It’s a little bit of history repeating in Credit Suisse’s litany of losses

Credit Suisse could perhaps have avoided the scandals and losses it has experienced over the past year had it learned from history that it should have been very familiar with, given its geographic proximity to UBS.

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In the late 1990s the Union Bank of Switzerland merged with Swiss Bank Corp to create UBS. Swiss Bank had acquired British investment bank S.G. Warburg in the mid-1990s and US investment bank Dillon Read in the late 1990s, just ahead of the merger.

The enlarged and aggressive UBS then acquired Paine Webber, a big US investment bank and brokerage, in 2000 and set out to challenge the big Wall Street banks that dominate investment banking. That ambition nearly destroyed UBS, which had to be bailed out by the Swiss National Bank after the 2008 financial crisis.

A lengthy report to shareholders in 2008 explained how its $US40 billion of subprime-related losses had occurred.

There was a long and detailed list of its mistakes, but the core of the explanation was the focus on size and revenue and a lack of focus on risk and reward.

Essentially, in setting out to achieve its objective of becoming the biggest player on Wall Street, UBS gave its investment banking unit an unfettered mandate to chase growth.

Moreover, it did so without building recognition of the higher risks in investment banking relative to its traditional banking activities into its strategy.

It essentially provided the investment bankers with a blank cheque written against the low-cost customer deposits in its retail funding base—and big individual financial incentives — to use that access to cheap funding to buy its way into big market shares in subprime lending and securities trading.

It’s no wonder that ended badly.

From what Credit Suisse has disclosed about its spate of financial disasters, something eerily similar occurred within UBS’s Swiss rival. In some respects – to borrow from Shirley Bassey – “it’s all just a little bit of history repeating”.

Chasing profits

Risk, and its concentration within the Greensill-Gupta relationships, seems to have been relegated behind reward as the bank chased revenue and profits, with Credit Suisse’s risk-management function streamlined and reoriented in recent years to be more commercially-minded.

Perhaps the secret ingredient in Macquarie Group’s success has been the separation and independence of its risk-management function, which has an arm’s-length and quasi-adversarial relationship with the group’s commercial activities.

For investment banks, which routinely engage in relatively high-risk activities, a robust risk and compliance department that can reject proposals and is supported by senior management is critical.

Self-evidently that doesn’t appear to have been the case at Credit Suisse — one of the few major banks that got through the financial crisis with scrapes rather than scars — even though it had a relatively recent template for avoiding disasters, nicely documented and issued by a compatriot only a few hundred metres away from its own Zurich headquarters.

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Perhaps Credit Suisse’s risk-management failures reflect something broader. It wasn’t, for instance, the only major bank to get caught up in the Archegos collapse.

Nomura lost about $US2 billion and others – JP Morgan, Goldman Sachs and Morgan Stanley among them – only escaped relatively unscathed because of the speed at which they dumped their exposures (increasing the losses for Credit Suisse and Nomura in the process) when it became evident that a cascade of margin calls on Archegos’ derivative exposures threatened its existence.

Archegos, a “family office” hedge fund, is said to have been provided with $US50 billion of credit from Wall Street institutions for its concentrated exposure to a handful of listed companies.

In a world where risk is seen to have been eradicated by the post-crisis monetary policies of the central banks, or at least one in which the risk has been transferred away from…