In another reminder that the credit crisis cauldron still boils, Credit Suisse Group warned that it likely won’t be profitable in the first quarter “in light of the difficult market conditions in March.”
Switzerland’s second-largest bank also said that after completing an internal review related to the revaluation of certain asset-backed securities positions in the trading of collateralized debt obligations, it reduced its valuation by $2.65 billion, covering the 2007 fourth quarter as well as this year’s first quarter. Net income for the fourth quarter and full-year 2007 was also revised.
Credit Suisse said the reductions were caused by pricing errors which were, in part, the result of intentional misconduct by a small number of traders. The bank said the employees had been terminated or suspended, and are in the process of being disciplined under local employment law. The bank’s review also found that the controls put in place to prevent or detect this activity were not effective.
“This incident is unacceptable and it does not represent the high standard of Credit Suisse,” said Credit Suisse CEO Brady Dougan. “Our overall control framework remains sound. We are taking strong action to remediate and move forward.”
The bank also said it has taken a number of remedial actions. They include the reassignment of the trading responsibility for the CDO trading business and enhancement of related control processes; improvement of the effectiveness of supervisory reviews and formalization of escalation procedures; improvement of the coordination among trading, product control and risk management and addition of further resources and improvement of training and enhancement of tools and other technical resources available to employees.
Moody’s Investors Services, after taking a preliminary look at the Credit Suisse report on additional writedowns to be taken, said it wasn’t changing its ratings of Credit Suisse and its subsidiaries. It said that the “the size of the valuation adjustment can be absorbed within the bank’s earnings.”
Moody’s said its “greatest concern is that such a large discrepancy in valuations was able to remain undetected for an extended period, and we will continue to discuss with the management the robustness of risk controls and the remediation processes being implemented.”