November 28, 2023

Investment Banking

Let Your Investment Banking Do The Walking

Credit Suisse at a make-or-break moment

The renowned banker Michael Klein has a new deal in his sights.

Compared with his record of megadeals bringing together Barclays and Lehman Brothers, Dow Chemical and Dupont, and Glencore and Xstrata, this will be a small one.

But if successful, it might do something few in the investment banking industry think is possible: take the dysfunctional, scandal-plagued lender Credit Suisse and turn it into a banking powerhouse.

Klein, a former Citibank M&A banker, is on the verge of signing an agreement to sell his eponymous advisory boutique firm to Credit Suisse for a sum in the “low nine figures”, says a person involved in the negotiations.

The takeover is the central plank in a radical restructuring plan that the Zurich-headquartered lender hopes will bring to an end an era of stumbling from crisis to crisis and open up a profitable new future.

The plan, unveiled by the Swiss bank’s management team last year, would see Klein become chief executive of a new entity, CS First Boston, merging his firm and Credit Suisse’s spun-off capital markets and advisory business.

“Michael Klein is an extraordinary banker — he is the most unbelievable client guy,” says a Credit Suisse executive. “We just hired a master of the universe to run our investment bank.” 

Yet for all the enthusiasm surrounding the deal, Credit Suisse is now firmly in the last chance saloon.

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On Thursday, it publishes arguably the most important set of financial results in its 167-year history. It has already warned the market that it is on course for its second consecutive annual loss following a damaging exodus of wealth management clients in October in response to intense social media speculation about its financial health. Chair Axel Lehmann has described 2022 as a “horrifying year” for the bank.

But if the size of the annual loss is significantly higher than the SFr7.2bn ($7.8bn) estimated by analysts and there is little sign that outflows have reversed — as the bank’s management insists they have — the bank’s capital and liquidity levels could take a hit. That would be a warning sign to shareholders and credit rating agencies.

“We don’t want any massive surprises,” says Vincent Kaufmann, chief executive of the Ethos Foundation, which represents about 5 per cent of Credit Suisse shareholders. “The worst scenario would be if the board was forced to reconsider its strategy — that would be really catastrophic.”

Credit Suisse shares hit an all-time low in December at SFr2.70, and although they have since risen to about SFr3.20, they are still down more than 60 per cent over the past year. The bank’s market price trades at close to an 80 per cent discount to its book value, compared to a 20 per cent premium for fierce rival UBS.

Following a series of downgrades over the past year, Credit Suisse’s debt teeters perilously one notch above junk status, as rated by S&P, and two above by Moody’s and Fitch. The latter two have a negative outlook on the group.

Should Credit Suisse slip into non-investment grade territory — an ignominy that even Deutsche Bank avoided during its lowest points as Europe’s basket-case bank — the Swiss lender’s restructuring would be put in jeopardy, as well as its future as a going concern.

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Within the bank’s corporate and executives boards — where the plan was formulated last year — there is a feeling that if the strategy does not succeed, the business is unlikely to survive without being broken up or sold off, according to people involved in the discussions.

In such a scenario, UBS remains on alert for a “999” emergency rescue call from the Swiss government, says a person familiar with the bank’s internal war-gaming. “The country is committed to a two-bank model, but we would be naive not to prepare for it.”

In that eventuality, UBS would prefer to take over the entire Credit Suisse group and make its own decisions about which business lines and staff to retain, without the complications from half-completed, third-party negotiations with Klein, the person adds.

The deal that could remake Credit Suisse hinges on what happens in the next few days.

A steep task

Even if Credit Suisse were to come through this week’s results unscathed, its new management team — having undergone an overhaul over the past year — still faces a fiendishly difficult task in executing the grand plan.

While chief executive Ulrich Körner — who was catapulted into the role last summer — has said it is a three-year project, those working on the details concede it could take up to five years or longer to pull off.

The plan is centred around focusing the bank more on wealth management and cutting its exposure to riskier investment banking. The part that has received most attention so far is the CS First Boston spin-off, whose name harks back to the group’s dealmaking heyday in the 1980s. 

