The mighty Credit Suisse, Europe’s most scandalous bank, has now been swallowed up by its rival UBS, ending their decades-long battle for Swiss banking dominance. This marks the end of an astonishing rise and fall story that traces its roots back to the bank’s role in transforming Switzerland into the economic powerhouse it is today.
But, while Credit Suisse had noble beginnings as a local Swiss Bank set to develop a backward nation, it gradually expanded into the high-stakes businesses of managing the wealth of the global elite, and then Wall Street investment banking. Ultimately, it’s desire to be the best got it to expand too quickly, which then led to a slow and steady decline marked by a series of scandals, ranging from petty squabbles between executives at luxurious cocktail parties to assisting in hiding the money of infamous dictators like Libya’s Gadhafi and Egypt’s Mubarak.
So, without further ado, let’s explore the dramatic story of Credit Suisse’s rise to prominence and fall from grace.
Ch1: Building a Nation
It’s hard to imagine now. But, in 1856, the visionary businessman and politician Alfred Escher described Switzerland as “Europe’s forgotten backwater.” A relatively poor country that had just emerged from a civil war and was surrounded by great powers such as France and Prussia that sought to influence it. Born in a wealthy, but disgraced family, mr. Escher set out to restore his family’s name by trying to modernize Switzerland, connecting it to the rest of Europe via rail. There was just one problem, since Switzerland was so poor, it was thought at the time that railway construction was only possible with the help foreign money, and therefore foreign influence.
To prevent this, Alfred Escher founded a Swiss bank in Zurich, then known by its German name as “Schweizerische Kreditanstalt” which roughly translates to Credit Suisse in French.
And, even though the bank only formally changed it’s name to Credit Suisse in the 1970s, I shall, for the sake of keeping the story simple, from here on out refer to the bank as Credit Suisse.
Anyway, what I found remarkable about mr. Escher’s motivation is that he seems to have understood one of the deepest mysteries of economics. A mystery, that even up to this day, not many people seem to understand, the power of private bank money creation.
After all, why would starting a bank in a poor country mean that mr. Escher no longer needed to rely on foreign investors to fund his railway company? Where would the money in the bank come from if not from wealthy foreigners? Well, it’s simple, by starting a bank, Mr. Escher essentially began his own money-printing business, enabling him to create money to employ Swiss workers for his railway projects.
Okay, that sounds complicated. So, here is how he did it, step by step.
At the time, the Swiss economy largely ran on Swiss Franc coins that were linked to gold and silver. And, with the promise of future riches, mr. Escher was able to convince his Zurich connections to supply the initial coins needed to start the bank, meaning that the bank now had coins in reserve, that were all owned by the shareholders.
As the first step of money creation, Mr. Escher’s railway company would borrow from the bank. But, instead of demanding coins, the railway company agreed to open a deposit account at Credit Suisse. Crucially, this now meant that the railway company and Credit Suisse were indebted to each other for the same amount.
But, what was the point of that? The railway company issuing debt to the bank and the bank issuing debt to railway company.
Well, the point is that these types of debt are not the same. You see, the debt issued by the bank in the form of a deposit account could be exchanged for coins whenever the railway company wanted whereas the debt issued by the railway company would only lead to a cash inflow in a couple of years.
On top of that, Mr. Escher convinced railway workers to accept payment in Credit Suisse deposit accounts instead of coins.
And that was the magic ingredient that explains why banks can create money and we cannot. I think famous U.S. economist Hyman Minsky made a really good point when he said:
Everyone can create money; the problem is to get it accepted” (1986, p. 228)
In other words, anyone can issue debt, but even today, only debt issued by banks is accepted as money. Of course, there are good reasons that, you and I, as well as mr. Eschers workers accept this deal. First, banks have made it really easy for clients to transfer their debts between them. Second, bank debt can be exchanged for cash whenever we want. And, third, banks are typically good for their debts.
