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in the show notes or go to

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raisin.co.uk slash pension craft. Some

0:30

banks are so massive, so important,

0:32

that they're labelled too big to

0:35

fail. But what happens when one

0:37

fails anyway? In 2023 Credit Suissez

0:39

collapse shook the global financial system,

0:42

forcing regulators into a frantic search

0:44

for solutions. Today, our guest journalist

0:46

Duncan Maven takes us behind the

0:49

scenes with insights from his new

0:51

book on Credit Suisse's dramatic downfall.

0:53

And in the dumb question of

0:56

the week, we ask, how do

0:58

you stop a bank run? All

1:00

right, let's get into it. Today we're

1:03

delighted to be joined by Duncan Maven,

1:05

editor at Bloomberg, an author of the

1:07

new book, Meltdown, Scandal, Sleeze, and The

1:09

Collapse of Credit Suisse. Thanks so much

1:11

for joining us, Duncan. Thanks, I've me

1:13

on. Now, obviously we're here to talk

1:15

about the downfall of one of the

1:17

oldest and largest banks in the world.

1:19

But maybe before we dive into the

1:21

Credit Swiss saga itself, perhaps it's

1:24

worth taking a little step back

1:26

to understand the importance of banking

1:28

to Switzerland to Switzerland. How did

1:30

banking become so central to the

1:32

Swiss economy? Yeah, it's a good question.

1:35

So, you know, this tiny country in

1:37

the middle of Europe and it becomes

1:39

this kind of global powerhouse of banking.

1:41

And actually, that is kind of the

1:43

reason why it was a tiny country

1:45

in the middle of Europe, becoming a bit

1:47

of a backwater in the 18th and

1:49

early 19th century. And, you know, politicians

1:52

that have sort of figured out, they

1:54

needed to do something to stay up

1:56

with their much bigger rivals Germany and

1:58

France and Italy and places. that. And

2:00

so they started, actually, originally they got

2:03

into transport and they started building railways

2:05

to move things around Europe and then

2:07

that needed financing. And so the banks

2:09

kind of followed that to some degree.

2:11

But I think it was essentially that

2:14

position in the middle of Europe meant

2:16

that the banks became of outsized importance

2:18

in Switzerland. And I think one of

2:20

the other solutions was to build a

2:23

tunnel, the Gotard Tunnel, through the Swiss

2:25

Mountains, to connect Switzerland with the rest

2:27

of Europe, was that part of this

2:29

story as well. Yeah, that's part of

2:31

it. So financing that tunnel was a

2:34

part of the story. The other thing

2:36

I think that happens and that's worth

2:38

knowing is that Switzerland obviously is divided

2:40

up into cantons and not all of

2:42

the cantons are about banking or about

2:45

banking. It's quite easy to sort of

2:47

sit in another country and think of

2:49

the Swiss and banking and connect the

2:51

two. But actually in Switzerland they don't

2:53

really think that way. If you're in

2:56

Zurich, you know, if you're something completely

2:58

different. chocolate. Yeah, it could be chocolate

3:00

cook with clocks, all of the cliches.

3:02

But it's really interesting because it becomes

3:05

really important later on in the story

3:07

of Crete Swiss, I think, and how

3:09

the Swiss are responding to it now.

3:11

I mean, one thing that's synonymous with

3:13

Swiss banking is this idea of secrecy,

3:16

isn't it? And the banking secrecy, it's

3:18

almost like a legal privilege or the

3:20

relationship you might have with a doctor

3:22

where they can't really disclose. who their

3:24

clients are even. How did this come

3:27

about? And is it kind of one

3:29

of the original sins of Swiss banking,

3:31

if you like? Yeah, I mean, it's

3:33

enshrined into Swiss law, right? It's actually,

3:36

it's a piece of Swiss law. Banks

3:38

have this sort of right to privacy.

3:40

It's quite hard to pin down exactly

3:42

when it started. You know, there are

3:44

some people who said it started hundreds

3:47

of years ago, but it really became

3:49

prominent, kind of early 20th century. you

3:51

know as Europe was descending into chaos

3:53

you know whether it was the first

3:55

war or the second war there was

3:58

a sort of a need for people

4:00

to put their money somewhere where they

4:02

felt it was safe from war and

4:04

the Swiss sort of and trying this

4:06

more to say, if you put it

4:09

here, you know, nobody can find out

4:11

who is behind it. Your money is

4:13

safe and private. Now the question is

4:15

whether that's a positive for Swiss banking

4:18

in the long run or a negative.

4:20

It's definitely led to the Swiss banks

4:22

accumulating more assets and more money coming

4:24

in. But it also potentially attracts people

4:26

who want to hide their money from

4:29

legitimate inquiries from authorities. So, you know,

4:31

organized criminals and dictators and those sort

4:33

of people would look to Switzerland and

4:35

say, well, if I put my money

4:37

there, nobody can tell where it's come

4:40

from. But as I understand it, how

4:42

you described it in your book was

4:44

there was almost the kind of regulatory

4:46

capture, right, when the law was being

4:48

drafted. Like, they kind of got the

4:51

banks to draft the law. a moment

4:53

where the banks were under pressure over,

4:55

you know, this was sort of an

4:57

informal thing, the privacy regulation, was sort

5:00

of not really, it wasn't enshrined in

5:02

law in the early 20th century, and

5:04

there were sort of authorities overseas in

5:06

particular who were sort of pursuing the

5:08

Swiss banks to say, we need, you

5:11

know, we need to get into there

5:13

because you're hiding money from bad guys

5:15

or tax evaders in particular, French authorities

5:17

were going after the Swiss banks for

5:19

tax evasion. And the response of the

5:22

Swiss authorities was to say, okay, okay,

5:24

we need to sort this out. Banks,

5:26

come on, figure out a set of

5:28

laws that work. And of course, the

5:31

banks figure out a set of laws

5:33

that work for them, rather than for

5:35

anybody else. And I mean, I think

5:37

this is a thing that happens time

5:39

and time again, throughout banking regulation, you

5:42

know, maybe regulation of other industries too.

