Tuesday, February 19, 2008

Credit Suisse $2.85B ABS Mismarkings

(Bloomberg) -- Credit Suisse Group discovered pricing errors on bonds that will cut first-quarter profit by about $1 billion, prompting the biggest share decline in more than five years.

Switzerland's second-largest bank said an internal review found ``mismarkings'' by an unidentified group of traders that contributed to $2.85 billion of writedowns on asset-backed securities. The bank said in a statement today that it's assessing whether 2007 earnings were also affected.

The announcement comes two days after Qatar said it was buying shares in Credit Suisse and a week after the Zurich-based company reported net writedowns of 2 billion Swiss francs ($1.8 billion) for all of last year. Chief Executive Officer Brady Dougan said on Feb. 12 that he was ``more optimistic than many'' about prospects for a debt market recovery.

``I'm speechless,'' said Georg Kanders, an analyst at WestLB in Dusseldorf with a ``buy'' rating on Credit Suisse. ``To announce this just a week after reporting earnings is a major blow. This will again put the whole sector under pressure.''

Credit Suisse fell as much as 10 percent, and was down 4.95 francs, or 8.7 percent, to 51.80 francs by 11:25 a.m., cutting the company's market value to 60 billion francs. Shares of financial companies slumped across Europe, with UBS AG, the biggest Swiss bank, dropping 2.3 percent.

Credit-default swaps on Credit Suisse's subordinated debt rose to a record, according to Deutsche Bank AG. Credit-default swaps, used to speculate on a company's ability to repay debt, rise as perceptions of credit quality worsen.

`Loss of Confidence'

Credit Suisse blamed the writedowns on ``significant adverse first quarter 2008 market developments'' and pricing errors ``by a small number of traders'' in the structured credit trading business. The company estimated that it remained profitable so far in the first quarter.

The announcement may raise questions about oversight at the bank less than a month after Societe Generale SA reported the worst trading loss in banking history following unauthorized bets by trader Jerome Kerviel. Credit Suisse spokesman Marc Dosch declined to comment. The company will hold a conference call for reporters and analysts at 3 p.m. Zurich time.

``The big question mark is about the bank's control systems,'' said Stefan Raetzer, who helps manage about $28 billion at Allianz Global Investors in Frankfurt. ``The writedown isn't as much of a problem here as the loss of confidence.''

Dougan

The loss is the biggest blow for Dougan, 48, since he took over as CEO from Oswald Gruebel in May after heading the investment bank for three years. Gruebel returned the bank to stable earnings after a decade of management turnover, bungled acquisitions and the first criminal conviction of a bank in Japan. Credit Suisse's writedowns follow about $19 billion in debt and loan markdowns at UBS.

``It unfortunately just reinforces the reputation that the large Swiss banks have generated over the last year for financial ineptitude,'' Peter Thorne, a London-based analyst at Helvea Ltd., said in a note to clients. ``Whilst we had received some assurance that the Credit Suisse balance sheet is not as laden with problem securities as UBS, this disclosure just raises the prospect that they may be simply bad at knowing what problems they do have.''

More Writedowns

Rising U.S. subprime mortgage defaults led to more than $145 billion in writedowns and loan losses at the world's biggest financial companies. The banks may be facing as much as $203 billion in additional writedowns, largely because of a worsening bond insurance crisis, UBS analyst Philip Finch said last week.

Credit Suisse didn't specify which securities it's writing down. Last week, the bank said it reduced holdings of commercial mortgage-backed securities to 25.9 billion francs during the fourth quarter from 35.9 billion francs. The bank also held 8.7 billion francs in residential mortgages as of Dec. 31, down from 16.3 billion francs; and 2.7 billion francs in collateralized debt obligations, compared with 2.3 billion francs.

Qatar is buying Credit Suisse shares, the Gulf state's prime minister, Sheikh Hamad bin Jasim bin Jaber al-Thani, said in an interview two days ago. He declined to specify the size of the holding in Credit Suisse. Kenneth Shen, head of strategic and private equity at the Qatar Investment Authority, didn't answer three calls to his mobile phone today. The authority has no press office or official spokesperson.

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