Wednesday, February 20, 2008

Credit Suisse shocks with $2.8bn mark-down

(FT) Credit Suisse sent fresh tremors through the banking sector Tuesday when it revealed $2.85bn of mark-downs on structured credit positions caused in part by “pricing errors” by some of the Swiss investment bank’s traders.

Credit Suisse has suspended a number of traders in connection with the writedown. It said they remained employees of the bank pending the outcome of a review.

The Financial Times has learnt that the bank has also suspended its global head of the collateralised debt obligations, Kareem Serageldin.

Brady Dougan, chief executive of the bank – previously perceived to be among the most resilient to the credit turmoil – would not confirm either the names or number of traders involved.

Credit Suisse said the losses would dent first-quarter net income by an estimated $1bn, although it would still make a profit in the period. However, its 2007 results were also being reviewed. The bank made net income of SFr8.55bn ($7.8bn) last year.

Mr Dougan said he had been unaware of the situation when he presented the group results last week. “Obviously it’s very disappointing for us,” he said. “We do still feel that, notwithstanding these issues, we have performed well relative to the industry.”

Shares in Credit Suisse closed down 6.6 per cent, at SFr53, dragging other European bank stocks lower. Analysts said they were mystified that Credit Suisse had no inkling of the problems when it issued its results.

The losses were incurred on the bank’s holdings in complex credit assets known as residential mortgage-backed securities and collateralised debt obligations.

These are bespoke securities whose value depends on pools of other credit assets, such as mortgages and loans. In many cases they are exposed to the US subprime mortgage market.

The losses came to light during a review of the bank’s trading positions last week. The bank described the review was “ad hoc” and part of its normal risk management procedures, and had not been triggered by any particular concern.

One insider said the review had aimed to see whether the bank could identify greater efficiencies in the way it managed and internally reported its positions. Credit Suisse said that while the positions had been valued daily in accordance with its rules, the valuations themselves had been out of date.

It said it had yet to establish whether the mis-statements were deliberate, saying that its review was ongoing. However, it stressed that there had been no fictitious trading positions like those at the centre of the trading losses racked up by a junior trader, Jérôme Kerviel, at France’s Société Générale last month.

“The final determination of these reductions will depend on further results of our review and continuing market developments,” Credit Suisse said.

The disclosure was made because the bank was in the process of completing a $2bn 10-year bond issue, which would otherwise have had to be pulled. Credit Suisse has in recent years worked hard under the leadership of Mr Dougan to rid itself of a reputation for volatile results caused by a culture of excessive risk-taking.

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