5:44

turns out the most knowledgeable people about

5:46

the industry are the bankers themselves and

5:48

the politicians don't really know an awful

5:50

lot. So they turn over the rulemaking

5:53

to the very people who should not

5:55

be allowed to make the rules. And

5:57

I remember you relate this story of

5:59

this poor guard who worked at one

6:01

of these Swiss banks watching some of

6:04

these documents being shredded and... he actually

6:06

reported it, but he actually put himself

6:08

at risk due to these secrecy laws.

6:10

Yeah, so you're jumping forward a few

6:13

decades, but it's all sort of connected.

6:15

One of the most fascinating aspects of

6:17

the Swiss banking history, when I was

6:19

digging into Credit Suisse, for me, was

6:21

the connection to the Nazis. And, you

6:24

know, this is another one of these

6:26

cliches, right? There's sort of Swiss banking

6:28

casinos and that kind of stuff. The

6:30

reality though is pretty horrendous and you

6:32

know they did two things really in

6:35

broad terms. One was they laundered money

6:37

for the Nazis so the other banks

6:39

around Europe wouldn't touch money from Germany

6:41

at that point and the Swiss banks

6:44

would. You know it's partly the privacy

6:46

stuff and partly you know Swiss neutrality

6:48

which in some ways sometimes translates into

6:50

a morality we don't take any size

6:52

therefore take anyone's money. So they do

6:55

one thing they laundered the Nazi money

6:57

but the other thing they do is

6:59

they... take money from Jewish people around

7:01

Europe who are worried about the Nazis

7:03

and say, you know, I've got a

7:06

factory in Czechoslovakia and I'm worried about

7:08

the Nazis coming so I'm going to

7:10

put my money in a Swiss bank

7:12

account where nobody can get to it.

7:14

After the war, when those same people

7:17

or their offspring come to get the

7:19

money, the problem is that the Swiss

7:21

banks won't give it back to them

7:23

in many cases, in thousands of cases,

7:26

worth millions of millions of millions, potentially

7:28

billions of dollars. So people come and

7:30

they say, you know, can I get

7:32

my money back? And there's a case

7:34

that I wrote about in the book

7:37

where this woman, her father had put

7:39

money in a bank in a bank

7:41

in London, some money in a bank

7:43

in Paris, some in a precursor of

7:45

Credit Suisseurice. She goes to London, they

7:48

give her the money, she goes to

7:50

Paris, they give her the money, she

7:52

goes to Switzerland and they say, have

7:54

you got a death certificate for your

7:57

father? And he died in Auschwitz, so

7:59

she doesn't. Anyway, jump forward to the

8:01

90s and some American senators decide they

8:03

want to look into this and they

8:05

said about a sort of big investigation

8:08

into what the Swiss banks have been

8:10

up to. And actually it's at UBS.

8:12

This security guard that you mentioned goes

8:14

down into the basement of the building

8:16

one night just on his normal rounds.

8:19

And he finds this huge pile of

8:21

documents that they are disposing of that

8:23

show how much money they are holding

8:25

in this way. And he takes a

8:27

bunch of the documents because he wants

8:30

to kind of blow the whistle. And

8:32

when the authorities and UPS find out,

8:34

they prosecute them under the privacy laws.

8:36

And so you shouldn't have taken this

8:39

information. He ends up with diplomatic or

8:41

some kind of immunity in the US

8:43

and ends up traveling to America and

8:45

ends up traveling to America. I mean,

8:47

there's one part in the book. I

8:50

think it's related to a different scandal

8:52

because Lord knows there's enough scandals here

8:54

at credit. But there's another part where

8:56

you referred to something which the authorities

8:58

term a shredding party. Yeah, that's right.

9:01

That was in Japan. So there was

9:03

a period in the 90s where they

9:05

were, relatively speaking, smaller scandals blowing up

9:07

in crisis offices around the world. So

9:10

he's one in London with a group

9:12

called the Flaming Ferraris, who were a

9:14

bunch of traders who named themselves after

9:16

this drink called the Flaming Ferrari. There's

9:18

one in Japan. There were sort of

9:21

numerous blowups, none of which are kind

9:23

of big enough to... really kill the

9:25

bank off, but they all put the

9:27

bank under some pressure, expose the sort

9:29

of flaws in the bank's culture I

9:32

suppose. Yeah, and the shredding part here

9:34

is exactly what it says, right? A

9:36

bunch of executives get together and start

9:38

just in the middle of the night

9:40

trying to destroy the evidence of what

9:43

they've been up to. Because one of

9:45

the things I took from the book

9:47

is, it's actually quite hard to pin

9:49

down. what brought down credits was. It

9:52

wasn't really, you know, a lack of

9:54

capital or anything like that. It was

9:56

just this accumulation, the snowball of scandals

9:58

over like, what was it, like 167

10:00

years. And I remember at the time

10:03

when credits Swiss went down or was

10:05

merged with UBS before you'd written the

10:07

book. And I went on their Wikipedia

10:09

page because I didn't know a great

10:11

deal about it. And there's, you know,

10:14

segments at all. And there's a bit

10:16

which says controversies. I clicked the down

10:18

arrow. Just this huge list just like

10:20

went off the screen with like, you

10:23

say, flaming Ferraris, tuna bonds, Nazis. I'm

10:25

like, what is this? Yeah. Well, so

10:27

I mean, that's, that was my view.

10:29

finance editor at the Wall Street Journal

10:31

and had kind of covered Credit Suisse

10:34

for a long time. And you know,

10:36

when you write a book like this,

10:38

there's lots of other stuff that happens

10:40

at Credit Suisse, right? There's tens of

10:42

thousands of people who work there, they

10:45

do lots of business. But in my

10:47

view, what really kills them is the

10:49

scandals, because ultimately in banking, you know,

10:51

banking's all about trust, with the Swiss

10:53

government. and ultimately leads to the downfall

10:56

of the bank. So the scandals are,

10:58

you know, I'm not just writing about

11:00

the scandals because they're crazy and, you

11:02

know, salacious and interesting to read about,

11:05

but because actually they really matter in

11:07

this case. They're really important. The trick,

11:09

honestly, with the book is something you

11:11

just alluded to really, which is there

11:13

are so many scandals. It's almost implausible.

