Written Wednesday Oct 28

Credit Suisse has stumbled in its initial restructuring effort. Forced by Swiss regulators to deleverage more quickly, the bank has turned to several unenthusiastic steps in order to comply. The Swiss banking unit will see a partial public flotation not to “unlock value”, as is commonly described, but rather to satisfy systemic banking requirements in the home country. The institution also floated a smaller “capital” campaign than many, apparently, were expecting. Small wonder given that it priced well below expectations, making all these positive pronouncements about it all into hollow PR.

The planned rights issue only raised CHF4.7 billion at a per share price of 18 francs; a 30% discount to the trading price around 24.50 francs. It was also significantly less than the 22.75 francs paid by private placement investors just a few days ago. Apparently, enthusiasm is in rapidly shortening supply for the bank’s plans.

These include a switch from ROE targets, which is typical for banks doing even wholesale banking, to growth targets. New CEO Tidjane Thiam is pivoting to Asia and emerging markets, thinking there is figurative gold in doing so. But that does not include the usual appeal or the version that has dominated such banking efforts for decades now. In other words, they aren’t going to Asia looking to be a wholesale bank but rather an RIA or brokerage firm. Mr. Thiam noted in his statement that:

Emerging markets, particularly in Asia, present us with great opportunities, and we will work hard to capture the wealth management opportunity in these economies that we are confident will become the largest proportion of the world economy over time.

Wither Credit Suisse’s “dollar” profile in the transition. Small wonder, given that FICC is pounding the bank relentlessly and reminding the “markets” that Credit Suisse’s decision to avoid “dollar” restructuring in at least 2013 was a big mistake.

Credit Suisse reported a weaker-than-expected profit in the third quarter as uncertain market conditions weighed on its fixed-income and trading operations. The bank said third-quarter profit declined 24 percent, to 779 million Swiss francs, or about $816 million, from the quarter a year ago. Revenue fell 9 percent, to 5.99 billion francs.

With that, Thiam reiterated the despondency of resource allocations in the “dollar” and thus the accelerated transformational shift to that wealth management degree:

Our third-quarter results reinforce the need for a restructuring of the bank aimed at reducing the volatility of our earnings and better aligning the activities of our investment bank behind the needs of the clients of our private banking and wealth management division.

That new focus might (likely) account for the distinct lack of enthusiasm for Credit Suisse’s new “capital.” Proclaiming the “dollar” as dead or at least dying removes the one manner in which eurodollar banks grew and prospered as they had. Wealth management is, by direct comparison, both far less opportune and inspiring. And that recalls the observation that the bank has little other choice, which is not something typically celebrated by primary markets; an individual and highly systemic realization about the state of global and “dollar” finance.

Not coincidentally, Credit Suisse’s relevant peer, Deutsche Bank also just announced that it is suspending its dividend for 2015 and 2016 in much the same process as the Swiss firm. FICC is a drag on profits and thus an intensely inefficient deployment of resources in this leverage sensitive environment. As today’s press release reveals, the institution is looking to trim risk-weighted assets (RWA) significantly in the coming years. Getting smaller is not the way the eurodollar system (or euroeuro) is done.

Risk Weighted Assets (RWA) (excluding regulatory inflation following regulatory changes expected to be at least EUR 100 billion by 2019/2020) of approximately EUR 320 billion at the end of 2018 and of approximately EUR 310 billion at the end of 2020.

Considering the bank reported RWA of (by model approach) €416.6 billion at the end of Q2, the shrinking is scheduled to be impressive. The “regulatory inflation” the bank alludes to is probably (though it isn’t clear just by the press release, more details are to be released tomorrow) Basel’s Fundamental Review of the Trading Book (FRTB). In credit trading and significant parts of FICC, especially structured (derivatives) credit, the new liquidity “horizon” buckets (formerly liquidity horizons were assumed short and uniform) for individual FICC segments are expected to increase the RWA contributions of the overall book by as much as 100%. Given this arrangement, there are expectations that CDS trading, in particular, might simply disappear altogether.

As with all things in this “dollar” withdrawal, it would be highly welcome news had it occurred under an intentional redesign globally.  Instead, the ad hoc extraction almost everywhere has left serious and dangerous vulnerabilities behind (just ask the PBOC and its sudden embrace of “dollar” forwards).  As I have stated previously, too many times, the issue is not purely regulation as eurodollar banks in their former incarnation would easily and readily absorb that increased “capital” charge if they thought there was any “money” in it.  That much was proven, with emphasis, by these very banks in their activities of the past few years.  Deutsche (and CS) was well aware of not just the direction of regulatory treatment of derivative book leverage (and total FICC commitment) but likely the specifics; yet the bank, in May 2014, no less, decided to increase exposure anyway (especially to leveraged loans and junk, including EM junk) despite the expected regulation-imposed inefficiency because they thought Yellen’s economy would reward that risk.


Third quarter results all around the eurodollar banks put that notion to rest, meaning that regulatory hardships are but one amplification of the growing systemic frailty that traces back, through all the esoteric nonsense like what’s in the FRTB (you only need to read the executive summary to see just how obscene Basel is at attempting to technocratically micromanage), to the basic economy.  The lack of global recovery and sustainable advance remains the driving force.

The combination here of Deutsche and Credit Suisse in terms of “capital” management and retaining is just another in a long series of visible signals about what to expect of the “dollar.” The negatives continue to pile up so the likelihood of somehow engineering a positive systemic reversal sinks to almost nil; the universal failure of QE and the losses accumulating by those banks that followed the last two in the US increasingly assure total central bank impotence moving forward (compared to only partial and temporary influence before).

The “dollar” is bank balance sheet construction and that just isn’t happening anymore. Central banks, in true recognition, only count where they can somehow influence those factors. Again, eurodollar banks in late 2015 continue to proclaim that they are moving far beyond any such influence and, alarmingly, have no choice but to do so.