After all, if some workers wanted coins from Credit Suisse, the bank could pay many of them using its coin reserves. And, then, if it’s reserves were depleted, it still had valuable loans to the railway company. It could potentially use these as collateral to borrow coins from other banks if needed. In other words, from the perspective of the workers, the bank was good for their debt because they were backed both by coin reserves as well as the loans to the railway company. It is only if the railway company would get into trouble that the workers would have a really strong incentive to run to the bank to try to get the limited coins out as quickly as possible.
And that was the magical money ‘printing’ business of Credit Suisse in a nutshell. Credit Suisse would in essence turn railway company debt into bank debt, which workers and companies could use as money.
But, before you start crying foul. Let’s remember that, up to this point, the deal has mostly been favorable to the companies, workers, and the Swiss economy, not the bank. After all, the more debts Credit Suisse monetized, the more companies could build, the more employment opportunities there would be, and the more the Swiss economy could grow. On the other hand, the Credit Suisse bankers had to work hard to make sure it didn’t monetize debt from the wrong companies, because if they couldn’t pay back, it would likely face a bank run. That is the job of a bank.
So, how does did it get paid for that? Well, by charging a higher interest rate on loans to the companies than it paid out on deposits.
And, that is the local banking business of Credit Suisse in a nutshell. Built, on a layer of cash brought in by its shareholders. It held the loans of companies building the Swiss economy, and gave them in return low interest rate deposit accounts that could actually be used as money.
This is how Mr. Escher achieved his dream. His bank Credit Suisse ********in essence******** monetized the debts of his railway companies, which allowed it to hire workers without needing foreign money.
This contributed greatly to the Swiss Railway boom, and thus the modernization of Switzerland. And so, Mr. Escher would go down into the Swiss history books as one of its most influential business tycoons ever, and as a bonus, his bank would turn out to have a great future ahead of it.
A future that while great, would soon take a dark turn as Switzerland started promoting and strictly enforcing its banking secrecy laws.
Ch2 Your Tax Evasion is Safe With Us
Even though Swiss banking secrecy, which made the sharing of client information punishable with up to five years in prison, was made official in 1934, the practice had already been encouraged by the Swiss government for decades. The goal of this Swiss policy was simple, convince wealthy foreigners to hold their money in Swiss banks.
At this point, you might be wondering. But, Joeri, I thought you said Mr. Escher had achieved his dream of developing the country without foreign money when he created a Swiss bank capable of creating money locally. And, yes he did do that for the railways. But, the thing is, small open economies like Switzerland still need a lot of foreign money to pay for stuff that isn’t in the country. Meaning that a big foreign currency reserve is needed, something that can be built up if wealthy foreigners are convinced to hold their money in Swiss banks.
And banking secrecy attracted wealthy foreigners for three main reasons. The first was tax evasion, the second was hiding illegally obtained money, and the third, most noble one, was hiding money from invading governments during the first and second world war.
Although let’s be honest, in practice the reasons were mainly tax evasion, tax evasion and tax evasion.
Anyway, as a business first and foremost, the promise of more profits persuaded Credit Suisse managers to abandon Mr. Escher’s simple banking model. This led to the emergence of the second great pillar of what would become the Credit Suisse banking empire: wealth and asset management.
If we go back to the balance sheet of Credit Suisse, we can visualize this as an extra layer, building on top of the traditional Swiss bank. Managing the wealth for shady foreigners, means taking in large deposits, and investing these in various ways. Again, making money because these investments typically earn a higher interest rate than the bank pays on these deposits. But, where wealth management differs from traditional banking, is that it also about just advising wealthy clients about how to manage their wealth, without taking any balance sheet risk. So,
At first glance, especially this advisory part seemed much safer than pure banking since it was just advice. However, given that the advice that these wealthy foreign clients wanted was, let’s be honest, typically about how to avoid taxes or hide ill-gotten wealth, it was this new lucrative wealth management division that would ultimately set Credit Suisse up to become Europe’s most scandalous bank.