11:16

There's at least one a year, maybe

11:18

more than one a year for decades.

11:20

So if a journalist were to design

11:22

a bank and wanted one that would

11:24

generate as many scandals as possible and

11:27

generate lots of copy, well, you couldn't

11:29

do better. That's right. You know, to

11:31

some degree I've sort of avoided in

11:33

the book talking about, you know, when

11:36

you talk to people who work there,

11:38

there were lots of things like sexual

11:40

harassment cases and... incidents of drunken nurse

11:42

or drug abuse. I didn't really write

11:44

about those in the book because those

11:47

are not the ones that killed the

11:49

bank. I sort of focused on the

11:51

big big money scandals that are the

11:53

ones that really destroyed its reputation. But

11:55

yeah, that all that stuff exists too.

11:58

And so as you say, you know,

12:00

if you were to sort of design

12:02

something that had lots and lots of

12:04

stories emanating from it, then you'd probably

12:06

design Credit Suisse. And I guess, from

12:09

my point of view, it's kind of

12:11

interesting, is a cultural story, because there's

12:13

a kind of group psychology, isn't there,

12:15

whereby a toxic culture can develop. And

12:18

one of the points you make in

12:20

the book, which I thought was really

12:22

interesting, was this kind of dichotomy between

12:24

the two mindsets of American banking. and

12:26

Swiss banking. And was that, do you

12:29

think, at one of those sources of

12:31

all of the problems to credit Swiss?

12:33

Yeah, I think it's culture and the

12:35

reasons for the scandal is quite hard

12:37

to pin down, right, ultimately. But I

12:40

think it is interesting that they are,

12:42

they're almost unique in the sense that

12:44

they're this Swiss private bank, you know,

12:46

does a lot of kind of... Hiding

12:49

money away for rich people in Switzerland

12:51

and that's one bit of business and

12:53

it's sort of this beneath a very

12:55

fine wine and white glove service and

12:57

all that kind of stuff. And that's

13:00

one bit of the business. And then

13:02

the other bit of the business is

13:04

this hard charging Wall Street, the city

13:06

of London, investment banking, trading. They're often

13:08

at the forefront of whatever new product

13:11

is out there, whatever new kind of

13:13

derivative is available. and there's a sort

13:15

of tension between these two pieces of

13:17

the bank constantly. So I think that

13:19

causes problems for executives, you know, for

13:22

the CEO, often it causes a real

13:24

tension, and how do you get these

13:26

two things to work together properly? I

13:28

think it means that, you know, both

13:31

of those places are not quite, they're

13:33

not quite 18, you know, in both

13:35

areas, they're sort of better Swiss private

13:37

banks, and they're better investment banks, and

13:39

so they're constantly trying to... catch up

13:42

with people who are a bit better

13:44

than them in both areas of the

13:46

bank. There's neither side of it. It's

13:48

sort of super stable. And so that

13:50

causes a problem for them. But ultimately,

13:53

yeah, I think that mix of business

13:55

is problematic. It becomes even more problematic

13:57

after the financial crisis. crisis when actually

13:59

investment banking kind of goes out of

14:02

fashion for the Europeans, at least in

14:04

the old way it's been done in

14:06

the past. And so they struggle really

14:08

to have just a profitable business at

14:10

that point. It seemed to me that

14:13

they had a problem just finding the

14:15

right leadership. I mean, that culture clash

14:17

can't have helped. I know there was

14:19

one part in the book where they

14:21

wanted to offer the CEO job to

14:24

a guy called, I think it was

14:26

Mac. And he said, I can't do

14:28

that, I can't come and learn German,

14:30

I don't have time for language lessons.

14:32

Yeah, they do, they constantly have a

14:35

problem of their identity, are they a

14:37

Swiss bank or are they a global

14:39

bank, you know? And so they kind

14:41

of swing back and forwards between Swiss

14:44

leaders and international leaders, that's definitely a

14:46

problem for them. They have investment bankers,

14:48

then they have... private bankers and at

14:50

one point they turn to an insurance

14:52

industry executive. You're literally desperately trying all

14:55

sorts of different things. And it seems

14:57

like the new CEO was always trying

14:59

to sort out the problems that the

15:01

last CEO had. The scandal from the

15:03

last 10 years. Exactly. It's amazing how

15:06

many times a new CEO comes in

15:08

and says, we're going to do things

15:10

differently. I'm going to clean this place

15:12

up. And within months they're dealing with

15:15

some multi-billion dollar scandal left over from

15:17

the last guy. And all of a

15:19

sudden, they're kind of scrambling. And you

15:21

know, actually, they'll take revenue from wherever

15:23

they can get it. They never actually

15:26

solve it, do they? They never settle

15:28

the cases, they always drag on for

15:30

a really long time. Why was this?

15:32

Why didn't they just sort of draw

15:34

a line under things? Well, I think

15:37

towards the last 15 years or so,

15:39

there's a strong argument that that was

15:41

a deliberate strategy, actually. The chairman was

15:43

a guy named Lewis Werner, who was...

15:45

a lawyer and you know he was

15:48

quite influential I think on their strategy

15:50

on this sort of stuff and then

15:52

their chief legal counsel together I think

15:54

their view was very much kind of

15:57

what you might get from a lawyer

15:59

a litigator you know we will fight

16:01

these cases and see if we can

16:03

get away with it. or we can

16:05

push it down the line. Often in

16:08

the end, they sort of do pay

16:10

a smaller fine as a result of

16:12

fighting the case, but the problem is

16:14

the case is drag on for years

16:16

and years and years, so where other

16:19

banks might have solved their problem, you

16:21

know, just paid the money and dealt

16:23

with the problem, acknowledged it and moved

16:25

on. Credit Suisse never says they did

16:28

anything wrong, and they push it down

16:30

the line, and they can kind of

16:32

claim, yeah, we paid half the fine

16:34

we would have paid. But they've had

16:36

these things that hang over them for

16:39

years and years. And they still paid

16:41

$15 billion worth of fines from 2010

16:43

onwards. Oh yeah, they paid a lot

16:45

of fines. I mean, the thing I

16:47

think is, you know, they're not the

16:50

only one who does a lot of

16:52

stuff wrong, right? Everybody has rogue traders.

