Fintech Horror Stories - Behind the Curtain at Credit Suisse (Part 1)

A former employee shares their experience at the embattled firm.

Today’s newsletter features an interview with a former employee who chose to go on the record about their experience at Credit Suisse. When the recent events of the last week and a half took place with the firm, we got in contact with this individual and decided to conduct a two part interview on how they saw things from the inside and why the ultimate end of the firm via purchase by UBS is not a surprise.

In order to protect the identity of this individual they remain anonymous. Here’s part one. Part two will be featured next week.

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What was your role with the organization?

I worked with product, control, risk and analytics teams; specifically supporting the middle office; my team partnered with the Prime Services desk.

How do you feel about the purchase (by UBS)?

It was a real surprise to me, specifically the speed of how quickly it was pushed through over a weekend. It has caught a lot of the people I’ve talked to who are still there by surprise. They still don’t know what it means for them. It’s kind of sad - looking back, I always thought this was something that could happen, but now it’s just gone. It doesn’t seem real; it’s just over now.

They’ve been around since the 1800s, right?

Yeah, they’ve been around for over 160 years and I remember the 160th anniversary being a big deal for them. It was such a prestigious institution - we pride ourselves on what was called “Swissness” - the quality of exceptional service - and that was something that was engrained in the company ethos. It’s funny that what finally brought this bank down was a series of really bad choices that just led to the degradation of customer support and confidence, and I think they lost that Swissness - they weren’t looked at as professional and instead were seen as more of a liability and so customers decided to take their money elsewhere.

Yeah - what struck me was in the face of the auditor opinion, which is where I got really into it, there was a lot of almost delusional sort of defiance.

That was really the mentality that started to take hold after the series of mishaps - “everything’s fine, everything’s going to be okay” - some people sent me that meme of the dog in the room with the saying “this is fine” - and I think that’s the attitude a lot of them were taking. One of the reasons I left is that I didn’t see a road to profitability. Specifically, I didn’t really see them taking the right steps to course correct. It was interesting working with the Prime Services team - they were very proud of the business line - to them, it was “riskless” and all they got was fees. Often they would claim “other than a fat finger, nothing can really bring anything down” - and what they weren’t considering was counterparty risk. To be fair, a lot of banks were in the same boat and suffered losses as well - but Credit Suisse’s way of handling it was really bad compared to Morgan Stanley and Goldman Sachs who did it correctly in spite of the losses.

For example, when Bill Hwang asked banks to let him trade on margin [in other words borrowing money from a broker to purchase stock] and they said no when he asked for an exception to their policy, and when he couldn’t pay them back that was that. But with Credit Suisse, he gets this grace period - why was that the appropriate reaction to a client in a business where these are high credit rated clients? People like Hwang should have had the maintenance margin available. And if they don’t, it’s a dangerous game to play to continue to entertain with grace periods etc. It was extraordinarily foolish of Credit Suisse to continue to wait for him and it was almost like they were being nice. There are protocols and systems that should have been followed and they were not.

And suddenly, you have the star business line, where you go from “Riskless is wonderful” (with Prime Services) to where they exit and they get rid of the whole thing. Upon further examination, they were using billions of their balance sheet to generate these equity swaps which were generating very little money - and they came to the conclusion that 1) this is not a good deployment of assets and 2) I suppose we can’t fix the problems associated with the risk here.

There’s probably stuff that was going on behind the scenes where on the surface, it looks like they’re being nice with Bill Hwang and Archegos but there was probably a lot of management override of policies (which incidentally is one of the things that got called out in the audit report).

I’m sure you’re familiar with the tiering system of Tier 1, Tier 2, Tier 3 capital and what gets bucketed into those capital types - there are a lot of illiquid equities that sit in warehouse on their books, for a variety of reasons. How do we account for the illiquidity of these equitities? You have to put them into the worst capital tier - there’s supposed to be treatment rules around placement into tiers, but there’s also very little data transparency and it’s kept in an Excel file (in the case of Credit Suisse). There was no central database or anything saying how securities mapped - it was just “yeah, we’ll assign it based on whatever it was the month before” - no regard for updating information or asking the question “what if this security isn’t a Tier 2 security anymore?” 

And that was the other thing - very little was written down - I remember learning most of the processes through a notebook that was owned by my predecessors’ predecessor. This was 2016! The book itself was probably from 2013/2014.

The other thing was the brain drain - starting in 2016, you would see 80% turnover one year. I was there for two years, had five different bosses - was going through a new one every quarter. There was no consistency and you were losing knowledge and information - a lot of notes were in desktops, files, notebooks that they took with them - there wasn’t a good compliance culture - a lot of this was based on primitive, tribal culture - oratory, instead of having official documents.

To me, it seems mind-boggling as to why you would operate this way. It’s not efficient - what would be the incentive for operating in such a stone-age like way?

They didn’t budget appropriately. They didn’t have the money for training or technical skill development. So when the need arises, it’s difficult to justify needing to ask for improving processes and infrastructure when you’re having trouble generating profit and revenue. Shareholders like to see expansions of revenue (instead of “Oh, I made more by cutting more” - which is something they are only fine with in a last ditch scenario).