Credit Suisse executives argue the new venture will cause huge disruption on Wall Street, with a business nimble enough to compete with fleet-footed boutique advisory firms — which have picked up market share over the past decade — but with the heft of a global bank’s balance sheet behind it.

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“The idea is to create a big boutique, two to three times the size of the next largest, but with the firepower of the monster investment banks,” says a person involved in planning the restructure. “To me, this model is the future of banking.” 

Credit Suisse executives appear to have already overcome the first hurdle to launching the business, albeit a fairly low one. Last month, the bank cut a deal with the owner of the First Boston trademark, an unrelated business, to enable it to use the brand for the new venture.

But the scant details Credit Suisse has made public so far have been met with scepticism by rivals. “They have the name, but do they have the right people?” asks the head of a rival investment bank, who was doubtful that the plan would work.

“It will take time and money to attract the right people. The advisory boutique model is a much more people-focused business than broader investment banking. That is the most important thing to get right.”

The spin-off has not been without controversy, with the bank’s board and management facing questions over the process of deciding the investment bank’s future amid accusations of conflicts of interest.

A small subset of the board was tasked with finding a solution to the investment bank last summer. One of the three members was Klein, who had been on the Credit Suisse board since 2018.

Key moments: The Greensill scandal

MARCH 2021

Credit Suisse was forced to suspend $10bn of investment funds tied to the specialist finance firm Greensill Capital, trapping the savings of up to 1,000 of its wealthiest clients. Ever since, the bank has been involved in a painstaking process of reclaiming its customers’ funds through insurance claims and lawsuits.

After the decision was reached on separating parts of the investment bank, Klein was tasked with leading the new venture, a decision Credit Suisse insiders insist was made by Körner. Klein has since stepped back from the board.

“Carving out the investment bank is wrought with issues,” says an analyst covering Credit Suisse. “It’s very ugly from a governance perspective; the guy was an insider and now he is going to run the spun-off bank.”

Credit Suisse executives have said the bank “shielded” itself from “perceived conflicts of interest”, with Klein recusing himself from final decisions on his personal involvement.

Yet his role in securing investment from Saudi Arabia for Credit Suisse’s capital raise and his personal benefit from selling his boutique to the bank have also raised eyebrows.

A person involved describes the negotiations over the deal as “quite adversarial” at times. Klein has hired law firm Paul, Weiss to be in his corner — known for charging more than $2,000 an hour, and for representing ​​Sam Bankman-Fried in the FTX bankruptcy case.

“Klein has negotiated a terrific deal for himself,” says the head of a rival investment bank. “This is a great deal for the banker, but not so much for the bank.”

Building the new bank

The big next step in putting the new investment bank together is defining its strategy and structure, a process that requires aligning lots of moving parts. This task has been chiefly left to Klein, who has to get the balance right between what Credit Suisse is traditionally good at and what business mix will help it compete with rivals.

Key moments: Archegos collapses

MARCH 2021

The collapse of Archegos Capital under the weight of its own heavily leveraged stock market bets caused a $5.5bn loss for Credit Suisse, marking the biggest trading loss in its history. Credit Suisse provided prime broking services to the family office, along with several other investment banks, which collectively lost more than $10bn.

Leveraged finance, along with securitised products, has been an area where Credit Suisse has excelled historically, but both require a weighty capital underpin, which the business is trying to move away from.

Klein’s personal strength as an M&A dealmaker is not matched by Credit Suisse’s own standing in the market, where it is viewed as a second-tier player on Wall Street.

Setting the strategy will depend on ensuring the right staff stay on with the new venture, as well as poaching talented bankers from rivals. In order to do so, Klein will offer equity stakes in CS First Boston, which is planned to be partly listed in the next few years.

Pulling all these threads together will depend on how much capital can be raised from investors in the new business, though any investor committing capital would want to see well-defined plans. Bankers coming from rivals would also want a clear indication about how much equity they would get in the business.