16:54

Lots of banks breach sanctions, lots of

16:56

banks get accused of money laundering, or

16:58

they sell residential mortgage back securities, and

17:01

they run up to the financial crisis.

17:03

But Credit Suisse does all of them.

17:05

It's not the worst necessarily in any

17:07

one of these categories, but it's up

17:10

there in every single one of them.

17:12

It's a Renaissance bank. Yeah, it's got

17:14

something for everybody. Yeah, so they just

17:16

constantly get in trouble. And then I

17:18

think, you know, the other thing that's

17:21

really interesting, it creates, wease, is some

17:23

of the scandals aren't financial at all.

17:25

Some of the really important scandals towards

17:27

the end aren't financially. I have nothing

17:29

to do with banking. That sort of

17:32

speaks to the problem with the culture,

17:34

I think. Certainly some of the problems

17:36

were to do with risk management and

17:38

a lack of it. I think it's

17:41

partly like you say because they were

17:43

so keen to get into new businesses

17:45

with derivatives where things are notoriously explosive

17:47

because of leverage. So do you think

17:49

that part of the problem could have

17:52

been solved if they'd have had some

17:54

kind of decent risk management? I think

17:56

you're right to point to that. Certainly

17:58

some of the scandal is really clear.

18:00

That's an important aspect. I mean... The

18:03

one that you referred to earlier that

18:05

knows a big tune upon scandal, which

18:07

is... you know, as crazy as it

18:09

sounds. I always sort of think I

18:11

understand it and then I walk away

18:14

to get a drink and I come

18:16

back and I'm like, what was that

18:18

tuna thing again? I mean, I can

18:20

try and explain it. It's essentially... 15

18:23

or so years ago, Mozambique discovers oil

18:25

off the coast of Mozambique and, you

18:27

know, the Mozambique and government decide we're

18:29

going to get really rich, you know,

18:31

and everybody in the world thinks they're

18:34

going to get rich. And so they

18:36

say we need to build some infrastructure,

18:38

we're going to build some radar and

18:40

some ports and included in that is

18:42

we're going to build a tuna fleet.

18:45

So it gives it a nice name,

18:47

but it's kind of incidental to the

18:49

story. and they go to Credit Suisse

18:51

to provide the financing through the bond

18:54

market. Where the risk management function comes

18:56

in is, Credit Suisse gets a report

18:58

done by an external agency into the

19:00

Lebanese company to say, are these people

19:02

that we should do business with? And

19:05

the report comes back and says, no,

19:07

you shouldn't. No way. They are the

19:09

kings of kickbacks. Literally uses the phrase,

19:11

the kings of kickbacks. And so the

19:13

Credit Suisse risk committee. just ignores this

19:16

because it's great business. So they've got

19:18

to, you know, they have a process,

19:20

they have a check and balance in

19:22

place and they completely ignore it. And

19:24

what happens, you know, they pay a

19:27

kick back to one of the Credit

19:29

Suisse bankers on the deal and about

19:31

200 million to officials in Mozambique, eventually

19:33

the whole thing's exposed, it kind of

19:36

crashes in Mozambique an economy, you know,

19:38

costs Credit Suisse, that case is still

19:40

going on even though Credit Suisse doesn't

19:42

exist anymore. people are going to jail,

19:44

it's huge and it could have been

19:47

stopped if they'd listened to their own

19:49

report. I mean there's others where risk

19:51

management just seems non-existent, right? Like the

19:53

Arcagos thing, where it was a hedge

19:55

fund that blew up, right, took too

19:58

much leverage, concentrated bets, and I think

20:00

you say in the book that Credit

20:02

Suisse's exposure to this hedge fund was

20:04

equivalent to half its... capital like they

20:07

bet the bank right pretty much on

20:09

this hedge fund it was huge and

20:11

what's really amazing about that is they

20:13

were making a few million dollars for

20:15

it so they sort of bet the

20:18

entire bank for a few million dollars

20:20

it's the pennies in front of a

20:22

steam roller thing isn't it it's crazy

20:24

I mean they're a little bit unlucky

20:26

I think with Arkegos because the guy

20:29

whose job was to kind of manage

20:31

the risk associated with Arkegos died sadly

20:33

in a tragic before Arkegos blew up

20:35

And they gave his job to the

20:37

guy who previously been the sales guy

20:40

for Arkegos. So sort of overnight this

20:42

guy goes from trying to get as

20:44

much business as possible from Arkegos to

20:46

being the guy who's supposed to stop

20:49

them having as much business as possible.

20:51

Who's supposed to stop them having as

20:53

much business as possible? Yeah. Who knows

20:55

whether that's the critical reason it all

20:57

goes wrong, but it's certainly kind of

21:00

nobody lending. quite the same way Crete

21:02

Swiss is there. They also all get

21:04

out much faster when it's clear that

21:06

things are going wrong and the result

21:08

is Crete Swiss takes an enormous hit

21:11

on that. Do you have a favourite

21:13

amongst all the scandals? Is there one

21:15

closest to your heart? Yeah, I think

21:17

that, well, the Nazi stuff is something

21:19

obviously we sort of all know about,

21:22

but I think it's really, really fascinating

21:24

once you get into it and recent.

