March 18 2023

It is a measure of how seriously the Swiss authorities view Credit Suisse’s position that they are, according to weekend reports, orchestrating a UBS takeover or rescue.

The Terrible Two

It is not the first time that a merger of these banking behemoths has been considered. Last time it was Credit Suisse which considered acquiring UBS when it was in serious difficulties after the 2008 Global Financial Crisis. UBS survived, with Swiss government backing, shareholder cash, endless cost-cutting and, eventually, after a revolving door of unmemorable CEO’s for its troubled investment bank, a return to its strengths: wealth and asset management not the chimera of an all-singing, all-dancing full service global bank able to compete with the US. Investment banking was scaled down but focused under Orcel’s leadership. Doing this required not just a reset of its business but its culture, which had underpinned and led to so many of its problems. It took — after some false starts — a decade and a lot of hard work at every level before the changes became effective and properly embedded.

It was not just banks which had to rethink themselves. So did the Swiss financial and political establishment. For the best part of a century, Switzerland’s financial USP was discretion, carefully protected by banking secrecy laws. Or, more bluntly, Swiss banks were where you hid your money, few questions asked. That ended as a result of US fury on discovering how UBS and others, including Credit Suisse (fined $2.6 billion in 2014) had helped US taxpayers evade tax. So the new USP became expertise: put your money in Switzerland not to hide it but because Swiss bankers know how to manage it well.

Credit Suisse’s current travails blow a hole in that. How is it that, despite all the regulatory changes, all the scrutiny, all the lessons learned (surely?), all the training, all the rules, Credit Suisse has got itself into such a mess that its acquisition by its rival is now even in contemplation? And if such a large, important bank can get into such a mess, what does it say about Swiss expertise and, indeed, Swiss regulatory effectiveness?

Blowing the whistle?

One clue may be in the reason for its announcement on 9 March of a delay to its 2022 annual report after a “late call from the US Securities and Exchange Commission” the previous day. Why was the SEC making comments about the “technical assessment of previously disclosed revisions to the consolidated cashflow statements” in 2019 and 2020 and — this is the kicker — “related controls” in March 2023 in a late night call? What or who triggered this? One possibility is that someone escalated this to the SEC because other attempts at escalation and remediation within Credit Suisse had not worked. If correct — if there was a whistleblowing to the SEC — that is very troubling because it suggests either that there were no effective routes for raising concerns within the bank. Or, worse still, that concerns raised were ignored or ineffectively handled. In short, the problem may not just be inadequate financial processes (“material weaknesses in our internal control over financial reporting” and a management failure to “design and maintain an effective risk assessment process” — oops!). It may also be that the bank’s processes — and culture — for identifying, escalating and handling concerns are inadequate too. If that is the case, what other problems are lurking? This will be bothering Credit Suisse, the Swiss regulator (which was very annoyed by whistleblowing failings in UBS in relation to the FX scandal), the Swiss central bank — and UBS — if it does decide to acquire all or part of its rival. What exactly would it be acquiring?

A Bargain or a Pig in a Poke?

What is in it for UBS? Taking out a competitor, its clients, funds under management and its better employees. Yes — all these. But is an acquisition necessary? Clients and staff will make their own decisions, regardless of what Boards decide. Funds are already flowing out of Credit Suisse, as happened to UBS when it was in trouble.

The risks for UBS are considerable. Bigger is not always better. Absorbing a well-run company is hard enough; absorbing one with difficulties something else entirely. There is every likelihood of plenty more nasties lurking under the carpet. The reputational difficulties will stick to UBS’s name, no matter how often the press releases refer to past Credit Suisse problems. The costs of investigating these — as well as the remediation work necessary to put matters right — will be enormous; not just financially but in management time, energy and enhanced regulatory scrutiny. What will the effect be on the share price? UBS shareholders had a lost decade as UBS cleaned itself up. Are they really willing to finance another clean up, another set of potentially unquantifiable liabilities? Will an acquisition be a distraction from UBS’s own plans and for its current senior management, largely new and brought in to build on what has been achieved by UBS not to clean up another bank’s mess?

Conflicts of interest

There have been plenty of red flags (Greensill, Archegos, Mozambique tuna bonds, GFG, for instance) that all has not been well within Credit Suisse. Some parts (the Compliance department) were well able to identify issues with some of the clients the bank was keen to do business with and warn against this. Despite that those concerns were ignored or, more likely, rationalised away. (Why, for instance, did anyone think it sensible to take on Archegos, an entity set up by someone — Bill Hwang — fined a few years earlier by the SEC for insider dealing?) This suggests an institution with no sound way of managing its risks and the conflicts of interest arising from the desire to do apparently profitable business set against the risks of taking on clients whose adherence to rules is more apparent than real. Changing that is not the work of a moment as Ulrich Koerner, Credit Suisse’s CEO (part of UBS’s senior management team 2009–2022) or its new General Counsel (formerly UBS’ General Counsel 2008–2022) will tell you.

