Credit Suisse

BreakingViews has a couple of posts up about one of my favorite things in the financial universe, Credit Suisse’s habit of paying its bankers in structured credit instruments that take pages to describe. How’s that going? Great:

Three years ago, around 2,000 employees were forced to take some $5 billion of the riskiest assets from the Swiss group’s balance sheet as their bonuses. Now, recipients are being offered the chance to buy more. What once seemed like a punishment has turned into something of a perk.

Investors in the “Partner Asset Facility” already sit on a paper profit of around 80 percent, thanks to a recovery in the value of the original portfolio. That gain is essentially safe, since most of the assets involved have been liquidated or sold down and the funds are sitting in low-risk, low-return investments. The snag is that beneficiaries can’t get to the payouts until 2016.

To ease the pain of waiting, Credit Suisse is giving participants another bite. They have a chance to plough some of their paper profits back in, buying up to $1 billion of risky assets, including mortgage securities, from the bank’s books. Over a third of participants opted in to a similar offer late last year. Some of the purchases are to be funded by leverage, leaving perhaps half to come from willing PAF holders.

Phrases like “risky assets, including mortgage securities,” are always a bit of a minefield, but the sense is clear enough, which is that a whole lot of senior people at Credit Suisse are pretty keen to take money that is basically theirs, which is currently held in the form of basically cash, and invest that on a ~2x levered basis in, er, “risky assets, including mortgage securities,” which let’s just stipulate have a higher risk and higher return than cash.

How would you describe those people? Read more »

  • 15 May 2012 at 7:18 PM

Layoffs Watch ’12: Credit Suisse

The Swiss bank is not done with its firings. Read more »

Financial news is very serious business and you should probably fret more than you do about the economy and the banksters and the muppets and the homeowners and so forth. Some things, though, are best viewed as purely aesthetic triumphs, and your reaction should just be an appreciative whistle. This starts slow but stick with it, it gets wonderful:

Our results are impacted by the risk of counterparty defaults and the potential for changes in counterparty credit spreads related to our derivative trading activities. In 1Q12, we entered into the 2011 Partner Asset Facility transaction (PAF2 transaction) to hedge the counterparty credit risk of a referenced portfolio of derivatives and their credit spread volatility. The hedge covers approximately USD 12 billion notional amount of expected positive exposure from our counterparties, and is addressed in three layers: (i) first loss (USD 0.5 billion), (ii) mezzanine (USD 0.8 billion) and (iii) senior (USD 11 billion). The first loss element is retained by us and actively managed through normal credit procedures. The mezzanine layer was hedged by transferring the risk of default and counterparty credit spread movements to eligible employees in the form of PAF2 awards, as part of their deferred compensation granted in the annual compensation process.

We have purchased protection on the senior layer to hedge against the potential for future counterparty credit spread volatility. This was executed through a CDS, accounted for at fair value, with a third-party entity. We also have a credit support facility with this entity that requires us to provide funding to it in certain circumstances. Under the facility, we may be required to fund payments or costs related to amounts due by the entity under the CDS, and any funded amount may be settled by the assignment of the rights and obligations of the CDS to us. The credit support facility is accounted for on an accrual basis. The transaction overall is a four-year transaction, but can be extended to nine years. We have the right to terminate the third-party transaction for certain reasons, including certain regulatory developments.

Oh man, if I could write like that. If I could do that*! Read more »

  • 16 Apr 2012 at 10:37 AM

Layoffs Watch ’12: Credit Suisse, Maybe

The Swiss bank might cut 5,000 employees or it might not. Read more »

  • 29 Mar 2012 at 6:27 PM
  • Banks

Today In Swiss Banks With Creepy But Defensible Structured Products

I don’t really understand it but the TVIX thing is creepy fun. If you haven’t followed it, Credit Suisse issued this exchange-traded note called TVIX that was a 2x levered bet on the VIX. They suspended new issuance about a month ago due to position limits, and people were just so damn excited to own the thing that its price crept up to 189% of its fair value, where “fair value” is a reasonably easily measurable thing based on the formula in the TVIX prospectus. Then last week Credit Suisse announced that they would be creating more units, and the price plummeted to and then through fair value, which is what you’d expect to happen. Except that it started plummeting a few hours before that announcement, which is Suspicious.

So of course people are sad and there’s a Bloomberg Brief with sort of sad-funny quotes like:

“When it started to fall, I bought more because I couldn’t believe how low it was going. I didn’t realize I was playing with a hand grenade.”
– Michael Gamble [heh! - ed.], 67, who doubled down on his TVIX investment before the price collapsed.

Investors “all think: ‘Oh, I’ll just buy these things, I’ll be hedged against volatility and everything will be wonderful.’ And now they’ve seen the market goes down and their volatility protection goes down too, and they’re going ‘Hmm, what happened here?’ These people are going to have to pay a really expensive lesson.”
– Larry McMillan, who manages $30 million as president of McMillan Analysis Corp.

So, yes, Larry, they are going to pay a really expensive lesson. But what is it? Stephen Lubben has a little thing in DealBook today where he frets: Read more »

  • 23 Mar 2012 at 3:49 PM

Double Volatility Product Double Volatile

I blame spring break both for the lack of news this week and for the fact that what news there is revolves around trading glitches. Apparently spring break has cleared New York not only of responsible adult bankers and traders taking their kids to Disney, but also of responsible adult trading computers who are off doing God knows what, leaving the callow analyst computers alone to man their desks. And no one should be surprised that they got a few things wrong on their first day in charge.

Away from BATS, the glitchy news is in TVIX, a 2x levered short volatility ETN issued by Credit Suisse. And the craziness here seems to be caused not by robots on the fritz or fat fingers. Here is the story:

Credit Suisse Group AG (CSGN), under pressure to restore order in an exchange-traded note tracking U.S. equity volatility, said it will start resupplying the market with shares today after cutting issuance off in February.

Stock will be added to the VelocityShares Daily 2x VIX Short-Term ETN (TVIX), or TVIX. The security, designed to track Chicago Board Options Exchange Volatility Index futures, has whipsawed investors for the past month, climbing 89 percent above its asset value and plunging 29 percent yesterday before Credit Suisse’s announcement. It fell another 19 percent to $8.23 at 9:56 a.m. New York time today, extending its retreat since Oct. 3 to 92 percent. [When I looked it was swinging wildly around in the $7.50ish area, which is a bit under its $7.83 NAV as of yesterday, go figure.]

Creating shares in the ETN will help bring the security back in line with its so-called indicative value, the price implied by futures on the CBOE gauge, said Alec Levine*, an equity derivatives strategist at Newedge Group SA in New York. Credit Suisse’s first round of share issuance is intended to lower the cost of borrowing the note, a step that may aid short sellers who yesterday helped cut the premium by 66 percent even as owners of the security were burned.

“Lending out shares is an attempt to drive down the premium,” Levine said yesterday in a phone interview. “When your product isn’t trading anywhere near NAV, it’s the market telling you that it’s a broken product.”

So that’s sort of a hilarious way to put it. “If you offer widgets at a suggested price of $29.95, and people are reselling them at $56, that’s the market telling you your widgets are broken.” Not … exactly. Read more »

  • 24 Feb 2012 at 11:58 AM

Layoffs Watch ’12: Credit Suisse

Cuts are coming to the House of Dougan next month. Read more »