21:26

It's still going on. They were still

21:28

kind of burying this stuff recently. There

21:31

were stories last week in the press

21:33

about US authorities again saying this has

21:35

not been fully resolved. That's right. So

21:37

they kicked, they had a monitor in

21:39

place to look into whether there were

21:42

still Nazi accounts and he was finding

21:44

stuff in South America. I think there

21:46

was one, there was an account tied

21:48

to, I think it was Mussolini, that

21:50

they found not long ago, a few

21:53

years ago. So that was still going

21:55

on until very very recently. So that

21:57

one I find really interesting, I mean

21:59

tragic and awful, the most ambiguous tune

22:02

of bond. one is just so crazy

22:04

and it involves you know so many

22:06

there are certain there are chances to

22:08

sort of fix it it's just a

22:10

crazy story you know the one that's

22:13

probably closest to my heart in some

22:15

ways is Green Cell because I've written

22:17

a book on Green Cell as well

22:19

and actually I think it's I sort

22:21

of become come to think that it's

22:24

really critical to what happens at Credit

22:26

Suisse so this is you know they

22:28

have a relationship with this Australian finance

22:30

here and a black screen cell. who

22:32

has a business that essentially provides loans

22:35

to businesses, you know, to smooth their

22:37

supplier payments. And they set up some

22:39

funds with Green Cell, and they end

22:41

up putting $10 billion of their clients'

22:44

money into Green Sales funds. I was

22:46

pretty clear to me. as a journalist,

22:48

we're pointing on it, early on that

22:50

a lot of the loans were never

22:52

going to get paid back. They were,

22:55

they were to Lex's neighbor, to you

22:57

know, old friends of his, they were

22:59

lots and lots of sort of loans

23:01

that were problematic in those funds. And

23:03

eventually, of course, it kind of blows

23:06

up, right? And the $10 billion has

23:08

to, it's got a huge problem for

23:10

them. And there's still, again, a lot

23:12

of that money is still missing. So

23:15

I think why that is really important

23:17

is really important is that. in most

23:19

of the other scandals it's sort of

23:21

shareholder money it hits profit ability it's

23:23

the bank's profits in this case it's

23:26

their client's money yeah it's actual clients

23:28

and so i think ultimately that has

23:30

a real effect on some of their

23:32

wealthiest clients who say you know what

23:34

i can't trust you with my money

23:37

i'm not gonna give it to you

23:39

anymore the other piece of it is

23:41

One of Greensell's biggest investors was this

23:43

Japanese conglomerate called Soft Bank, big tech

23:45

investor. And Softbank happened to be one

23:48

of Credit Suisse's biggest investment banking clients,

23:50

if not the biggest investment banking client.

23:52

So when Greensell blows up, they sort

23:54

of lose that relationship too. So they

23:57

sort of annoyed all the clients they

23:59

put into the Greensell fund and they've

24:01

upset their biggest... of investment banking fees.

24:03

And they made David Cameron look like

24:05

a fool. Yeah, well, you know, that

24:08

might not have been too hard. But,

24:10

you know, Cameron was an employee, essentially

24:12

a green cell, and highly paid one

24:14

at that. But apparently he was lobbying

24:16

former government colleagues with text messages. Yeah,

24:19

yeah, hundreds of text messages. I mean,

24:21

he was sort of, you know, constantly

24:23

barrage in them with messages to say

24:25

during COVID. This company is really important,

24:28

you need to make sure that it

24:30

gets some business. I think he walked

24:32

away with several million pounds for his

24:34

work, so I'm not going to feel

24:36

too bad that he had to send

24:39

a few text messages. Today's episode is

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25:05

craft. Nowadays, when we think about a

25:07

bank run, it's not like it was

25:10

a Mary Poppins where there's a cue

25:12

of people and they get worried about

25:14

not being able to take out their

25:16

money. You don't have to physically be

25:18

there queuing to take your money out.

25:21

All you need is a text message

25:23

from someone who's got a lot of

25:25

followers, and you can spark one of

25:27

these digital bank runs nowadays. Yeah, I

25:29

think it's really interesting. The regulators are

25:32

worried about it. They don't know what

25:34

to do what to do. I mean.

25:36

the traditional bank run is as you

25:38

see a bunch of people queuing outside

25:41

the bank and you get worried about

25:43

your own deposit and so you join

25:45

the queue and try and get your

25:47

money out and certainly you know I've

25:49

heard people talk about during the financial

25:52

crisis for instance northern rock queues of

25:54

people probably one of the problems in

25:56

all the rockhead was they didn't have

25:58

that many branches so the Qs looked

26:00

especially big and so that leads to

26:03

the run on the bank. In the

26:05

case of Crow Sweets it's really relevant

26:07

and we saw this you know a

26:09

couple of years ago with not just

26:11

Crow Sweets but a couple of other

26:14

banks in the states where as you

26:16

say sort of messages go around on

26:18

what tap or on credit or you

26:20

know one of these forums and all

26:23

of a sudden everybody's pulled their money

26:25

out. and you don't have to go

26:27

to the branch, actually you can do

26:29

it on your phone, you can move

26:31

large sums of money in a flash,

26:34

and the bank really doesn't know what

26:36

to do about it. A credit suite,

26:38

you know, I think the first, it

26:40

was really the scene of the first

26:42

ever significant digital bank run, so a

26:45

few months before they collapsed, a journalist

26:47

in Australia who normally writes about things

26:49

like, you know, is Sydney a better

26:51

city to live in Melbourne? What's the

26:54

cost of a student house in... the

26:56

suburbs of Adelaide or something like that.

26:58

He tweeted out something pretty innocuous really,

27:00

but it said credible source tells me

27:02

major global bank is on the brink

27:05

or words to that effect. And the

27:07

internet, you know, did what the internet

27:09

does and kind of decided to investigate.

