“It Drives Me Nuts” – Credit Suisse Infuriates Clients By Charging $145MM Fee In Greensill Bankruptcy

After suffering one of the worst quarters in the Swiss bank’s 165-year history. Credit Suisse was forced to suspend its dividend amid the fallout (while also being forced to raise $2 billion in convertible notes) from the the bankruptcies of Greensill Capital – the troubled Australian trade finance firm – and Archegos Capital Management – the family office of former Tiger Global trader Bill Hwang that was a client of Credit Suisse’s prime brokerage. The two blowups, which occurred within weeks of each other, just happened to fall most heavily on Credit Suisse, which had the largest exposure to Archegos of the half dozen or so bulge bracket prime brokerages that were caught up in the blowup, when Archegos’s positions turned sour, eliciting a $20 billion margin call that drained the firm of practically all of its assets (and left Hwang, formerly a billionaire, nearly penniless relative to his former wealth).

Clients and shareholders both were understandably furious about the losses associated with Greensill, which had stocked a Credit Suisse fund with $10 billion in ‘trade finance’ assets that, in some cases, were part of a ‘circular financing scheme’ whereby SoftBank funneled financial support to certain Vision Fund companies’ whose ‘trade’ paper was owned by the CS fund. Credit Suisse has since cut its ties with SoftBank.

In the months since Greensill’s collapse, Credit Suisse has been surprisingly successful at recovering money from the defunct supply chain finance funds. Per the FT, $7 billion has been recovered from the funds, which filed for administration in March after allegations of fraud. But unfortunately for both CS and its clients, roughly $2.3 billion will be “difficult to recoup”, leaving the fund’s investors saddled with pretty serious losses on an asset that was rating investment grade.

At one point, there were whispers that Credit Suisse would step in and absorb some or all of the losses clients’ sustained due to the Greensill collapse, since Credit Suisse’s own lax risk-management strategies were blamed for making the firm vulnerable to Greensill.

Not to mention that CS has successfully pitched it to sovereign wealth funds and other highly desirable clients whom the world’s biggest banks are typically desperate to keep happy. Losing even one major client like that could deprive CS of billions of dollars in trading and fee revenue over a period of years. These clients (roughly 1,000 of them) were sold on the notion that any losses would be fully insured. But that was before Greensill lost its only insurer, forcing the CS fund gatings and eventual collapse of Greensill). Clients were understandably furious, and some reportedly threatened to pull their business, which led to whispers that Credit Suisse might take an unprecedented step of making clients’ whole (or at least offsetting some of their losses).

Instead, six months after the collapse, CS is telling investors in the defunct supply-chain finance funds that it will be charging them a total of $145MM this year as part of a strategy to prop up what’s left of Greensill to increase their chances of recovering all of the losses during the administration process.

It’s not clear exactly why CS settled on this course of action, but customers are apparently complaining to the FT that they’re angrier than they’ve ever been since the start of this whole fiasco.

“It drives me nuts,” said one participant in the funds. “They created a flawed structure in the first place. Then had zero governance and monitoring. And now it has blown up, they are taking no responsibility and letting the investors pay for everything.”

For its part, CS insists that its hands are tied and that it needs to keep Greensill alive in order to recover the $2.3 billion it now says it believes can be recovered. The debt is tied to three debtors, Sanjeev Gupta’s GFG Alliance, US miner Bluestone Resources and SoftBank-backed construction company Katerra. If GS folds, CS says it won’t be able to make its claim for non-payment of invoices under the company’s insurance policies.

What’s even more interesting is that CS says it’s acting on advice of the trustee in the Greensill Administration process, which just happens to be rival megabank: Citigroup.

Of the $145MM, about $10m is being used to back Greensill’s skeleton staff of between 100 and 150 people, as well as associated costs for the insolvent company.

Credit Suisse made the decision on the advice of the trustee of the funds, Citigroup. Of the $145m, about $10m is being used to back Greensill’s skeleton staff of between 100 and 150 people, as well as associated costs for the insolvent company.

“The recovery work that Credit Suisse is doing on behalf of fund investors inevitably incurs external expenses,” the bank said in a statement. “Credit Suisse is fronting as much of this expense as possible and will seek to recoup the amount that we have incurred when appropriate.”

The statement added that the lender had waived all management fees and costs from its internal recovery teams.

Prior to its collapse, Citi had been charging Greensill as much as $15m a year to be trustee on the SCF notes, people familiar with the arrangement said. It continues to share part of a deduction, known as a haircut, of between 38 and 59 basis points as the invoice-backed notes mature, before distributing cash into the SCF funds.

Citigroup disputed the $15m figure and size of the haircut, adding that it “is charging standard fees and expenses in acting as an agent bank and trustee” and “does not comment on client confidential matters”.

Greensill declined to comment.

The remainder of the $145m is being used to pay a service agreement with administrators Grant Thornton, as well as various legal firms and financial advisers, the bank said in the latest update to clients.

Per the FT, CS has already warned clients that charges like the $145MM – in a sense they’re paying to increase the chances of getting their money back – might reoccur for however long it takes CS to get back all the billions of dollars it has convinced trustees it can (potentially) recover.

Finally, the FT says CS executives know the additional charges are hurting the bank’s relationship with key clients. But the fear of “undermining the insolvency proceedings” – and potentially missing out on the recovery of as much as $7 billion, or perhaps even more – is simply too great. Credit Suisse can’t risk upsetting the apple cart right now.

It’s just the latest sign that the fallout from these historic scandals could have a long-term negative impact on the bank, potentially making it an even more attractive merger target for crosstown rival UBS, or some other European giant.