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Crédit Suisse hit by subprime crisis and internal errors

Latest update : 2008-02-19

Swiss bank Crédit Suisse had to write off $2.85 billion in bad investment and pricing error blamed on some of its traders, leading to a $1 billion cut in first quarter profit forecasts (Story: B. Coll).

ZURICH  - Credit Suisse has written $2.85 billion off the value of its asset-backed investments and suspended some traders after finding pricing errors on its books, hammering its shares.
Credit Suisse's CEO Brady Dougan said most of the writedowns were the result of worsening market conditions in the first six weeks of the year but declined to quantify losses resulting from mismarks by traders, pending an internal review.
"A lot of the repricing is due to movements in markets," Dougan said on a conference call with analysts. "We remain well
The bank said the writedowns would wipe $1 billion from its first-quarter net income, after taking into account tax credits and cancelling some staff bonuses, but it still expected to stay in profit for the quarter.
The writedown and mismarking errors are the latest in a string of shocks from global banks, including huge new subprime-related exposures at rival UBS and a trading scandal exposed last month at Societe Generale.
Dougan said it appeared the traders who were suspended had been slow to adjust the value of their trading portfolios to fast-moving developments in markets. "It seems to be a lateness in marking but it's still a matter under review." 

The disclosure came a week after the bank unveiled fourth quarter net profit of 1.329 billion Swiss francs ($1.22 billion), and trimmed its subprime-linked writedowns for 2007 to 2 billion francs, less than the charges so far this year unveiled on Tuesday.
Dougan did not expect the writedowns and the investigation into mismarking to affect its 2007 results. He would not sayhow many traders had been suspended although only a few were involved. "We're not going to quote a specific number," he said. 

Credit Suisse executives played down any suggestions of parallels between its own traders and a scandal at Societe Generale where huge losses were blamed on lone trader Jerome Kerviel. "This was instigated as a result of our normal control procedures, not as a result of the Kerviel incident," said the bank's Chief Risk Officer Wilson Ervin.
"This is a disaster," said Helvea analyst Peter Thorne. "This could be the tip of the iceberg." 

Unlike UBS, which has been hit by $18 billion of charges, and some major U.S. banks such as Citigroup and Merrill Lynch, Credit Suisse had until now been relatively unscathed by the credit crisis.
"Those who thought that certain banks such as Credit Suisse were 'out of the woods' should exercise caution," said Bear Stearns banking analyst Chris Wheeler in a note. 

Credit Suisse shares fell over 10 percent in early trading and were down 7.14 percent at 52.70 Swiss francs at 1540 GMT. 

The revelations were particularly embarrassing for Credit Suisse, as it had only recently, after painful restructuring, shaken off a reputation for being accident-prone and springing unpleasant surprises on investors.
The writedowns were across the range of Credit Suisse's exposures to commercial mortgage-backed securities (CMBS), retail mortgage-backed securities (RMBS) and collateralised debt obligations (CDOs), its spokesman said. 

CDOs are repackaged securities with substantial exposure to subprime mortgages, which have suffered a collapse in their value as borrowers have reneged on loans in record numbers. 

"It looks like the decline in market indices is accelerating in the first quarter, and that worries me more than the mistakes," said Simon Maughan, an analyst at MF Global. Credit Suisse said last week its gross exposure to CMBSs was 25.9 billion Swiss francs, its exposure to residential mortgages was 8.7 billion francs and to CDOs 2.7 billion. 

The internal review that identified mismarkings and pricing errors by a small number of traders in its Structured Credit Trading business was continuing, said the bank. 

"The spooky bit is the mismarking, and the impression that the company is not on top of things," said another analyst at a U.S. bank in London.

The latest announcement was triggered by disclosure requirements relating to the listing of a $2 billion bond by Credit Suisse which closes on Feb. 19.
Following Tuesday's writedown, Credit Suisse faced calls to reprice a $2 billion 10-year subordinated bond issue it placed last week. Dougan said in the conference call the fund-raising was not critical for the bank and that there had been no impact on its capital from the writedowns. 

Bear Stearns's Chris Wheeler said in a note that Credit Suisse's auditor, KPMG, discovered the mismarkings and errors during an audit it was conducting for the bond issue and subsequently refused to sign off on the review. 

Some banks, including UBS, have been accused by investors of dragging their feet in adjusting the values of their securities portfolios to reflect their true market value, a procedure known as "marking to market". 

Credit Suisse declined to comment on the Bear Stearns note but confirmed that KPMG is the bank's auditor. 

The Qatar Investment Authority bought a stake of 1 to 2 percent in Credit Suisse, the Financial Times said on Tuesday, saying this was believed to have cost no more than $500 million.

Date created : 2008-02-19