The Swiss bank's hit from a troubled range of supply chain funds may eclipse its net profit last year. Credit Suisse's board is scrambling to ascertain the wreckage, and reportedly thinking of compensating clients for some damages.

Executives at the Zurich-based bank are warning that damages from a line of funds managed with now-insolvent Greensill may rise to $3 billion, according to the «Financial Times» (behind paywall) on Friday, citing sources. This is more than the 2.67 billion Swiss francs ($2.85 billion) in net profit the bank generated last year, and just shy of the 3.42 billion francs in 2019.

The estimate underscores both the urgency with which Credit Suisse needs to get its hands around the problem as well as the potential financial hit it is likely to incur. The Swiss wealth manager's board is overseeing a post-mortem of how it could have overseen a series of warning signs. This investigation doesn't stop short of CEO Thomas Gottstein, according to «Bloomberg».

Board Takes On Oversight

Credit Suisse director Richard Meddings, an ex-CSFB banker with an extensive background in audit and risk management, is emerging as a key figure in the probe, along with David Mathers and Romeo Cerutti, Credit Suisse's long-standing finance and legal chiefs, respectively.

A Credit Suisse insider quoted by the «FT» said $3 billion «is the theoretical maximum» and that they expected the Swiss bank's ultimate loss at as little as $1 billion – after a long process. The scandal blew open three weeks ago when Credit Suisse pulled the plug on the $10.1 billion line of Greensill funds, after credit insurance on the fund assets wasn't renewed. 

Complex Legal, Supervisory 

This set into motion Greensill's insolvency, which in turn is hitting one of the financier's biggest clients, GFG, controlled by British industrial magnate Sanjeev Gupta. The involvement of at least four jurisdictions and regulators – Switzerland, U.K., Germany, and Australia – as well as unclarity over the portfolio companies and wrangling over insurance will prolong the scandal for years.

Complicating matters, Chairman Urs Rohner hands over to António Horta-Osório in just five weeks. Though he is still running Lloyds until the end of next month, Horta-Osório is likely already also heavily involved at Credit Suisse.

Agonizing Choices

The review led by Credit Suisse's board comes as legal action from its fund investors looms. The bank faces the agonizing choice of what to tell its wealthy clientele, which makes for the lion's share of the 1,000 clients who bought the Greensill funds.

Offering compensation to them raises the specter of moral hazard in future, while playing hardball on claims may antagonize clients – at odds with Credit Suisse's ambitions for expanding its business the world's wealthy. The Swiss bank is weighing whether to partially compensate the fund clients for as much as half of their losses, «Reuters» reported on Thursday, citing sources.

Flagging Potential Withdrawals

Meanwhile, Credit Suisse is liquidating what it can – cash – from the funds: it plans to return another $1 billion early next month, after paying back $3.1 million three weeks ago, according to the «FT». Last week, the bank admitted its damage is manifold: «The ultimate cost to the group of resolving these matters may be material to its operating results,» according to Credit Suisse's annual report.

«We might also suffer reputational harm associated with these matters that might cause client departures or loss of assets under management,» it said. A reputation expert told finews.com on Friday the bank should acknowledge the lapses in risk management which allowed the scandal to unfold, as well as apologize to its stakeholders.

Seeking To Cauterize Wound

Credit Suisse is seeking to cauterize the issue within its asset management, which co-managed the supply chain funds and will be on the hook for any losses. Even as it splits the unit from its wider private bank as a result of the scandal, it appears clear the problem is much larger and more threatening.

For example, Credit Suisse granted a controversial $160 million bridge loan to Greensill Capital last year ahead of a planned initial public offering (the loan was since partly repaid). It reportedly banked the company’s founder, Lex Greensill, in its wealth management arm.

At the same time, Credit Suisse’s portfolio managers were touting the supply chain funds as recently as December, long after Germany began investigating at Greensill’s German bank mid-2020.