It is not a problem confined to Credit Suisse of course. Questions have been raised about Goldman Sachs’ dual role in relation to Silicon Valley Bank. (It’s not for the first time that Goldmans has faced such questions in relation to M&A deals). Barclays has faced endless issues caused by the tensions between its investment bank and its retail bank, its latest problem arising from its appointment of Jes Staley and the judgment shown by its Board when questions about his relationship with Epstein were raised. (If only the Board and the FCA had taken more seriously Staley’s judgment and failure to understand why whistleblowing matters when concerns were raised in 2017–2018.)

Over the last few decades, the creation of ever larger financial institutions has led to multiple conflicts of interest between the interests of the institution, its clients, between different categories of clients and between different parts of the business. Internal Chinese Walls and oodles of rules sought to recreate what had previously been legal barriers in order to manage those conflicts. Self-regulation and — post the Guinness, Maxwell and Barings scandals — light-touch regulation were meant to do the rest. It did not work. Repeated scandals and harm to the ultimate customers of banks and taxpayers led to more intrusive regulation and ring-fencing — the 21st century’s equivalent of Glass-Steagall. Loopholes have been closed or tried to be anyway. Regulators have been playing Whack-A-Mole with financial institutions ever since. But conflicts of interest are at the heart of all financial scandals. As an official of the US’s Financial Crimes Enforcement Team said when the Vatican Bank did a deal with the US in 2013 “large amounts of money sometimes bring out the worst in people.”

What about governments?

It is not just large banks which have conflicts of interest. Governments have these too. Finance brings in lots of tax revenue. It can be — for a while anyway — a Golden Goose, ready to be plucked for politicians’ favourite projects: banks make money, bankers get paid extraordinarily large sums and consider themselves very clever and worth all this money rather than lucky, politicians get tax revenues and voters get all the goods those revenues pay for without having to pay for any of it themselves. Win-win. Until it all goes Splat! (For those of a more literary bent, the La Fontaine poem about the frog wanting to be a cow — La Grenouille et Le Boeuf — pithily sums up what went wrong.)

While it is all going well, though, politicians fall over themselves to attract such institutions to their country and take especial pride in having ever larger institutions.

• Think of Ireland and its International Finance Centre, which became the location of choice for various dubious German entities, which Ireland then decided to support at vast expense.
• Or Gordon Brown boasting about light-touch regulation for the City in 2004-5.
• Or Alex Salmond and his support for RBS’s ill-fated over-reaching pursuit of ABN AMRO.
• Or, more recently, the support by German politicians and the BaFin, the German regulator, of Wirecard, a German — but apparently cutting edge, global and profitable — fintech entity. A German champion to rival those arrogant Anglo-Saxons! Until it turned out to be so much hot air, fraud and money-laundering.

The desire to have a national financial champion can blind even the most sober of governments and regulators to the risks of letting such companies think themselves indispensable and/or grow too big, unwieldy and, effectively, hard to manage and regulate well.

Two risks

There are only two things which matter about financial institutions, whether large or small, whatever sector they are in: –

1. Do they understand the risks they are managing? This is not a side issue. It is their core work. Managing money — whether it is mortgages, shares, derivatives, loans to business, assets of the wealthy — is all about understanding and managing risk.
2. The only capital that matters is the trust that customers, staff, counterparties, regulators and others have in such an entity. The amount of capital, its liquidity and all the other measures are simply a way of putting figures on this. Once that trust has gone, a bank is finished.

There are serious doubts about Credit Suisse’s ability to understand and manage the risks it is running. What is not yet clear is whether the trust it needs to have the time to sort itself out is still there. Monday may provide an answer.

What Next?

Whatever that answer is and assuming there is no systemic fall-out, governments and regulators (and voters) need to ask themselves whether it is time to rethink whether such large global institutions, however well-capitalised or regulated, are a good idea. If you have institutions with built-in conflicts of interest, you will always have problems, even if systemic risk is avoided. Maybe smaller, more focused entities are best, ones which understand that finance is a service industry, part of an economy’s plumbing, there to serve others not help itself. Maybe global banks — much like other aspects of globalisation — are an idea which needs challenging and rethinking?

April 21 2020

This film of a police officer telling a member of the public that if he doesn’t do what he tells him he (the police officer) will “make it up” and that he – rather than the innocent citizen – will be believed has been widely publicised – and criticised. The Lancashire Police have apologised for the officer’s “completely unacceptable” language and behaviour. As well they might.

No doubt lessons will be learned and training given. Well, let me summarise that training. There are three things the police should never “make up”: the law, offences or evidence. It really should not be hard to understand this. Or follow it.

