Operational Risk Strikes Again
First Societe Generale, now Credit Suisse. As trading scandals keep surfacing, audit and surveillance professionals are likely to find themselves in ever-greater demand.
The "mismarkings" that Credit Suisse revealed Tuesday account for an unspecified portion of a $2.85 billion write-down of asset-backed securities that the bank plans to record in the first quarter. The amount is far smaller than both Societe Generale's $7.2 billion fourth-quarter loss from unauthorized trades discovered and unwound a month ago, and Swiss rival UBS's running total of nearly $19 billion in write-downs. But the disclosure dealt a severe blow to Credit Suisse's recent reputation for competent oversight and transparency in its own financial statements, according to analysts and investors quoted by Bloomberg News.
The news ups the ante still further on managements at other banks to insure their procedures for overseeing and recording trading activity can't be manipulated by traders seeking to inflate their own bonuses through fake profits or unauthorized positions. As with the SocGen rogue trader scandal, it may accelerate the trend toward upgrading all types of risk management - especially the departments that deal with "operational risk," which includes compliance-related and monitoring and auditing of traders' actions.
Credit Suisse said that a normal internal review found "mismarkings" of securities by a "small number" of traders in its structured credit business. Those pricing errors weren't the main source of the $2.85 billion write-down, which the bank attributed primarily to adverse market movements. But the bank also said it's still reviewing the situation, and that the 2007 earnings it reported last week might be affected as well. A spokesman told Bloomberg the internal review will be completed before March 18, when Credit Suisse is to publish its annual report. An unspecified number of traders have been suspended.
Various analysts and investors quoted by Bloomberg reacted in terms such as "speechless,'' "a major blow," "loss of confidence," and "financial ineptitude." Andy Lynch, a London-based portfolio manager at Schroder Investment Management, summed it up this way: "The management team of Credit Suisse had done a very good job of convincing investors that they're in control, that they're navigating the waters very well. Suddenly that confidence has gone and the question everyone is asking is what's next, what else might they find in this review?''
The revelation's timing is doubly embarrassing for Credit Suisse management. The company reported 2007 earnings a week ago, including net write-downs of just 2 billion Swiss francs ($1.8 billion). It also sold $2 billion of subordinated bonds last week. Terms of those bonds may now be "reviewed," Chief Executive Brady Dougan said in a conference call. And this past weekend, the prime minister of Qatar told Bloomberg his country was buying Credit Suisse shares.