“I think it is very hard to start these types of conversations with people until you have a strategy to explain to them, and he can’t have a strategy until he has the capital in place,” says the head of the financial advisory group at another Wall Street bank.

Credit Suisse is seeking to tempt investors with a five-year exchangeable debt security that will yield 6 per cent a year and convert into equity when CS First Boston lists, according to a sales document describing the venture as a “super boutique” that was first reported by Reuters.

Key moments: Uli the knife takes over

JULY 2022

Ulrich Körner was the surprise choice to take over from departing chief executive Thomas Gottstein. The appointment of the man nicknamed “Uli the knife” during his 11 years as a UBS executive was announced at the same time the board said it would begin drawing up a radical plan to restructure the bank.

Another key feature of the master plan that has been little discussed outside Credit Suisse is the creation of a so-called “bad bank” — known internally as the capital release unit — tasked with winding down high-risk business lines and exposures that are seen as expensive and peripheral to the group.

Against this backdrop is a vast cost-cutting drive targeting SFr2.5bn or 15 per cent of the group’s spending. The effort involves everything from rationalising IT systems to selling office buildings and luxury hotels, and includes shedding 9,000 roles from the bank’s 52,000 workforce.

The bank’s first wave of redundancies at the end of last year focused on the US, where labour laws make it easier to fire staff, but negotiations are already under way with investment bankers in Europe that could see more than 10 per cent of roles going this year.

The lay-offs are undermining some of the planning, affecting staff morale and leading to a spate of defections by senior bankers.

CS First Boston will be centred in New York and retain some investment bankers in Europe and Asia to give the business global scale. But staff outside the US are unclear what role they will play in the new venture, if any.

“The reality is it’s difficult to imagine where we fit in; we are all a little bit in waiting mode,” says one Europe-based Credit Suisse investment banker. “The direction of travel is quite evident. European activities are going to be slimmed down — the extent of that is going to be defined over time.”


Rumours on social media over the financial health of Credit Suisse led to clients pulling a 10th of the assets held in the bank’s wealth business, on a scale experienced by rival UBS throughout an entire year during the financial crisis.

In New York, meanwhile, staff who have been told they are likely to be kept on for the new venture are unclear about what financial packages they will receive. “They have no idea of what equity they will be getting, but the alternative is that they will be looking elsewhere,” says a person with knowledge of the process.

“No one knows when it launches, how it launches, will they get a salary in the first two months, who is financing it. They ask about what equity they will get and are told ‘we will talk about that later’.” 

Rivals circling

Waiting in the wings as Credit Suisse prepares to report its seventh quarterly loss out of the past nine on Thursday are other suitors interested in parts or all of its business.

Beyond UBS, they include Deutsche Bank, which is struggling to grow its own wealth management operations and is still too reliant on its volatile trading business for revenue.

Another rumoured party is French lender BNP Paribas, which last week closed the $16.3bn sale of its Bank of the West US division to Bank of Montreal. After buying back €4bn of stock, the French bank said it would use the remainder of the proceeds to invest in technology and for acquisitions.

Though BNP’s chief executive said this week that the bank would target small add-ons, a deal for Credit Suisse could prove tempting given the French group lacks a successful private banking arm and is weak in Asia.

Credit Suisse may also be a takeover target for Middle Eastern sovereign wealth funds that are flush with cash as a result of the booming energy prices amid the war in Ukraine. Investors from Saudi Arabia and Qatar already make up a fifth of the bank’s shareholder base.

The turnround is still plan A for the bank. But shareholders and analysts are hoping to see more information as the results come out on Thursday — from details of the securitised products group sale, to clarity over how the bank will meet its ambitious cost-cutting targets.

“They need to bring clarity,” said Kaufmann of Ethos. “When there is little transparency, rumours set in — and as we saw with the social media storm in October, that can be hugely damaging.”

Additional reporting by Arash Massoudi in London and Sam Jones in Zurich

Video: Credit Suisse: what next for the crisis-hit bank? | FT Film