27:11

And pretty soon everyone decided that that

27:13

must have been Credit Suisse. You know,

27:16

and part of the reason for that

27:18

is because it's had all these scandals

27:20

we talked about. and within kind of

27:22

hours billions of dollars are coming out

27:24

of the bank and within a few

27:27

days about a hundred billion dollars had

27:29

been pulled out of the bank. One

27:31

of the anecdotes in the book you

27:33

mentioned is that some of the executives

27:36

only learned about the crisis because their

27:38

kids told them that their bank was

27:40

trending on social media. That's right. That's

27:42

right. So they were you know they

27:44

were hearing this kind of and they

27:47

were completely done founded. They didn't know

27:49

what to do. I mean they literally

27:51

was sort of... like rabbits in their

27:53

headlights, you know, they were, once it

27:55

became pretty clear that the money was

27:58

coming out, the past of senior... executives

28:00

who were there at that time were

28:02

standing around their officers meeting outside their offices

28:04

and literally didn't know what to do. Their

28:06

normal plan for when things go wrong is

28:08

they'd call journalists at the FT or Bloomberg

28:11

or places like that and they'd go and

28:13

have a meeting with them and they'd sit

28:15

down and they'd explain why the bank wasn't

28:17

in so much trouble after all and show

28:19

them some numbers and people would write it

28:22

and everything would slow down. In this case

28:24

they didn't know who to turn to. How

28:26

do you turn off the tap on... read

28:28

it or Twitter or you know, or often

28:30

in this case it was in Asia, so

28:33

it was on social media in Asia, and

28:35

they really didn't know what to do. The

28:37

thing I like about the credit Swiss

28:39

Chicago is there's always an element of

28:41

absurdity lurking not too far in the

28:44

background. So there was this weird thing

28:46

you describe in the book where there

28:48

was a confusion about the initials

28:50

SMB, which could mean Swiss National Bank,

28:52

or it could mean... the Saudi National

28:54

Bank. Do you want to explain what

28:57

happened here? Yeah. So a few months

28:59

after this Twitter kind of fiasco, you

29:01

know, the things had sort of stabilized.

29:03

The bank was in real trouble, but

29:06

it was sort of stabilized. And there

29:08

was an interview with one of the

29:10

senior guys at the Saudi National Bank,

29:13

which was an investor in Credit Suisse.

29:15

The interviewer asked him, you know, would

29:17

you put more money into Credit Suisse?

29:20

And he said, no, which is totally

29:22

legitimate, you know, they're just a shareholder,

29:24

they don't need to put more money

29:27

in. And then the story got put

29:29

out and it, you know, sort of

29:31

ends up on the newswise and things

29:34

and it says, S&B, we will not

29:36

back Credit Suisse. Which sounds like the

29:38

Swiss government to say, we don't

29:40

have their back. Yeah, just washing

29:42

its hands and credit Suissez. the

29:44

market believes that even its own

29:46

government doesn't trust that anymore. I

29:48

think it is, as you say,

29:50

there's a lot of absurd stuff

29:52

happens with Croweis. I mean, they have

29:54

a chairman with the surname Lehman, which doesn't

29:57

help either, really, does it? That's right. So,

29:59

you know. If you speak to some

30:01

people at Credit Suisse, they'll say, you

30:03

know, when they were really close to

30:06

the end, they were thinking of, you

30:08

know, how do we, should we, should

30:10

we put him, should we put our

30:12

channel, Axle Lehman on TV, to say,

30:15

you know, this isn't our Lehman moment.

30:17

Yeah. tragic really right I mean there

30:19

are tens of thousands of people's jobs

30:21

at stake but it is absurd and

30:24

you know it just all seems to

30:26

kind of go wrong for them at

30:28

the end and actually you know to

30:30

be fair to Absal Lehman he's one

30:32

of several top executives at that bank

30:35

who just kind of inherit the mess

30:37

within the last 18 months or so

30:39

and you know that revolving kind of

30:41

door of executives we mentioned It really

30:44

has speeded up towards the end, so

30:46

they've got a new chairman and a

30:48

new CEO and a new CFO and

30:50

each legal council and you had a

30:53

new investment bank and new head of

30:55

comms. Everybody's new and so when it

30:57

all starts to go wrong, there isn't

30:59

really any kind of institutional knowledge. It's

31:02

very difficult for them I think in

31:04

the end. They all sound frozen from

31:06

the way you describe it. maybe head

31:08

in the sand is another way to

31:11

look at it. You know, I think

31:13

the Swiss government, the Swiss finance minister,

31:15

I think was particularly frustrated that she

31:17

could see that the bank was in

31:20

real trouble and she's kind of calling

31:22

the CEO and chairman and they're just

31:24

acting as their things are really normal.

31:26

They've like gone to conferences and things.

31:29

I can't get hold of the guy

31:31

in charge because he's gone to some

31:33

bank conference while his bank is imploding.

31:35

But you know, who knows, in that

31:38

position would any of us act any

31:40

differently? I'm not sure. Yeah, I think

31:42

if your job is to run the

31:44

bank, you're probably desperately hoping that it's

31:46

not going to collapse. Maybe you almost

31:49

have to act normal, because if you

31:51

don't, it looks like the bank runs

31:53

going to accelerate. There's some truth to

31:55

that for sure. It becomes self-fulfillage. So

31:58

there was this kind of last ditch

32:00

meeting wasn't there between politicians and the

32:02

Board of UBS where they were talking

32:04

about brass tax and they said if

32:07

there is no agreement tomorrow morning you

32:09

won't just have a credit Swiss problem

32:11

you'll have a Switzerland problem. So it

32:13

really was a systemic problem was it

32:16

at that point? Yeah that's right there

32:18

was a real worry that it would

32:20

kind of broad now into not just

32:22

Switzerland but actually sort of globally become

32:25

a problem. And the Swiss government are

32:27

kind of talking with Janet Yellen and

32:29

with others because it really, you know,

32:31

Credit Suisse is an enormous bank and

32:34

if it unravels in a kind of

32:36

unruly way, then there was a worry

32:38

that it would sort of create another

32:40

financial crisis. I think the reality for

32:43

the Swiss finance minister, you know, she's

32:45

come under some criticism for the way

32:47

she handled the end of the bank,

32:49

which is, you know, spoiler alert. She

32:52

forces emerging between Credit Suisse and UBS

32:54

and UBS. And so some people have

32:56

criticized her for that. I think to

32:58

sort of, you know, offer a little

33:01

bit of defense for her, I think

33:03

she inherited, she's also new by the

33:05

way, so she was new in her

33:07

role in the January before it collapsed

33:09

in the March, she I think looked

33:12

around the room and said, who do

33:14

I trust, this bank's in trouble, who

33:16

do I trust to stop it being,

33:18

you know, to stop this mess getting

33:21

much bigger, and the guys at UBS

33:23

were experienced, then they'd kind of... a

33:25

chairman of UBS had been through the

33:27

financial crisis when he was at Morgan

33:30

Stanley. And so I think she sort

33:32

of, with some justification, kind of trusted

33:34

them to get it right. I think

33:36

that they were seeing an impact on

33:39

the Swiss bank already because so much

33:41

money was being pulled out of Credit

33:43

Suisse. So obviously for UBS and the

33:45

other Swiss banks, that was a real

33:48

problem. I mean, I think a merger

33:50

between these two Swiss giants had been

33:52

rumored on and off for decades, right.

