Why Compliance Matters: Credit Suisse Edition

By now you may have already heard that Credit Suisse is cutting another 2,000 jobs from its investment banking operations. That’s unfortunate news for the 2,000 bankers soon to be unemployed, but compliance officers on Wall Street have another lesson to absorb here.

The real news for compliance professionals—or anyone else working in finance who wonders why compliance is supposedly so important—is the outburst Credit Suisse’s new CEO Tidjane Thiam delivered while disclosing those 2,000 job cuts. The cuts, plus a $346 million write-down in business the bank took this quarter, were required because of sloppy risk management and compliance.

So the next time anyone in the business units complains to you about the headache of regulatory compliance, print out some of the media coverage this week about Thiam’s gripes, and staple it to that person’s forehead. This is why compliance matters.

The symptoms of Credit Suisse’s woes—the layoffs, the write-downs, the drop in share price, the strained relations with investors and market analysts—all trace back to improper trades the bank has been carrying on its books at least since last year. The positions didn’t have the liquidity they should have, and when markets went sideways over the winter, that left Credit Suisse in a weaker position than its bankers expected.

Even worse, however, is that the bank was in a weaker position than senior executives knew about, because Thiam and his team weren’t able to see what traders were doing. That’s a failure of risk management (top management not able to see an accurate, total view of risk) and compliance (traders withholding information from management) at the same time.

You can’t blame Thiam, then, for flashing some frustration when he talked to analysts on a conference call last week. He flat out said: “When I spoke on October 21 I was not aware of the positions on that scale.” In a separate interview on Bloomberg TV, Thiam minced no words: “This wasn’t clear to me, and it wasn’t clear to my CFO… There needs to be a cultural change because this is completely unacceptable.” He also said the offending employees had faced “consequences” for their actions, although nobody has specified what that means.

The Compliance Failures Afoot

Thiam himself is not terribly responsible for this mess. He only took over as CEO of Credit Suisse last summer, and came from outside the organization. His job was always going to be to cut costs, restructure bank operations, galvanize the tone at the top of the firm, and change the culture.

In the Bloomberg TV interview, Thiam essentially said traders didn’t want to face reality with the positions they took, because at the time those bets were yielding lots of revenue that the trading division needed to cover its costs. Dump the positions, and suddenly you can’t cover your costs, and next come the cutbacks—so from the traders’ point of view, of course you don’t want to confess the full scope of risk. That derails the gravy train.

So right there, we have a failure of “culture” like so many financial regulators worry about today. Again, Thiam can’t be held responsible for a culture he didn’t create. But he is trying to create a new culture now, so let’s hope that whatever consequences were meted out to offending employees convey the message that Credit Suisse won’t tolerate fibbing on risk positions any longer.

More troubling is the apparent lack of transparency into Credit Suisse’s trading positions. You might remember that last week I wrote about a financial technology business I know, where the COO told me no large banks have a good sense of their enterprise-wide exposure to various counter-parties. The COO and his firm make a living selling technology to banks to help solve that problem, rather than have traders and risk managers piece together their best guesses on risk via Excel spreadsheets.

Credit Suisse’s problems underline that COO’s point. Banks need to structure their operations so accurate data about risk is generated, and structure their reporting lines and IT systems so senior executives can pull up that accurate, comprehensive data when they need it. If someone within the bank can withhold valuable risk data (which seems to have happened here), then you have design flaws that need correction.

Credit Suisse knows this, I’m sure; every bank does. This week’s woes just show how difficult developing effective, informative risk metrics is: really difficult.

Now, let’s be frank: Thiam announced job cuts back in October too, when he first announced his restructuring plans to stabilize Credit Suisse. Would better compliance systems in place then have spared the 2,000 job cuts or $346 million write-down announced this week? Probably not; most likely his news last October would simply have been that much worse.

But at least Thiam could have delivered his message with certainty, and let everyone—investors, regulators, employees—prepare for what’s next. And that is why compliance matters.