The first major scandal involved several Swiss banks acquired by Credit Suisse, which were later found to have harbored stolen Nazi wealth. Upon discovery, Credit Suisse refused to return this wealth to Holocaust survivors for decades.
However, a far more damaging scandal turned out to be the Chiasso scandal of 1977, which occurred in the Swiss town of Chiasso, which is in walking distance of Italy. What had happened is that, the local office in this tiny village next to the Italian border had facilitated Italians illegally smuggling millions out of the country. But, instead of putting the money of wealthy Italians into official Credit Suisse accounts, this local manager, mr. Ernst Kuhrmeier had put the funds into his own operation in another notorious Alpine tax haven, Liechtsentein, instead.
This caused a severe blow to the reputation of Credit Suisse and Swiss banking in general. But, strikingly, this wasn’t due to the facilitation of tax evasion; it was because the funds were apparently not safe in the Swiss bank.
But, rather than resolving these issues and returning to the old boring ways of local banking, Credit Suisse’s management was hungry for more. So, they decided to use this scandal as an opportunity to rebrand Credit Suisse as an international bank, expanding beyond Swiss banking and wealth management, and venturing into the lucrative but high-risk world of Wall Street investment banking.
Ch3 Swiss <3 Wall Street
In the early 1980s, while the Swiss bankers had perfected the profitable business of tax evasion, they were still outclassed by a new breed of competitors: the American Wall Street banker. You see, Wall Street bankers had mastered an even more lucrative business model: investment banking. In theory, investment banking is more like wealth management than traditional banking in that it is for a large part about earning commission income for services rendered, rather than about earning interest income. But, instead of helping clients evade taxes, investment bankers provide services aimed at helping clients obtain the funding needed to expand their business.
Just to illustrate, say that you were a growing global corporation in the 1980s, and you wanted to expand. Sure, you could go to Credit Suisse to get a loan. But, in this decade, it became increasingly popular to instead go to a Wall Street investment bank like ‘Goldman Sachs,’ ‘Shearson Lehman Brothers,’ or the most illustrious of them all, ‘First Boston.’ A bank that would serve as the springboard for many Wall Street titans such as former Lazard CEO Bruce Wasserstein and even BlackRock CEO Larry Fink.
One the reasons investment banking became so popular is that a bank like First Boston could potentially get you a lower interest rate than a traditional bank could. They did so, not by giving you a loan. But, by helping you issue bonds on America’s competitive bond markets. Alternatively, if you sought less risk and wanted to issue stocks, investment bankers could assist with that as well. Finally, if you were in the market for buying up the competition, first Boston could help you determine at what price you should make an offer, all of this for a small commission of course.
At least, that is how investment banking started out. As an advisory business.
But, in the 80s, investment banks increasingly got in on the action themselves, issuing debt to buy the risky types of securities they helped clients issue. Or, increasingly, they started providing the loans that clients needed to take over other companies.
Risky? Certainly. But, the interest rates that investment banks could charge on these loans and the profits they could make on their trading activities were, in the eyes of Credit Suisse management, worth the risk.
There was just one problem: how could a group of conservative Swiss bankers join this elite Wall Street club? Well, as it turns out, all they had to do was wait. When First Boston, the illustrious bank, encountered trouble due to excessive lending to clients for acquisitions, Credit Suisse swooped in to “rescue” it. And, this ultimately led to Credit Suisse completely absorbing First Boston and firmly joining the ranks of elite global banks like JP Morgan and Goldman Sachs under it’s own name.
This marked the completion of Credit Suisse as a global, full-service bank. A bank that, like any other was built on top of cash reserves and shareholder capital. The first, safest layer was then, the traditional Swiss bank, that provided loans and deposits to the Swiss. The second layer was the wealth and asset management business that invested deposits from wealthy individuals into various projects. The third, and final layer was now the risky Wall-Street investment bank, which issued borrowed money on capital markets and invested in risky securities and provided loans to clients looking to take over other businesses.
