Credit Suisse spooked by what lurks within
Mistakes do happen but it takes good managers and intelligence to bring them to light
Tidjane Thiam, Credit Suisse’s relatively new chief executive, was really annoyed on Wednesday.
Just five months after outlining a strategic plan to set the bank on a new course, he was having to try again — this time with deeper job cuts and bigger losses than previously expected.
Staff in the bank’s markets division, he said, had hidden giant risky bets from senior management and the cost of unwinding those positions was a large part of the problem.
This behaviour was “unacceptable”, Mr Thiam said. “There have been consequences. I don’t want to name names, but there have been changes,” he explained. “There is a new way to manage the bank, which we’ve been very explicit on.”
Good on Mr Thiam for identifying culprits and trying to change the culture. But it is shocking that this kind of thing can still happen in 2016.
Poor tracking of banks’ trading positions was a big part of the problem before the financial crisis — and fear of unknown exposures was a key reason that the markets ground to a halt after the collapse of Lehman Brothers.
Ever since, bankers and regulators have sought to ensure every lender has up-to-date information about its holdings, particularly in its trading book. Analytics firms run around selling high-tech “dashboards” that are supposed to provide real-time monitoring of banks’ various exposures.
So how could senior managers at Credit Suisse be unaware of its outsized, risky and hard to sell positions? Some of them dated back several years.
In fact, all sorts of unexpectedly bad things still lurk inside the world’s big banks. JPMorgan Chase’s $6.2bn London Whale trading loss in 2012 is one particularly famous example. But mistakes happen all the time. As many banks cut staff and try to rationalise computer systems, it is not unheard of for entire securities portfolios to fall through the cracks and be forgotten for many months.
Critics, including Bernie Sanders, the US presidential candidate, argue that slips such as these are evidence that the banks are still too big to manage properly and should be broken up. In Israel, Moshe Kahlon, the finance minister, is championing a plan to force banks to sell off their credit card divisions.
Bank chiefs have hit back, arguing that some activities, particularly those that cross international borders, can be better handled by large institutions. They also complain of unrealistic expectations. “Can I know what every one of 257,000 people is doing? Clearly, I can’t,” Stuart Gulliver, the HSBC chief, told a UK parliamentary committee last year. He suggested he was being held to higher standards than the military or the church.
In truth, errors and misbehaviour happen everywhere. In a well-run institution, though, managers spot problems early. Then measures are taken to limit the damage and make amends. Culture is key, but so are resources. After the “Whale”, JPMorgan spent an extra $1bn on controls.
In that context, Credit Suisse’s other big announcement this week makes perfect sense. It has joined forces with Palantir, a CIA-backed artificial intelligence firm, to use data-driven behavioural analysis to root out rogue traders and insider dealing.