If business schools of the post-pandemic world run classes on the art of leadership, the Credit Suisse scandals of the early 2020s will prove a particularly intriguing case study. Students will weigh up relative roles of agency and structure as they learn the intricacies of moral decision-making.
The default of a $500m plus margin loan to Luckin Coffee, a Chinese rival to Starbucks, in early 2020 sets the scene. A $5bn margin default at Archegos Capital and the politically-sensitive Greensill packaged loans affair further tipped the scales towards banking infamy.
Market commentators have been quick to point out this combination of mis-selling complex products and inappropriate lending against supposedly safe securities that sowed the seeds for the 2007-2009 global financial crisis. They have also blamed the ‘one bank’ structure.
Swiss banks quickly embraced the cross-selling possibilities of combining investment banking, private banking and portfolio management. “Enforcers” would pace the Zurich private banking floors to make sure relationship managers were selling enough investment bank-sourced products to wealthy clients.
As these firms have evolved, wealth management became the central force and “elite squads” of private bankers were created. Many of these were former investment bankers, able to mix institutional disciplines with softer-focus ethical and multi-generational themes, into a heady cocktail sold to the fastest growing and most lucrative client base – the global family.
With each client investing more than $250m, this “big money” and how to source and service it, became the major pre-occupation of banking bosses. Many of these high-flying families, such as that of former trader Bill Hwang, set up their own hedge fund or private equity operation to invest business profits. The $4.7bn loss announced by Credit Suisse, from financing Mr Hwang’s family office, Archegos Capital Management, shows how such ventures can quickly derail.
Tightening compliance
Tradition among leading banks has been to accommodate “mega clients”, at the cost of increased risk exposure, sometimes without sound collateral. Compliance is now likely to be tightened along the street, but the “greed is good” culture prevails.
Leveraging arrangements go south when collateral is insufficient to cover loans, with prime brokerage desks winning new business by offering aggressive lending terms. “At the height of the last financial crisis, RBS had leveraged its balance sheet 40:1 and the loan book was as large as UK GDP,” recalls Kim Cornwall, a former senior banker at Merrill Lynch and SocGen, now training relationship managers to deal with wealthy clients.
“Small movements in the value of the underlying collateral can quickly wipe out the client’s equity and leave the bank with an unsecured debit.”
The Archegos Capital case shows “elite” bankers must be made more aware of the financial ecosystem beyond the ‘one bank’ marketing mantra. “All senior bankers should spend time with the most junior margin clerks who liquidate client positions in securities and commodities when a margin call arises,” says Mr Cornwall. “The fancy algorithms and software the banks use are no match for common sense and decisive leadership actions.”
Lucrative deals
This debacle comes hard on the heels of losses to the bank’s ultra-wealthy clients, offered funds from supply chain finance firm Greensill Capital, currently under intense media scrutiny due to the involvement of former UK prime minister David Cameron in lobbying government ministers for access to a Bank of England coronavirus loan scheme.
Wealthy clients were sold the funds, which had a $1.2bn exposure to Sanjeev Gupta’s troubled steel empire. “Bankers working with families get introduced to deals they feel pressured to raise funds for, and that’s when the real trouble starts,” says Cara Williams, senior partner for the family offices segment at consultancy Mercer.
Her warnings ring particularly poignant to those clients who lost fortunes to the fraudulent $68bn Ponzi scheme overseen by Bernie Madoff, who died recently in a US prison. His “investments” were inadvertently facilitated by many private banks.
While Credit Suisse did not respond to PWM’s requests to discuss these issues, all the former bankers and consultants we spoke to highlighted an aggressive sales culture in investment banks, enticing relationship managers to seek the most lucrative deals, without adequate safety nets.
The ‘one bank’ structure facilitates these activities, but it has feathered too many nests to be cast aside. And it is thriving stateside, with adherents JP Morgan and Bank of America currently in the ascendancy. It is Europe where problems have festered, with cosy networks binding families, advisers, banks and politicians together.
Dysfunctional coteries can prove financially ruinous for banks, clients, governments and societies as a whole. A root and branch review of leadership failures is surely creeping up the regulatory agenda.
It is the absence of an adequate “management bandwidth” to oversee the biggest deals which has been more crucial than any structural deficiency, says Amin Rajan, founder of the Create-Research consultancy. While senior heads have already rolled, the “revolving door” at the helm of major banks should be called into question.
As PWM’s survey on diversity and recruitment shows, integrity, competence and compassion are key components of moral leadership in private banking and asset management. But there are also rival pressures bearing down on our leaders, from both shareholders and clients. Wealth management is traditionally a low margin business. Aggressive cross-selling not only allows private banks to boost these profits, but it gives them a tighter hold on the biggest clients, whose lack of loyalty they constantly fear.
For Credit Suisse, stories of past successes may not be enough to put the Zurich giant back at the top table. There have been rumours for many years of a merger or rescue by Zurich rival UBS, although both US and Swiss authorities may block such a move.“All options are now on the table,” suggests Mr Rajan, with a “miracle” needed to return the bank to its former glories. “Credit Suisse faces a Herculean task to revive its fortunes.”