And, in the next decade, this risky combination was about to get even riskier, as Credit Suisse’s management set its sights on yet another rival.
Ch4 A Swiss Rivalry
In the 1990s, Credit Suisse’s ambitious chairman mr. Rainer E. Gut had one problem. While he ran a prestigious global full-service bank, he didn’t run the most prestigious bank in town, UBS.
In this decades, both banks had adopted a so-called ‘hunter strategy,’ meaning that they mainly pursued growth by hunting smaller, weaker rivals, and buying them up. So, when the large Swiss bank known as Volksbank was struggling after the housing bubble burst, both UBS and Credit Suisse saw their chance to swallow it up to become the biggest Swiss bank. So, they both courted Volksbank, and it initially sided with UBS. However, Mr. Gut worked tirelessly in various backroom deals, eventually securing the deal for Credit Suisse, making it the biggest Swiss bank. However, this was not to last long as, less than a year later, UBS merged with Bank Corp, becoming the biggest Swiss bank once again.
However, for both organizations this would cause big problems later on. You see, these mergers combined several highly complex organizations, making it very difficult to monitor what all employees were up to. And indeed, not long after, these complexities began to catch up with Credit Suisse. First, it’s wealth management division came under increasing scrutiny from the press after it came to light that they had helped dictators from Nigeria, the Philippines and even the notorious Japanese Yakuza gang to hide and launder money. Second, it’s investment bank got into big trouble and suffered heavy losses during the dotcom bubble. Consequently, in 2006, Credit Suisse became one of the first banks to dispose of its sub-prime mortgage portfolio when trouble arose.
However, this turned out to be a blessing in disguise as it meant that when the global financial crisis hit, Credit Suisse had already gotten rid of it’s most toxic assets. As a consequence, Credit Suisse, managed to do much better than both its Wall Street rivals and UBS, which needed a state bailout.
However, in hindsight, receiving a bailout and facing restructuring might have been a blessing in disguise for UBS, as it was forced to slim down its excessive operations while Credit Suisse kept expanding its scandal-ridden wealth management and risky investment banking operations.
Ch5 Scandals, Scandals, Scandals
Although Credit Suisse did not escape the crisis unharmed, in 2008 the company still suffered substantial losses due to bad investments made by its investment banking division. Fortunately, the bank’s overall losses were limited thanks to the success of its wealth management division. Although the reasons for its success would soon become apparent.
While the very nature of Swiss banking secrecy encouraged tax avoidance and theft, in this period it became clear that Credit Suisse had taken it to another level, being the bank of choice for money laundering officials from regimes such as that of Libya’s Ghaddafi and Egypt’s Mubarak.
However, the scandals that really hurt were the ones that got regulators to fine the Credit Suisse. Already in 2009, the bank was fined millions for helping Iran to evade sanctions. A fine that paled in comparison to the billion Dollar fine the bank had to pay for helping U.S. citizens evade taxes on an industrial scale in 2014. Fines that together with further losses from its investment bank, led Credit Suisse to seek new management in the form of charismatic CEO Tidjane Thiam, who pledged to de-emphasize investment banking and focus the company’s energy on helping the ultra-wealthy to avoid even more taxes, but now with a focus on Asia, and hopefully while staying within the law.
Tidjane Thiam’s leadership at Credit Suisse started strong, but eventually led to one of the company’s most high-profile scandals, which involved him clashing with his head of wealth management, Iqbal Khan. The two men, who apparently started on a friendly note, saw their relationship turn sour as a result of Mr. Khan’s resentment of not sharing more of the spotlight with Mr. Thiam. But , in a move that seemed to come right out of a reality drama show on Netflix, Khan moved in right next door to his boss, Thiam, and spent two whole years loudly renovating the property. In retaliation, Thiam allegedly planted trees that blocked mr. Khan’s view of Lake Zurich, which in turn led to very public falling out that took place at Thiam’s cocktail party. Then, when Khan eventually left, he went directly from Credit Suisse to its biggest rival, UBS. Then, in an almost movie-like twist, Credit Suisse had private investigators tail mr. Kahn, leading to a high-stakes chase through Zurich, a physical altercation, and, ultimately, the suicide of the private investigator involved.
