Credit Suisse’s Greensill Mess Spoils Restart for CEO Gottstein

(Bloomberg) -- The rapid unraveling of Lex Greensill's trade finance empire is leaving one of his biggest backers with some unpalatable choices.

Credit Suisse Group AG, which set off a cascade of events Monday by freezing about $10 billion of funds that it ran with Greensill, is having to pick between saddling fund investors with potential losses, or taking the assets on its own books and irking shareholders and regulators. The bank was pulled even deeper into the scandal when it emerged that it had also extended $140 million in loans to Greensill, according to a person familiar with the matter.

The spiraling events are undercutting efforts by Thomas Gottstein to break a losing streak that has marred his first year in office, and raise fresh questions about the bank's risk taking. Not even two weeks ago, the Credit Suisse Chief Executive Officer signaled he was ready to turn the page after posting the bank's first quarterly loss in three years on costs to settle legacy matters. This time around, the questions may be harder for Gottstein to dodge because at least some of the issues happened under his watch.

“Although Credit Suisse does not have fund exposure, it has reputational risk,” analysts Kian Abouhossein and Amit Ranjan at JPMorgan Chase & Co. wrote in a note, adding that those concerns have already pushed the shares lower compared with peers. “We hope for clarity on the process of how to exit” the funds' assets.

Read more: Credit Suisse Blow-Ups Give Gottstein a Crash Course in Risk

Credit Suisse offered the Greensill funds through its asset management unit, marketing them to clients such as treasurers and pension funds. They invested in a loosely regulated type of short-term loans sourced by Greensill Capital, a startup aiming to disrupt a niche part of global banking known as supply chain finance.

It was an unusual structure, because the Swiss bank largely allowed Greensill -- the seller of the assets -- to decide what the funds would buy, without a Credit Suisse fund manager involved in the selection of the individual securities. To lift the appeal to investors, many of the assets were insured, making them appear as safe but higher-yielding alternatives to money market funds.

The decision to freeze them came after Bond and Credit Company, an Australian division of Tokio Marine Holdings Inc., didn't renew trade credit insurance on some of holdings on March 1, according to court documents and people briefed on the matter. Without the insurance backing up the loans, valuing the securities became difficult.

Credit Suisse's announcement rippled across Europe, with GAM Holding AG following suit Tuesday and winding down a similar fund that also invested in Greensill-sourced assets. German financial regulator BaFin is close to freezing payments in and out of Greensill Bank AG, which the financier used to warehouse some of his assets, according to people familiar with the matter. With several major buyers of its securities gone, Greensill Capital is now in talks to sell its operating business to Athene Holding Ltd. to avoid collapse.

While Credit Suisse's decision shocked investors, signs of trouble had been mounting for some time, including under Gottstein's watch. Assets linked to Greensill and one of his key business partners, U.K. industrialist Sanjeev Gupta, were at the center of a scandal at Swiss asset manager GAM already in 2018.

Read also: Credit Suisse Overhauls Rules for Funds Accused of Conflicts

Last year, Gottstein ordered a review of the Credit Suisse funds, after reports alleged conflicts of interest involving SoftBank Group Corp., a long-time Credit Suisse client that had also invested in the funds and taken a stake in Greensill Capital. It found, among other things, that the Credit Suisse funds had extended large amounts of financings to companies backed by SoftBank's Vision Fund, creating the impression that SoftBank was using them to prop up its other investments.

SoftBank pulled its investment following the review, and Credit Suisse overhauled the fund guidelines, while saying it had confidence in the control structure at the unit. Yet even after the review, the funds still had a large proportion of loans to suppliers of SoftBank-backed companies.

Gottstein also centralized the bank's risk and compliance in Zurich under Lara Warner, who had reshaped Credit Suisse's approach to risk in previous years. But by and large, he shied away from more decisive moves, arguing the bank's missteps last year weren't connected.

The latest debacle is likely to revive questions whether the CEO has done enough to address the bank's many blowups. It also adds an element of urgency to a review of the asset management unit that Gottstein started late last year.

The business, run by Eric Varvel, has been a particular sore spot. It shuttered a quantitative strategy last year and took a 24 million-franc charge on seed capital in a U.S. real estate vehicle. A joint-venture with the Qatar Investment Authority decided to close two groups of funds. Most damaging, the bank took a roughly $450 million writedown on its stake in hedge fund York Capital Management, pushing it to a fourth-quarter loss.

While the fallout from this week's fund freeze is likely to cause more pain, the impact on Credit Suisse earnings is limited because the funds contribute only a very small fraction to overall revenue, the JPMorgan analysts wrote in their note.

“We are more concerned about reputational exposure from the negative newsflow, and risk management from a perspective of funds with low liquidity,” they wrote.

Read more: Credit Suisse Cuts Asset Management Headcount by 10% in Revamp

Credit Suisse is now considering a range of options to limit the damage, people familiar have said. It may wind down the investments or move just some of the assets out of the funds. To calm investors, it could take questionable loans on its balance sheet while it winds them down. But using its own capital could also put Credit Suisse itself at risk of losses.

Gottstein has said his broader review of the asset management business will look at “how we get to the next level.” With just about 440 billion francs ($480 billion) under management, the unit is on the small side in an industry where $1 trillion in assets and more is often cited as the sweet spot to reap savings. In the U.S., rival Wells Fargo & Co. last month agreed to sell its $603 billion asset manager to focus on its wealth and brokerage businesses.

“We cannot exclude further bumps in the road, but I think Credit Suisse is at the start of a new growth phase,” Gottstein said in an interview last month, after presenting fourth-quarter results. “You can never say its over, but I definitely feel good about the fact that we have dealt with some historic issues.”

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