Credit Suisse Considers Repaying Furious Clients As Greensill Losses Tally $3 Billion

After scrapping some senior bonuses, suspending several top executives and replacing the head of its asset management unit (where trade-finance funds co-managed with Greensill Capital were managed), Credit Suisse apparently has the money to toss overworked junior bankers a $20K ‘second bonus’. But the bank’s virtue-signaling when it comes to its treatment of junior bankers (currently a hot topic in the public discourse thanks to a handful of exhausted Goldman analysts) might not look so generous after its clients see their total losses from the collapse of the aforementioned funds.

According an exclusive report in the Financial Times arriving just one week after the Swiss bank published its 2020 annual report – in which the Swiss bank claimed in a section addressing the Greensill collapse that “Credit Suisse’s priority remains the recovery of funds for CSAM’s investors” – CS executives have tabulated its client losses at a whopping $3 billion, on some $10 billion in assets in the funds, which were stocked with assets structured by Greensill. After gating the funds on March 1, CS has reportedly returned more than $3 billion to its clients, with another $1 billion promised. Reuters reported that more than $1 billion in cash is left in the funds. But after spending the last three weeks trying to unwind a complex series of contracts underpinning the fund’s assets, the bank has determined that many of the firms financed by Greensill are unable, or unwilling, to make good on their debts.

Urs Rohner, Chairman of the Board of Directors and Thomas Gottstein, Chief Executive Officer.

The funds were marketed to CS’s “professional” – ie institutional – clients as low-risk vehicles, and now Credit Suisse is in the uncomfortable position of telling some of its most valuable clients, including wealthy individuals in the Middle East and pension funds in Switzerland (the bank’s backyard), that the funds it marketed as low risk vehicles that helped grease the wheels of international trade were actually stocked with claims on future sales of companies like GFG Alliance, Sanjeev Gupta’s steel empire, which owes $1.3 billion. SoftBank-backed construction startup Katerra is reportedly on the hook for $400MM.

Unfortunately for CS, as it goes about trying to collect on the money owed, there are several major creditors that are “dragging their heels” on repaying the Credit Suisse funds, according to a person briefed on the process of recovering the assets.

“I would stress that is the theoretical maximum,” said a person involved in the discussions. “I still expect losses to be much lower…It could be a long process though.”

In the long term, once courts have had an opportunity to adjudicate the avalanche of lawsuits, executives believe they might be able to cut that loss down to $1.5 billion. But that seems like a big “if”. At any rate, the final tally of losses might not be known for months, or years.

With these lucrative relationships hanging by a thread, Bloomberg reports that the internal investigation being carried out by the board is looking into top executives’ role in the trade-finance business.

Directors are reviewing the way in which supply chain finance funds were sold to investors, including its own wealth management clients, and how the bank managed conflicts of interest and a business relationship with Lex Greensill that spanned three divisions, one of the people said. The bank has reactivated a special crisis committee — led by chairman Urs Rohner and the heads of the audit and risk committees — to oversee the issues surrounding Greensill, according to its annual report.

Bloomberg reported that the investigation will examine CEO Thomas Gottstein’s role in the Greensill business. To be sure, even if the bank does find some culpability on Gottstein’s part, dumping a second CEO overboard within the span of 18 months isn’t exactly a good look. And at any rate, the bank’s clients probably wouldn’t care either way. Heads on platters aren’t going to put money back in their pockets.

But with the risk of losing billions of dollars in business over the episode, Credit Suisse is reportedly considering doing just that: Citing four sources from within the bank, Reuters reported that Credit Suisse is considering reimbursing some of the customers.

Switzerland’s second-largest bank this month closed around $10 billion of supply-chain finance funds that bought notes from Greensill. Of this, $3.1 billion has so far been repaid and more than $1.2 billion in cash remains in the funds, leaving more than $5 billion outstanding.

While Credit Suisse hopes more can be salvaged, the fact it is considering making investors in the funds good underscores concern that the debacle could see ultra-rich customers turn their back on it, three of the people said.

“Money is going to flow,” one person with direct knowledge of the discussions within the bank told Reuters. “Investors will get compensation. That’s unavoidable. It’s going to hurt.”

The total cost has yet to be determined, but “there is a proposal on the table to take over about 50% of the losses.”

While the report might just be a trial balloon, we can’t help but wonder how its shareholders might feel. Investment banks are supposed to rip clients’ faces off. Covering a third party’s duly deserved losses might set a dangerous precedent.