Capital Markets

Credit Suisse: No Rogue Traders Here

The banking giant is estimating a $2.85 billion write-down. But officials claim the pricing problems were rare incidents.
Marie LeoneFebruary 19, 2008

Credit Suisse Group, Switzerland’s second-largest bank, has suspended several traders who are being investigated for inflating the value of asset-backed securities on the company balance sheet, according to a conference call held on Tuesday. As a result, the bank will be forced to reprice the assets, which could cause Credit Suisse to take a first quarter write-down of $2.85 billion. It will be reflected in an estimated $1 billion net loss at the end of the quarter.

The investigation, which is being handled by an internal control team at Credit Suisse, is ongoing, so the losses remain an estimate. Officials said the pricing errors were caused by the way traders marked the assets to market. Essentially, traders were tardy with the markings, which resulted in an overstatement of the assets. The errors, which so far only affected the first quarter results, will not trigger a restatement of 2007 financial statements, noted Brady Dougan, CEO of Credit Suisse. He also noted that the company will remain profitable despite the loss.

“Clearly we are very disappointed … and not happy about the situation,” said Dougan in the call. But he emphasized that the problem was caught by the bank’s regular internal control review process, which includes daily and random checks. Dougan, as well as the bank’s chief risk officer, D. Wilson Ervin, noted that the investigation’s preliminary results indicate that the mismarkings are an isolated incident, and does not pose a company-wide threat.

Dougan also asserted that the errors relate to short and long positions, and therefore the full impact cannot be determined until the end of the quarter. “These are mid-quarter numbers, and obviously these trading positions can go either way.”

Dougan explained that the interim report provides an evaluation adjustment that the bank thinks is appropriate now. However, he added, “We trade these in such a way that the loss should get lower by the end of the quarter. It is a dynamic number.”

The assets included residential mortgage backed securities, as well as collateralized debt obligations, two relatively high-risk investments tied to the U.S. credit crisis. Officials would not elaborate how much of the write-down was allocated to RMBS, CDOs or other subprime vehicles. They only reiterated that the charge reflects all positions, securities, and derivatives currently on the balance sheet.

The write-down disclosure was prompted by regulatory requirements tied to a $2 billion bond offering by Credit Suisse, which closes on Tuesday. According to Reuters, accounting firm KPMG discovered the marking errors during an audit it was conducting for the bond offering. Ervin added that the bank has several pricing controls that are tracked on a daily, monthly and “ad hoc basis.” The ad hoc reviews are mostly used to keep tabs on stressed markets and it was in “doing that cross checking that [the mismarkings] came to light.”

Ervin stressed that the ad hoc reviews were part of the bank’s regular risk management procedure, and not a response to the recently uncovered $7 billion fraud scheme at Societe Generale orchestrated by rogue futures trader Jerome Kerviel.

Regarding the bond issue, Dougan said that if the offering is not fully subscribed, it would not pose a liquidity problem for the bank because sale was just part of the company’s normal fundraising activity. “It is not critical that we complete [it.]” However, he noted that the bank wants to take into account the views of potential bondholders since its values that relationship.

The write-down may affect bonus compensation at the end of the year. but that won’t be determined until the review is complete. Dougan would not be pinned down to an exact timetable regarding wrapping up the investigation. He would only say that the probe would be completed, “as quickly as possible.”