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Can Credit Suisse remain independent?


Credit Suisse Group AG cried out to the cavalry on Wednesday, and it finally came: Swiss authorities threw down a 50 billion francs ($54 billion) liquidity line to quell mounting panic that threatened to overwhelm its defenses.

Another moment of acute danger in Credit Suisse’s struggle to reinvent itself should be over: The stock rose and debt risks improved in early Thursday trading, though those gains lost momentum as the morning wore on. progressed. The problem is that the chronic problems persist and that’s what investors are focusing on. Some still believe in an independent future for a Credit Suisse, though much smaller in size and ambition; others now see a takeover and breakup as the most likely ultimate solution.

Chief Executive Officer Ulrich Koerner and the rest of the leadership can only stick to their strategic renewal and try to regain the trust of customers and employees. Koerner told employees to keep their minds on the facts and not on the sentiment. He needs savers to do the same.

Credit Suisse has ample capital, no imminent losses from bad assets and more than enough liquidity to cover withdrawals. It is faith, not fundamentals, that matter at this point.

For the months to come, the problem is that prolonged corporate uncertainty and another bout of sharp fear have added to concerns that the bank’s name has already been damaged too much. Staff have left and wealthy customers have cut their assets. It’s this damage — or “franchise erosion” in banking parlance — that has led JPMorgan Chase & Co. analyst Kian Abouhossain to conclude that current plans are no longer sufficient. He sees a sale and breakup, probably organized by UBS Group AG, as the most likely endgame now. At the very least, Abouhossain says the investment bank will have to be shut down completely. No more First Boston revival.

What can Credit Suisse do to prevent this fate? First, fill the void of information left by stock with few or no fringe supporters. Sometime near the annual shareholder meeting in early April and several weeks later, ahead of Q1 results, the bank should be able to release details of the historical costs and revenues of the reorganized, continuing set of operations. This is a hugely important first step that could give analysts and investors the data they need to assess likely profitability and make more informed decisions about what the stock should be worth. The sooner those numbers can come out, the better.

Credit Suisse’s offer to buy back about $3 billion of its own bonds is also a bold game designed to have multiple payouts as it fights for survival. A sell-off of a bank’s stocks and bonds and a jump in costs to protect its debts from defaults create a nasty feedback loop that directly harms its ability to operate.

These market movements make Credit Suisse a riskier counterparty for things like derivatives trading. Its clients and partners in these transactions need to buy more hedges and could lead them to limit their exposure to the Swiss bank, as BNP Paribas SA reportedly did on Wednesday. This is downright bad for business.

Offering to buy back debt trading at distressed levels raises prices and helps lower protection costs. In addition, for every bond bought back at a lower face value, Credit Suisse adds to its capital by taking advantage of the portion of its debt it now never has to repay. The risk is reduced, the balance sheet is further strengthened and the bondholders who did not sell have a safer security than before.

Deutsche Bank AG followed this strategy during the depths of the crisis and Credit Suisse followed suit late last year after the German bank’s former treasurer Dixit Joshi joined as chief financial officer. It’s a smart tactic, but it hasn’t had the desired effect so far: Credit Suisse bonds and credit default swaps were still under pressure as US markets opened on Thursday.

These are nervous days. Credit Suisse executives are working hard to complete Plan A, but quietly behind the scenes they must also discuss contingency backup plans. A takeover by UBS wouldn’t be easy: it would likely have to spin off the Swiss domestic bank because the combined market share would be too large and much of the investment bank would likely still face a costly shutdown. The international asset business would be the prize, but where there are common customers, there would likely be some revenue loss as well.

But if a bank could buy Credit Suisse’s roughly 40 billion francs worth of physical shares for something close to its current market value of 8 billion francs, that bank would have a lot of room for error.

Paul J. Davies is a Bloomberg Opinion columnist on banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.