“Ah, yes, hello, come in, thank you for your cheque, half a billion dollars, eh, very nice. Pleasure doing business with you.”
“Ummm what was that? Oh that, you mean the $2.85bn hole we found in our balance sheet a few hours after your generous investment – oh I wouldn’t worry about that if I was you. Nothing to worry about.”
But as he said those words, the Swiss banker looked up, and there, as plain to see as the snow on the mountains on the horizon, was an egg, smothered all over his face.
It is difficult to imagine a more-awkward conversation – as the Swiss bank Credit Suisse, just days after it wowed markets with its results, and just hours after it ushered in a $500m investment from Qatar, revealed it had suddenly discovered the need to write-down $2.85bn of mortgage-related assets.
No one is suggesting there was any kind of deliberate fraud at the bank, it just hadn’t spotted the problem lurking there.
To slightly misuse a phrase that has been appearing more and more often in the pages of the media of late, it was as if the bank was so busy dusting its ornaments, and making its room look nice, that it just failed to spot the hulking great elephant standing there in the corner.
Just a few days ago, the bank was a star. Fourth-quarter net profits came in at $1.22bn, while total subprime related losses for 2007 were stated as $1.8bn. That’s a lot of money, but markets had expected bigger write-downs that that. Remember, that other Swiss Bank, UBS, has been one of the biggest casualties of subprime to date, and Swiss banks in general have suffered because Switzerland was the home of a carry trade – in which people borrowed from Swiss banks, because the rate of interest in Switzerland was modest, and lent abroad where rates were higher.
And while staff at Credit Suisse were still beaming over the results, out pops Qatar – buying $500m worth of shares.
For Qatar it was a big first step. It has got this $15bn wodge of cash burning a hole in its pocket and it is busy looking at ways to spend it. The Credit Suisse investment was its first big splurge.
And then its auditors, KPMG, were quietly carrying out an internal review when they found the losses.
The bank, in its review, had uncovered “mismarkings and pricing errors” made by a handful of traders, who have now been suspended.
But relax. “Our analysis does not indicate we would have to restate at the end of 2007,” said the bank’s boss Brady Dougan.
So that’s good, the write-down won’t show up until the next results. Ummmm.
Credit Suisse insists this is nothing like the debacle that hit Société Générale, while, “We think that most of the issues that have come about are in the first quarter of 2008,” said Mr Dougan.
What lessons can we learn from this saga? Lesson number one: one crisis will often beget another. Such was the case earlier this decade, when the problems at WorldCom and Enron emerged in the aftermath of major falls in the stock market. Such was the case in the months, and even years, after 1929. But this time, it seems that there has been an uncanny amount of begetting going on, and a whole family of crises has emerged from the subprime debacle – or is the problem deeper than that, and subprime just a symptom of an underlying problem.
Lesson number two: banks are more prone to making errors than we had perhaps thought possible. Northern Rock, it appears, is just one example.
It does beg the question, of course, if banks can make so many errors, how can their senior staff justify such high remuneration? – but that is an issue for another day.
Whether there are more problems at Credit Suisse, it is too early to tell. But what we can say with a fair degree of certainly, there are many skeletons still hanging in bank cupboards across the world.
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