Afterthoughts to the end of the party

If you want to win back the trust of people, you have to protect them from the excesses of the financial world

by Marc Chesney*

(18 April 2023) The lights are out: For Credit Suisse (CS), the party is over. Members of the executive board and the board of directors temporarily leave the muted green carpet of the casino financial world. They do so with serious faces, full pockets and light hearts. Expressions of regret and apologies fit the occasion. They would have done their best.

They were paid handsomely for it.

Let the public believe it: only bad luck, rumours and even conspiracies from abroad got in the way of their business model, their skilful risk management and their ability to “regain the confidence of the financial markets”.

Exasperatingly, we have been repeatedly told that what is needed now are these vast sums of money to regain the confidence of the financial markets that has been so sorely lacking of late and has sometimes deprived us of sleep.

However, the trust of citizens and taxpayers is unfortunately not on the agenda. To win back the trust of people, you have to protect them from the excesses of the financial world and its poker players. This, however, is not on the agenda either.

Let us review the chronology of events.

About 35 years of financial casino

The takeover of First Boston by Credit Suisse in 1988 marked the bank’s entry into the league of the casino financial world with large-scale bets. A change in the business model was on the horizon. Instead of simply collecting interest on loans made and managing assets, it wanted to focus on mergers and acquisitions and speculative derivatives trades conducted in huge trading areas. The aim was to realise large profits as quickly as possible. Any large risks would ultimately be borne by the taxpayers. Worldwide, the new business model developed rapidly and became the benchmark for all big banks.

Fifteen years of deliberate blindness

The financial crisis of 2008 and the collapse of the US Bank Lehman Brothers clearly demonstrated the destructive and damaging nature of this model.

A cocktail of complex, toxic and opaque financial products, enormous debt and grotesque remuneration for the top echelons of financial institutions and their traders, and at the same time a boundless cynicism have brought the system to the brink of collapse.

Nevertheless, most politicians and academics who specialise in financial and economic issues looked the other way with blinkers. They forgot to do their duty and look after the interests of taxpayers and citizens. Thus, the unbridled financial world could continue to do its business unhindered, to the delight of its lobbyists.

I have been drawing attention to these problems since 2018: the bankruptcy of Lehman Brothers was the bankruptcy of a system (“Neue Zürcher Zeitung”). The financial casino mentality and the remuneration of the irresponsible CS managers were scandalous (“Tages-Anzeiger”). In 2020 alone, the nominal value of these complex financial products, also called derivatives, at CS amounted to about 25 times the Swiss gross domestic product!

A week of panic

From 13 to 19 March 2023, confusion and panic reigned. On 15 March, the Swiss National Bank (SNB) and the regulator Finma spoke words of reassurance and all the media spread this: “Credit Suisse meets the capital and liquidity requirements for systemically important banks.” This did not prevent CS from applying for a CHF 50 billion SNB loan only hours after its reassuring statement, supposedly to reassure financial markets. The reassurance of the financial markets lasted only a few hours. 50 billion was obviously not enough reassurance.

The speculators on the financial markets wanted more.

Two days to find a solution

Under pressure from the US government, which feared a further spread of the domino effect triggered by the collapse of the Silicon Valley Bank, a solution was hastily concocted on the weekend of 18 and 19 March with little transparency: Union Bank of Switzerland (UBS) could take over CS for a symbolic price. Even emergency law was applied to keep the most important contractual agreements secret.

All regulations introduced since 2008 – for example for insolvency proceedings to save the Swiss business – were ignored. A colossus was created that will in future control Switzerland instead of being controlled by it. The balance sheet of this new UBS will be about two and a half times the Swiss gross domestic product (GDP), the nominal value of the outstanding derivatives 30 to 40 times this sum.

Ninety minutes of communication exercises

The last act was a farce that could be laughed at if it were not tragic. It consisted of the main actors in this affair sitting together at the same table. They were the same ones who had declared a few days earlier that Credit Suisse met the capital and liquidity requirements for systemically important banks.

At the press conference on 19 March, they declared that the takeover was the best solution for Switzerland to restore the confidence of the financial markets.

Beyond the case of CS, it is about

• the bankruptcy of the financial system, which has become a casino;
• the failure of a political elite that let everything happen for the last 15 years;
• the failure of the academic world in this field, which showed a misplaced indulgence towards the financial institutions.

Citizens must remain vigilant or the parties and bankruptcies will continue.

* Marc Chesney, born in 1959, is Professor of Mathematical Finance at the University of Zurich. He takes a critical view of the financial markets and the big banks. He is the author of several articles on the dangers associated with the size and complexity of the financial sphere. Marc Chesney is a member of Finance Watch.

Source: https://www.infosperber.ch/wirtschaft/konzerne/credit-suisse-eine-nachlese-zum-ende-der-party, 7 April 2023

(Translation “Swiss Standpoint”)