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Credit Suisse Bombshell: Surprise Warning of 1Q Loss

The market had taken some comfort from Lehman’s and Goldman’s first quarter better-than-expected results; these will likely be undone by the surprise warning by Credit Suisse, which heretofore had looked comparatively unscathed, by virtue of remaining profitable. That was undone today when the Swiss bank announced it expected to lose money this quarter.

What is particularly troubling is that the bank’s’ loss at least in part stemmed from inadequate controls. The bank found intentional mispricings by a small number of traders who have since been sacked. The Bloomberg story notes:

The Swiss bank hasn’t disclosed the names of the traders responsible for the incorrect pricing of residential mortgage- backed bonds and collateralized debt obligations. Credit Suisse said it reassigned trading responsibility for the CDO business and took measures to improve controls to prevent and detect misconduct, which were “not effective” previously.

On the scale of recent Wall Street woes, however, the damage is small in absolute terms. The bank is taking writedowns of $2.65 billion, which it will spread over its fourth quarter 2007 and first quarter 2008. It expects to report the first loss in five years for the current quarter.

From the Financial Times:

Credit Suisse on Thursday issued a surprise profits warning, a move that will shatter the fragile confidence restored among leading investment banks after better than expected results from some top Wall Street houses this week.

The Swiss bank, which is particularly active in leveraged loans and commercial mortgage backed securities, said based on its latest estimates, it was “unlikely to be profitable in the first quarter.”….

“With regard to 2008, including valuation reductions, Credit Suisse was profitable through the end of February. In the light of difficult market conditions in March, at this time, Credit Suisse believes it is unlikely to be profitable in the first quarter”, it said….

In a brighter piece of news, Credit Suisse lowered the size of the surprise writedown it announced last month, shortly after reporting its 2007 results, but that is likely to be wholly overshadowed by the profits announcement.

Rather than $2.85bn, spread between late 2007 and early 2008, the bank revised the figure down to $2.65bn. Translated into Swiss francs, the group’s reporting currency, that means a SFr1.68bn pre-tax hit in the first quarter. Previous to today’s profit warning, the bank had expected to be profitable in the period.

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4 comments

  1. Francois

    “The bank found intentional mispricings by a small number of traders…”

    “Intentional mispricings”??

    Are we to understand this euphemism along the same framework as ultra long-term unilateral borrowing” = bank robbery?

    Now that would be plenty reassuring wouldn’t it?

  2. Jim Driscoll

    On the scale of recent Wall Street woes, however, the damage is small in absolute terms. The bank is taking writedowns of $2.65 billion

    We apparently have different definitions of what is small in absolute terms.

    In fact, this loss isn’t even comparably small, unless you’re comparing it to the loss experienced by Bear Sterns stockholders. That’s the only loss recently which would dwarf this – all the other bank losses recently were comparable.

  3. Yves Smith

    Jim,

    Over $5 billion writedowns for a single quarter have become not uncommon, witness UBS, SocGen, Merrill, Cit, AIG, Morgan Stanley. I hate to say it, but by the standards of credit market carnage (or poor management of traders), $2.65 billion over two quarters is not bad.

  4. Anonymous

    Is nobody making the bonus connection?

    CS allowed traders to write their own bonus, because they valued inventory according to their own traders’ estimates.

    These guys are “sophisticated”, No?

    John

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