In the end, this tumultuous scandal cost Thiam his job, overshadowing the fact that revenues had actually begun to recover during his tenure.
That being said, during his tenure, scandals within Credit Suisse’s wealth management division persisted, with the bank facing scrutiny over its role in Asian corruption scandals, such as Malaysia’s 1MDB case and the bribing of Hong Kong officials to establish a foothold in that city.
To make matter worse, their investment banking arm then began making headlines for all the wrong reasons. First, there was the colossal collapse of Archegos Capital, which cost Credit Suisse billions. And, as if that wasn’t enough, British finance firm Greensill Capital met a disastrous end soon after, striking another blow to the bank’s balance sheet.
So, in 2021 and 2022, both the investment bank and wealth management divisions of Credit Suisse experienced massive losses. Losses that could not be offset by the good old Swiss banking division. Therefore, it made sense that already in 2022 the bank suffered massive deposit outflows, especially from its wealthy clients. Outflows that got worse when banking turmoil started in the United States. And, given that we now know that other banks, and the Swiss central bank were unwilling to save the bank, these depositors were right to flee the bank, as the various assets backing it’s deposits had lost too much value. And so, the bank would have entered bankruptcy… if it was a normal business.
However, as we have seen at the start of this story, banks are not normal businesses, they play a vital role in our economies, turning Swiss debts into money, money that is the lifeblood of the Swiss economy and so, of course, the bank had to be saved? Or did it?
Ch6 Private Gains, Public Losses
When discussing a bailout, there was just one problem: the Swiss people were still pretty pissed about the government bailing out UBS in 2008. So, the government assured them: “this is no bailout.” They just negotiated a deal in which UBS was to take over Credit-Suisse for a reduced price from existing shareholders, risky foreign bond-holders from the U.S. and Asia would lose their investment, and deposit holders as well as many key staff members would be protected.
Oh, and the government promised to protect UBS from further market panic via a cheap loan and it would provide a guarantee of bearing a large share of the losses if Credit Suisse turned out to be worth way less than what UBS bought it for.
So, yeah, it’s not a bailout. The government just provided cheap loans, and guarantees which are worth a lot of millions of Dollars. And all of this was done for the good of regular Swiss people according to Swiss finance minister who said:
“Without a solution, payment transactions with Credit Suisse in Switzerland would have been significantly disrupted, possibly even collapsed, and wages and bills could no longer have been paid.”
The problem with that statement, though, is that the Swiss retail bank was only a small part of Credit Suisse. And that small part could have been saved on its own. After all, during the great financial crisis, this is exactly what the Belgian and Dutch governments did when the bloated Fortis and ABN AMRO combination collapsed. They only bailed out the local banking units that were crucial for their national economies. The other parts were allowed to collapse or be sold off at bargain prices to the highest bidder.
And, this was actually a viable option for Credit Suisse. Because, as the Financial Times reported, ex-’First Boston Banker‘ and now Blackrock CEO, Larry fink had actually already sent some of his top-ranking lieutenants to Zurich to explore the option to buy precisely these parts of the company.
But, this take-over was allegedly blocked by the Swiss government.
Instead, they preferred that UBS would become an even bigger, too big to fail, mega conglomerate that is twice the size of the Swiss economy. A behemoth that would dominate Swiss retail banking, Swiss Wealth Management, and Swiss Investment banking. A conglomerate that, at the time of the takeover, was led by a foreign CEO who was swiftly replaced by a Swiss banker after the deal.
So, could there be something more going on here? Was this take-over in the best interest of the Swiss people, or just in the interest of the influential Swiss banking class that faced only minor consequences thanks to this collapse?
Unfortunately, as I am not part of Swiss banking circles, I cannot answer that question. But, perhaps you can answer this question. Let me know what you think, in the comments