33:54

So was it a case that in

33:57

the end, UBS won, they emerged victorious?

33:59

hard not to think of it that

34:01

way. Yeah, so they had talked about

34:03

a merger for decades and there were

34:06

plans, you know, both banks had plans

34:08

drawn up on how it would work.

34:10

It never got off the ground in

34:12

the past, partly because, you know, egos

34:15

of different CEOs and chairman would not

34:17

allow it to, so you know, who's

34:19

going to be the CEO of the

34:21

combined bank? You know, that's a tricky

34:23

question. Partly because the politicians didn't want

34:26

it because they were too big banks

34:28

was... outsized for the size of Credit

34:30

Suisse, for the size of Switzerland, sorry,

34:32

but if you had one big bank,

34:35

that's even even worse. However, in a

34:37

crisis, you know, we'd rather have one

34:39

big bank than no big banks. So

34:41

they sort of forced it together at

34:44

an incredibly low price, you know, about

34:46

three billion dollars, which might sound like

34:48

a lot of money, but for a

34:50

big global bank, it's essentially peanuts. So

34:53

yeah, I think UBS has won. I

34:55

think they now have to, you know.

34:57

having won that they now have to

34:59

kind of carry that victory along and

35:02

merging the two is going to be

35:04

a really tricky thing for the next

35:06

few years especially they don't want any

35:08

of this culture we've talked about to

35:11

kind of seep into UDS so you

35:13

know they have that problem they have

35:15

the problem of being the one big

35:17

bank in a relatively small country so

35:20

yeah they've won but they still have

35:22

to keep winning I suppose And in

35:24

terms of repercussions, do you think the

35:26

ripple effects from this merger, and I

35:29

guess the failure of Credit Suisse, do

35:31

you think that led to the problems

35:33

with Silicon Valley Bank, Silvergate Bank, and

35:35

the other US banks which went to

35:38

the wall afterwards? Yeah, so I think

35:40

it might work kind of the other

35:42

way around, so Credit Suisse was already

35:44

in trouble. And it had this Twitter

35:46

problem in the autumn before it collapsed.

35:49

And then in the spring, the American

35:51

banks had problems for slightly different reasons,

35:53

but the problems were kind of emerging

35:55

in the same way, you know, through

35:58

social media and digital bank. runs and

36:00

that sort of spilled over into a

36:02

general fear among investors and some, especially

36:04

some of the bigger clients banks about

36:07

you, whereas my money is it safe.

36:09

So I think in some ways it's

36:11

the American bank sort of speeded up

36:13

the demise of Credit Suisse, but they

36:16

sort of lean on each other, you

36:18

know, those two events, like they definitely

36:20

go hand-to-hand I think. And is this

36:22

really a warning against deregulation? Because I

36:25

remember reading a paper about bank deregulation

36:27

and how it often leads the scandals

36:29

a couple of years down the road.

36:31

And of course, with the new Trump

36:34

presidency, what we're hearing is they're going

36:36

to deregulate banks. So do you think

36:38

this is a warning about what could

36:40

happen if that happened? It's difficult, right?

36:43

So I think in the US, definitely

36:45

there was a, you know, the move

36:47

to deregulate in the US, even over

36:49

the last few years, has exposed some

36:52

of those banks there to the things

36:54

I went wrong with Silicon Valley Bank

36:56

and signature and so on. And so

36:58

if further deregulation and the new Trump

37:00

administration, I suspect, is only going to

37:03

likely lead to more problems. In Switzerland,

37:05

actually, I'm not sure if that was

37:07

necessarily the case. So, you know, if

37:09

you look at Credit Suisse, Actually, it

37:12

meets all of the sort of capital

37:14

requirements and all of the sort of

37:16

rules that are in place to protect

37:18

banks. That isn't really the problem in

37:21

Crowswies. The problem is these scandals, which

37:23

mean that it's deeply tarnished and its

37:25

clients don't trust it and so on.

37:27

I think if there's an argument for

37:30

a regulation, for me it's around conduct.

37:32

What happens at Crowswies is despite all

37:34

these scandals we've talked about, hardly anyone

37:36

ever really suffers, right? So despite all

37:39

of this stuff that we've talked about,

37:41

that we've talked about. The number of

37:43

people who go to jail, I could

37:45

count on one hand. It's so bizarre.

37:48

And in fact, the CEOs and the

37:50

senior executives walk away with hundreds of

37:52

millions of dollars collectively in pay. Well,

37:54

you say this, don't you? Finmanated that

37:57

the bank made a commute. net loss

37:59

of more than $2 billion over the

38:01

10 years before the collapse, yet it

38:03

paid out bonuses of around $35 billion

38:06

in the same period. Talk about moral

38:08

hazard. Right. So I think that's the

38:10

problem right there, right? It's not about

38:12

whether the capital requirements are high enough

38:14

or low enough or those sort of

38:17

restrictions. The problem seems to be that...

38:19

Whatever you do, if you're a senior

38:21

executive in a bank, you get paid

38:23

really well. And in fact, you probably

38:26

get paid better if the bank takes

38:28

on loads of risk and, you know,

38:30

your particular bit of the bank is

38:32

generating some revenue for a while, even

38:35

if you have to leave because, you

38:37

know, some scandal emerges and it forces

38:39

you out. In the meantime, you've made

38:41

a lot of money. You enjoyed your

38:44

career in banking, didn't you, Roman? I

38:46

loved it. What was interesting was the

38:48

number of bright people I worked with

38:50

and I don't think there's any other

38:53

industry where you get that combination of

38:55

skills, money and fun. You know, I

38:57

think it was just incredible and I

38:59

learned so much about derivatives and how

39:02

things are priced and traded. You know,

39:04

I absolutely loved it. Well, I think

39:06

if you talk to people who worked

39:08

at Credit Suisse, they'll say the same.

