerland in the late 1990s, UBS expanded quickly during the banking boom of the 2000s, opening up a trading floor bigger than a football field in Stamford, Conn. 

It needed Swiss state aid to rescue it during the financial crisis in 2008 because it had lost money on toxic securities. Chastened, it has pulled back from trading to concentrate on managing its wealth.

The president and CEO of Credit Suisse was wary of calls from Swiss authorities. What the markets heard was that the largest shareholders in Credit Suisse were not going to support this. Mr. Lehmann, who was in the same conference in Riyadh, was quick to return to Zurich. 

Credit Suisse urged the Swiss National Bank and the Finma to reassure markets, offering a message of support. Credit Suisse received more than $50bn in liquidity lines from the central bank on Wednesday evening, with the regulator saying that they had met Switzerland’s capital and liquidity requirements.

Credit Suisse customers continued to withdraw deposits on Thursday. Authorities moved to provide more than $150 billion in extra liquidity to the bank, said Finance Secretary Ms. Keller-Sutter.

The government did not disclose those moves, hoping to keep Credit Suisse going through the weekend, when it might be able to come up with a permanent solution. Stung from having had to bail out UBS earlier, Swiss authorities have a blueprint for how they will deal with large banks should they fall into distress. 

To avoid tapping taxpayers, the country’s financial regulators quickly would have forced losses as necessary on shareholders and bondholders. That decision was rejected in Credit Suisse’s case because authorities worried that would send panic through the banks investors worldwide, Mr. Jordan, the central bank’s governor, said Sunday.

UBS chairman Colm Kelleher received a phone call on Thursday from a Swiss official, the three-man panel representing Finma, the Swiss national bank and the finance minister. 

The message was clear: UBS will either buy out Credit Suisse, or the latter will fail, possibly taking down UBS and other banks in the aftermath. Mr. Kelly, who is of Irish descent, joined UBS in April as its president, following a long career at Morgan Stanley, including a stint as its CFO during the financial crisis of 2008. 

His team has been on an aggressive roll, helped by a plan developed under the leadership of the previous UBS president, Axel Weber, for how the combined UBS-Credit Suisse might look. 

The chairman and CEO of both UBS and Credit Suisse met quickly on Friday at UBS with the Finance Minister, who was told that the two were expected to conclude a deal by Sunday.

Credit Suisse’s biggest shareholders in the Gulf, including the Saudi National Bank, are worried about losing all of their investments.

Arthur Wilmarth, professor at the George Washington School of Law, was not surprised by the collapse of Credit Suisse. 

“I think it was naive for most people to think that it might be contained just with a couple of regional banks, because clearly there are still shocks reverberating within our own banking system,” Wilmarth said. “And this would indicate that it could potentially spread to banks of a very large size.”

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