Is Credit Suisse a Canary in the Financial Industry Coal Mine?

Credit Suisse on Thursday released a restructuring plan in an effort to push back against a narrative recently dominated by huge losses and bizarre scandals. Investors were deeply unimpressed, sending Suisse stock tumbling more than 15% after an earnings report that also included big losses, and a fundraising plan that would massively dilute current shareholders.

Elements of the plan seem significant not just for the struggling bank, but for the financial industry overall. Suisse wants to get much smaller, reducing headcount by roughly one-fifth. According to multiple reports, it wants to spin off some of its investment banking and advisory business to form a company called Credit Suisse First Boston – or, rather, to re-form it.

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Credit Suisse’s dramatic flubs in recent years are dominating discussion of the new tack, and fair enough: The bank’s embarrassing losses on borderline frauds like Archegos and Greensill invite very pointed questions about whether the bank has the talent and discipline needed to handle high finance.

But Suisse’s repeated self-inflicted wounds may also be the product of broader structural factors, maybe including the limits of the high finance market as a whole.

Suisse was among the European banks that decided, starting mostly in the 1990s, to try to compete with Wall Street in corporate dealmaking. For both Suisse and the equally notorious Deutsche Bank, this strategic shift has arguably been a decades-long boondoggle.

Deutsche beat its own retreat in 2019, proactively shrinking its investment banking operations after, quite simply, failing to make money at it. UBS did something similar way back in 2012, though under quite different conditions. Notably, UBS planned 10,000 layoffs in its investment banking pullback, very close to Credit Suisse’s planned 9,000 cuts.

For Credit Suisse, the spin-off of First Boston would certainly represent a poetic admission of defeat. The relationship between Suisse and First Boston started in 1978, leading to a merger in 1988 and the retirement of the “Credit Suisse First Boston” brand in 2005.

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But despite that bold symbolic move, Credit Suisse never made sustained headway in taking finance business away from Wall Street titans including Goldman Sachs and JPMorgan. Suisse’s market cap peaked in 2007. Despite being relatively well-positioned going into the global financial crisis, it basically failed to capitalize on the decade-long expansion that followed.

Now, Suisse’s road map suggests a greater strategic focus on wealth management for rich individuals. That’s still a potentially lucrative market but it offers nothing like the opportunity of investment banking.

When the pie stops growing

One way to interpret the recent retreats by Deutsche Bank and Suisse is that there simply isn’t enough demand for investment banking to support every entity that would love to be collecting investment banking-size fees. That’s not obvious from a high level because the sector has continued to grow, but a recent Deloitte report identified significant structural headwinds – including potential competition from blockchains and other lower-friction digital finance technologies.

Really seeing the deeper limits of high finance, though, requires attention to the relationship between speculation and crisis. Entities like Suisse and Deutsche that try to “break in” to mergers advisory and the like will tend to engage in riskier deals, even at similar levels of competence, leading almost inevitably to blowups like those of hedge fund Archegos and financial services firm Greensill.

What really boggles the mind, though, is thinking about how many near-misses this implies: deals that maybe should never have happened, but which expansion-hungry banks made anyway. Even if these edge deals didn’t make much money, they would have been counted toward “growth” in finance as long as they didn’t blow up quite as badly as an Archegos.

Even more significantly, most mergers and other deals that earn fees for banks end up having neutral or negative impacts for shareholder value and in the real economy.

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Put differently, it seems likely that the growth in finance in recent decades was driven by the supply side – money looking for deals to do, rather than deals that actually needed to get done. Some of the itchiest suppliers are finally taking their chips and going home, which in this framing could have some stabilizing effect on the macroeconomy and mute the kind of boom-bust cycles that have begun to feel endemic.

That might be wishful thinking – the world remains awash in capital seeking returns, so who’s to say if unproductive deals will actually be damped by the decline of a couple of spectacularly bumbling intermediaries? But given the increasingly extractive role of finance in world affairs, some may see it as a slim ray of hope.