There was one system we used intimately, every day. It was older than I was - an old First Boston system that they had integrated into their infrastructure - there were particular transactions we did around high yield debt and in those, there were credit default swaps. The credit default swaps never worked in the system, so we said “ignore those.” We threw out this nonsense number while saying “this is wrong, ignore this” while being unable to produce the actual number and pointing to some other team for the information that may or may not have had the right number.

To bring it back, when you see why Credit Suisse actually failed, they didn’t have the infrastructure or capability or systems to run a multi-national bank that is highly regulated.

Did they ever have this capability at one time?

I think pre-2008, they had good systems compared to the other banks. But as their products got more complicated and structured, and as the company got bigger and had to manage more accounts, the need for tighter technological solutions increased. If you’re managed 2-3 portfolios of equity swaps, that can be done in Excel, but if you’re managing 300 portfolios of equity swaps, that can’t be done in Excel and you can’t do it using systems from 1993. It’s easy to play Monday morning quarterback and say “of course you should have done that,” but at the time they wanted to focus on investing in their revenue streams (which also weren’t working). But revenue streams weren’t working because they were taking hits from a risk management perspective because they were making silly, sloppy mistakes - sort of a catch 22. If they focused on improving technology, they wouldn’t have made those mistakes and would have better positioned themselves to have made more money and fixed the problems they had. But they didn’t see it that way and didn’t invest in it the way JP Morgan and Bank of America do. To be frank, most banks’ infrastructure is shoddy. Credit Suisse was in a league of its own here.

And as you increase regulation and requirements, you need systems that can keep up with that and when you’re spending all your time using Excel documents, trying to put together reports for regulators (which is also important), the lack of efficiency in responding to them takes away time from doing things to run the bank. The audit opinion referenced a lot of “coming up with” to try and satisfy the regulators’ questions because they don’t actually know since they don’t have the systems to get accurate data - they have to reconstruct information every quarter.

Yeah - it’s okay to have open and direct communications with the regulators - you can’t get a formal opinion, obviously until the exam or testing is over - but it’s baffling when institutions have this aversion to even having an ongoing conversation with them.

There’s this strange hostility to regulators where the line of thinking can go “If we start talking to them, they might start to get insights about our shoddy infrastructure and actually raise it as a concern”. Auditors get to see the infrastructure but don’t get to touch it - essentially the “Museum effect” - you can see a vase from far away and it might look nice, but you don’t know anything about its craftsmanship. So some of these auditors created this where they said “it looks fine” but they can’t possibly dig in [for a variety of reasons, time likely being one].

Credit Suisse is 167 years old, an amalgam of various acquisitions and spiderwebs and that applies to the infrastructure as well. Normally in these kinds of situations, you’d expect bridges to be built but in their case, they sort of built a lane hanging precariously over the cliff. The other solution that they could run would be a total overhaul, with a centralized architecture, but that’s very expensive - and it could have saved their company had they done so. Trying to get these systems obtained through acquisition to talk to each other is even more challenging.

I knew some of the tech guys who did UAT with us, and they were smart guys, but they were woefully understaffed. The best talent is going to the tech companies. So then they ask, should we outsource our tech function? And the end result is this huge tech function which isn’t anywhere near the quality of the tech companies.

You mention understaffing - it’s a big global bank - do you feel they had enough people, or maybe not the right people, or teams not talking to each other?

Teams talked to each other - it was affable - but once the brain drain started kicking in, it beat down morale and forced us to find replacements for those positions. When you have top talent leaving because they’re concerned about the state of the company, you’ll rarely get someone better to take the position - someone else will pay them more, or they don’t want to come and work for a company going the wrong way. You’ll generally end up with a less qualified individual from a background that doesn’t fit perfectly, and that has a cascading effect.

For the risk analysts like myself, they were paying us half of the street rate - I received one bonus the entire time I was there, and it was 5% of my salary - it’s not a typical big bank payout - and that wears a lot of people thin. Your unprofitability problems then start to compound and you can’t go back to the shareholders and say you’re going to pay people more and solve your tech problem at the same time - where is the money coming from?

Yeah, you can’t spend your way out of this kind of problem.

The shareholders’ short sighted view is also “give me my dividend now” so that doesn’t help either.

I will say Tidjane [Thiam, former CEO] was interesting because he came from an insurance background and was sort of an outsider to banking. He wanted to pivot to wealth management but made an interesting move by selling off the wealth management business in the US which happens to be the wealthiest country in the world. The justification was pivoting to Asia, where Credit Suisse certainly had a foot in the door, but he never really got to enter the market fully or integrate the way he wanted to. The wealth management also happened to be sold to Wells Fargo. They wanted to emulate UBS’ pivot to wealth management but went about it in the worst way possible (in my opinion). They kept the investment bank arm large, which was baffling since wealth management is a relatively easy business especially from a complexity and compliance perspective.

Wealth management is rather riskless, only reputational risk in play - you’re just managing people’s money - vs investment bank, there’s more unknowns and a lot of balance sheet is being deployed. Credit Suisse could never really cut that down - for example, they wanted to offload their asset backed securities arm/portfolio - and Tidjane got on TV and said we were unwinding that arm, which led to asset prices going down because it became known that these assets were going to be flooding the market.

And then of course, the spying scandal, which was embarrassing and led to what I believe were a lot of unnecessary departures. People didn’t want to be associated with the bank anymore.

To be continued…