The inevitable internal investigation has now started. There are a few points worth noting about the behaviour of the officer making these remarks.

(1) How likely is it that this was the first time this officer thought of saying he would make stuff up to get his way?

Any investigation will necessarily have to focus not just on this incident but on other cases where this officer’s evidence or statements or behaviour may have been critical to the outcome. If the investigation does not do this of its own accord, defence lawyers are likely to make themselves heard.

(2) Note the striking confidence with which he asserted his belief that his uniform, his status would automatically make him more believable. It is not so much the arrogance of the statement which is shocking but its truth. And it is precisely because it is (generally) true, that the officer’s behaviour is so reprehensible. Abuse of trust undermines the confidence which the public and police both need if policing is to work well – especially during lockdown when the police have been given unprecedentedly wide (and potentially oppressive) powers.

Abuse of trust at any time undermines the reputation of every other police officer, no matter how honest or hard-working. As the Lancashire Police’s apology put it: “It only takes one incident like this to undo the hard work of so many.” Quite.

And what of the other officer in the incident? You did notice him, didn’t you? The one who was standing by while this was happening and did not intervene. (The Lancashire Police did not feel it necessary to apologise for his conduct, inaction generally being seen – wrongly – as somehow less deserving of criticism.)

Why might that be? Maybe he did not think what his colleague was doing was wrong. Maybe he did but did not think he should intervene at that stage. Maybe he didn’t think he would get any support from his colleagues or superiors if he did. Or, worse, that he might be criticised or ostracised. (Perhaps the investigation will ask questions about this aspect too.)

Or maybe it was as simple as thinking that he should stick by his colleague. Esprit de corps, teamwork, loyalty to colleagues, to a common aim or work purpose, collaboration are all highly valued (from childhood onwards), trained for, rewarded. It is easy to side instinctively with “us” against “them”. It goes with the grain of human behaviour. Those seen as snitches are not viewed favourably. Little wonder then that people might find it hard to realise that loyalty to misbehaving colleagues is misplaced.

If police officers sometimes find this hard, despite the importance of their role, how much harder is it for the rest of us. So maybe we need to realise that creating the sort of culture where people do not turn a blind eye, where people instinctively challenge or call out wrong behaviour, takes something deeper and more sustained than just a whistleblowing policy, however well-written, and annual training.

Photo by Matt Seymour on Unsplash

January 23 2020

One of the saddest aspects of the One Coin scam perpetrated by the now missing Dr Ruja Ignatova is how unsophisticated (and, indeed, poor) savers in African countries were specifically targeted using the claim that this wonderful new cryptocurrency technology would bring easy finance (and all its many advantages) to the unbanked. OneCoin was presented as practically a social service and a revolution in finance which would transform the prospects of those whom traditional finance providers had ignored.

All too good to be true?

Of course. And what this meant in practice for those believing these claims can be heard here in the BBC’s radio documentary – The Missing Cryptoqueen. What it also meant for those involved in handling the money she made was rather more traditional – convictions for fraud and money-laundering.

Investors believed what they hoped was true and failed to ask some basic and obvious questions. If there was no blockchain how could this new currency really be a cryptocurrency? And what was the track record of the person behind it? If they had, they might have learnt that there was no blockchain and that Dr Ignatova had form, having received in 2016 a suspended sentence and fine from a German court for her role in relation to a German metallurgical factory taken over by her, asset stripped and then left to go bankrupt in 2009.

Past performance can sometimes be a guide to the future, it seems.

So what might an investor make of an opportunity to invest in a new venture which will:-

• Package new and existing mortgages into securities to be sold to investors
• The mortgages to be sold to people who have a low uptake of these products, preferring to use their savings to buy land and build property
• In a country – Ghana – with high interest rates and a very recent banking crisis, which resulted in 7 Ghanaian banks collapsing
• On the basis of a study, whose authors have not been revealed, which apparently states that there are plenty of people able to afford a $50,000 mortgage among the 9 million Ghanaians earning more than $11 a day (a munificent annual income of $4,015)
• Promoted by a convicted fraudster (responsible for the UK’s biggest fraud). Yes, Kweku Adoboli is back (though this time it is the economy of Ghana he plans to grow and the balance sheets of (presumably) the remaining Ghanaian banks he wants to expand)
• Who declines to say who his business partners are
• But expects banks to be shareholders in the new venture (assuming actual and potential conflicts of interest can be properly managed)
• And who is still being economical with the actualité of the reasons why he was convicted and imprisoned.

But it is good to see that he has developed a sense of humour – if this quote is genuine: “The day when I deliver my first profit to someone, that will be a good day.”

The injunction “Let the buyer beware” is as sound as ever.