Banking expert Peter F. Koons ranks
Can First Boston take out Credit Suisse?
Credit Suisse is selling a large part of its investment bank and outsourcing it: but what if the First Boston subsidiary suffers huge losses in the future? Should CS step in then?
Credit Suisse is working to revive CS First Boston.
Credit Suisse shareholders are tired of the investment bank Credit Suisse (IB). The International Bureau has burned 5,259,000,000 francs in the last 21 months, that is, since the beginning of 2021. With several multi-billion dollar disasters and several expensive court cases, IB is an endless pit and plunges the bank into deep red numbers. But with the planned redesign of the bank, everything should improve. The IB is reduced and largely outsourced.
For example, CS will sell a large portion of the company with secured mortgage loans or credit card debt. On the other hand, you are outsourcing your capital and consulting business to a new company which will henceforth be known as CS First Boston. The risky assets end up in a “bad bank” where they are eventually liquidated.
Does Credit Suisse Have to Cover Affiliate Losses?
Shareholders should be happy with this step: in the future, the investment bank’s losses will not eat up all the profits from running the Swiss business and assets. But would that also apply if CS’s First Boston subsidiary continued to waste hundreds of millions each year? Kunz (57), banking expert and professor of law at the University of Bern: “Credit Suisse should not be liable for subsidiaries or cover their losses.”
However, there are certainly instances where the parent company contractually warrants liability. This move can create trust with business partners or clients. This happens again and again, Koons says: “However, Credit Suisse hasn’t said anything on this point.”
And then there will be an exception: if Credit Suisse’s behavior raises certain expectations regarding liability and subsequently disappoints them. But this does not happen in practice, Koons asserts.
CS can’t pull the head out of the lever
The situation in “Bad Bank” is completely different. Koons is convinced that in the event of outsourcing ongoing legal process or liability risks, this must be accompanied by contractual guarantees from the parent company: “For reputational reasons, Credit Suisse cannot outsource bad risks and therefore wants to get himself out of the case.” It helps legally. “In a lawsuit, the plaintiffs can object that the bank has put off the risk with the subsidiary in order to avoid the risk of liability,” says the law professor.
If First Boston gives bad numbers, CS shareholders won’t get away with fault even without liability: Because the First Boston holding owned by Credit Suisse will lose its value — and the bank will have to make painful value adjustments.
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