39:11

It's actually amazing how many people really

39:13

loved working at Credit Suisse. You know,

39:15

and clearly not everybody at Credit Suisse

39:17

was involved in misconduct. Vass majority weren't.

39:20

But enough were that it caused problems.

39:22

But yeah, I think people at Credit

39:24

Suisse would say the same thing. Most

39:26

of the people I talked to for

39:29

the book would say it was like

39:31

the best part of their career. You

39:33

know, the most exciting, challenging, interesting part

39:35

of their career. I think the problem

39:37

as I say comes when, you know,

39:40

the pay is so so so vast

39:42

and the punishment for wrongdoing is minimal

39:44

then you know clearly that skews you

39:46

towards excessive risk-taking and away from being

39:49

kind of on your best behavior. Kunken,

39:51

the story of Credit Swiss is full

39:53

of crises and drama. Join our community

39:55

to learn how to avoid that kind

39:58

of drama in your own personal investments.

40:00

Learn more by going to pensioncraft.com/membership. Okay,

40:02

today's dumb question of the week is

40:04

how do you stop a bank run?

40:07

Well, I think once it started, it's

40:09

really difficult and you're sort of left

40:11

to chance a little bit. digital bank

40:13

run is particularly challenging I think because

40:16

you know you can't get on Twitter

40:18

and sort of deny that your bank's

40:20

in trouble that only makes it worse.

40:22

I think the only way to stop

40:25

a bank run is to run a

40:27

really really good bank trying to avoid

40:29

some scandals and you know then people

40:31

might believe you when you say that

40:34

everything's safe and sound. I mean I

40:36

guess the point is that no bank

40:38

is immune to a bank on right

40:40

just the nature of banking means you

40:43

don't have enough cash on hand. to

40:45

pay everyone if they run out of

40:47

the door at the same time. Correct,

40:49

I think that's the fundamental weakness in

40:51

you know fractional reserve banking as it's

40:54

called is if I put a hundred

40:56

pounds into the bank they they don't

40:58

keep a hundred pounds they give it

41:00

out to somebody else and if I

41:03

go and ask for my hundred pounds

41:05

back they don't have it right there

41:07

and then it is a you know

41:09

that's the fundamental weakness and if we

41:12

all asked for our hundred pounds back

41:14

at the same time then they're finished.

41:16

And you know it's like a thing

41:18

we don't ever want to really acknowledge

41:21

because it's really uncomfortable once you accept

41:23

that that's what's going on. I guess

41:25

if you're a hedge fund the way

41:27

they do it is via gating so

41:30

they literally turn around to their clients

41:32

and say sorry you can pull out

41:34

this much money whoever's first and that's

41:36

it. You can't take your money out

41:39

now. Obviously a bank couldn't do that.

41:41

Yeah exactly. Bank deposit you expect to

41:43

be able to get it whenever you

41:45

want it. I guess regulators and governments

41:48

have put some institutional safeguards in place

41:50

to sort of lower the risk of

41:52

people feeling they have to run on

41:54

a bank. So you have things like

41:57

deposit insurance, so the government will get

41:59

it. the first, I don't know, 85,000

42:01

or whatever it might be in different

42:03

countries, central banks there to provide

42:06

liquidity and emergency loans to banks,

42:08

but even that is not enough

42:10

really. Yeah, I mean you're right, you're

42:12

right, when things go really wrong, as

42:14

we're in the US around Silicon Valley

42:16

and Signature Bank, what actually happens is

42:18

Janet Yellen and Joe Biden at the

42:20

time, come out and say, don't worry,

42:22

everything's fine, we've got your back. and

42:24

that sorts it all out. However, that's

42:26

also uncomfortable to our knowledge really because

42:29

if you say that actually, you know,

42:31

who you really put your money with,

42:33

it's the US government, then what on

42:36

earth are we paying the banks for?

42:38

Why are all the bank executives getting

42:40

paid incredibly well when actually all they're

42:43

doing is holding money on behalf of

42:45

the government, you know, managing a system?

42:47

They're sort of intermediaries really. And I

42:49

guess the solution that lots of governments

42:52

have come up with is the idea

42:54

of bailins, where the people who are

42:56

on the hook are the shareholders,

42:58

then the depositors, and the government really

43:00

isn't so much on the hook, at

43:02

least that's the theory. Yeah, that's right.

43:05

I guess this whole banking thing has built

43:07

up because we, like you say, it makes

43:09

people uncomfortable, so we need to

43:11

pretend that the money's there. So we

43:14

can lend money to productive businesses

43:16

while pretending it's not us doing

43:18

the lending, when it is us

43:20

doing the lending really. Correct. It's

43:22

a big confidence game, isn't it? Yeah.

43:24

Well that was great Duncan. I'd

43:27

really recommend meltdown for anyone that

43:29

wants to understand how banking works.

43:31

And what can go wrong when

43:33

bankers go off the rails? But you're

43:35

a great storyteller to be able

43:38

to turn this 160-year-old story into

43:40

such an entertaining book. Thank you so

43:42

much for joining us. Thanks, I really

43:44

appreciate talking to you. Thank you for

43:46

joining us for many happy returns. Keep

43:49

sending us your questions, no matter

43:51

how dumb, at MHR at pensioncraft.com.

43:53

And do remember to check out

43:56

pensioncraft.com, for all the information about

43:58

our membership, call... and investment coaching

44:00

options. Many happy returns is a

44:03

pension craft production, co-hosted and executive

44:05

produced by Romine Akiza and Michael

44:07

Pew. This podcast is for informational

44:09

and entertainment purposes and is not

44:11

financial advice. We do not provide

44:13

recommendations or endorse any decision to

44:16

buy, sell or hold any security.

44:18

We cannot be held responsible for

44:20

any actions listeners may take and

44:22

investors are encouraged to see independent

44:24

financial advice.