Can Credit Suisse let go of the swashbuckling investment banking culture it imported from the U.S.? Initial signs indicate that is taking care of itself.

Zurich-based Credit Suisse's investment bank swung to a loss in the second quarter, due to 493 million Swiss francs ($540 million) in losses from Archegos. Last year, it had posted a profit of 912 million francs in the same period.

Unsurprisingly after throttling risk following Archegos, all types of revenue fell dramatically on the quarter: fixed income by 43 percent, capital markets by more than a quarter, and advisory by 43 percent.

Less Gnomes of Zurich, More Wolves of Wall Street

These are, of course, gruesome results for the 17,650-person-strong investment bank, much of which's DNA comes from First Boston. It is this culture that would have led to an 80 percent surge in first-quarter revenue to $4.05 billion chasing the boom in credit and capital markets – if it hadn’t also fallen into the $5-billion elephant trap that was Archegos.

The Swiss bank has traditionally taken on more risk than U.S. rivals, relative to its size. The 165-year-old Swiss lender knows how to foster entrepreneurial risk-taking and exploit Wall Street's nooks and crannies, like Niron Stabinsky’s clout with SPACs.

Poor Returns

The difference this time is the sheer scale by which the investment bank has missed the mark. Archegos earned Credit Suisse less than $18 million in fees last year, a dramatic mismatch of risk-taking that has led to the departure of 23 employees and clawbacks from bonuses already paid out of $70 million.

The breadth of Credit Suisse’s problems is also emerging. Asset management is mired in the $10.1 billion Greensill scandal, which has likely already infected Credit Suisse’s private bank. Mix in an unexciting outlook – «we continue to expect more normal levels of market volumes in the coming quarters of 2021 compared to the elevated levels seen in 2020» – and shackles on risk to create an unappetizing scenario.

Rush for Exit

Scores of investment bankers have seen the writing on the wall. More than 30 have already defected, according to various media reports. These include dealmakers in areas of traditional strength for Credit Suisse such as leveraged finance and mergers and acquisitions, where FIG luminary Tim Devine headed for Barclays in May.

The issue is front and center for analysts: «Containing revenue attrition and sustaining its underlying franchise will be important factors for sustaining its current credit profile and ratings,» Moody’s analyst Michael Rohr said following the second-quarter results. Put simply, rainmakers don't want to work for a bank that is yanking bonuses.

Breaking Down Naturally

Credit Suisse’s prime brokerage business – the site of the Archegos train wreck – sounds much like it has been all but shut down. A «substantial resizing» of it helped Credit Suisse cut risk-weighted assets by more than $20 billion in the quarter.

As «Bloomberg» commentator Matt Levine noted, Credit Suisse’s universal bank «hedge» has broken down: «When trading is bad M&A can pick up the slack, and vice versa. But when your trading business is uniquely bad the M&A bankers just leave.»

The First Boston element in Credit Suisse’s DNA is in the process of breaking down all by itself.