The Swiss bank appears to have scrapped the idea of coughing up recompense for wealthy investors who lost money on Greensill funds. While a risky strategy for a private bank looking to grow, Credit Suisse may not have much choice.

Zurich-based Credit Suisse is leaning towards taking a hard line on reimbursing roughly 1,000 clientele – the bulk wealthy individuals – who lost money on its supply chain funds, a person familiar with the Swiss bank's thinking told finews.com. This would be a reversal from an initial plan to recompense the investors for as much as half of their losses.

Credit Suisse made scant mention of the funds in a trading update on Tuesday tallying an up to 4.4 billion Swiss franc ($4.7 billion) Archegos hit, beyond flagging a separate update on repayments from the four funds shortly. It hasn't yet pinpointed the damage on the $10.1 billion Greensill funds, which it pulled the plug on last month and is now liquidating.

Greensill's Manifold Hit

Until now, it has returned roughly $3.1 billion to the fund investors, largely from skimming their cash. The bank admitted its damage is manifold: «The ultimate cost to the group of resolving these matters may be material to its operating results,» according to Credit Suisse's annual report.

Credit Suisse's hard-line, first reported by «Bloomberg», follows the thinking that its fund investors were qualified – or savvy and well-informed enough – to make a judgment about their suitability, as well as wealthy enough to splurge on them even if it resulted in losses. They also include family offices and pension funds.

Agonizing Choice

The tack is a risky one for Credit Suisse, and the specter of legal action from the fund investors already looms. For Credit Suisse, offering compensation for losses raises the specter of moral hazard in the future, but playing hardball on claims may antagonize clients.

The latter option is both at odds with Credit Suisse's ambitions for expanding its business the world's wealthy, and also ill-advised for its reputation. The «Suisse» in its name is meant to stand for quality, reliability, trustworthiness, and stability.

«Serious Lessons» Learned

Letting wealthy clients stew in losses is a far cry from coddling and wooing them, especially as it is becoming apparent that Credit Suisse made grave mistakes with the funds. It has mandated an outside review, and promised that «serious lessons will be learned».

But instead of running damage control for clients and ring-fencing the wreckage, Credit Suisse effectively wants to limit its own pain and «outsource» the losses. Besides the risk to its reputation, Credit Suisse risks a prolonged legal showdown with a powerful, financially potent clientele who are accustomed to getting their way.

Is Hope A Strategy?

Bidzina Ivanishvili is a case in point: the ex-Georgian leader is now in his sixth year of bitter legal wrangling with Credit Suisse over investments advised by former private banker Patrice Lescaudron. For Greensill, the damage is potentially wider: investors in the U.S., U.K., Luxembourg, and Switzerland are said to be weighing their legal options.

Credit Suisse's tactic is to play the long game, and hope as it winds down the funds and returns more cash that it can lower the Greensill losses $1 to $1.5 billion. The approach is likely to be rooted in the simple fact that the bank doesn't have much cash lying around right now: it halted share buybacks and reneged on two-thirds of what it promised shareholders as a 2020 payout.

Scrappy Vs Conciliatory

While Credit Suisse's approach to most legal issues is scrappy and pugnacious, it probably can't concede much even if it wanted to. The bank has a serious, looming problem with its capital, which it had carefully been patching up thanks to tapping shareholders twice in the last five years.

Credit Suisse desperately wants to keep the hardest form of capital – common equity Tier 1 – at more than 12 percent (the regulatory minimum is 10 percent, and it stood at 12.9 percent at year-end). Home regulator Finma has already ordered an additional 2 billion francs of additional risk capital over Greensill. 

«It Still Hurts»

CEO Thomas Gottstein was sibylline when asked about reimbursing clients, saying the bank wanted to fight to get back as much as it can out of the funds despite Greensill's insolvency. «Our clients are professional investors,» he told Swiss daily «Neue Zuercher Zeitung» (behind paywall, in German) on Wednesday.

As part of their portfolio diversification, many of these clients put just five or ten percent of the total money they have with us into these funds,» Gottstein noted, while conceding «It still hurts».

Postponing The Problem

The decision to «let» the Greensill fund clientele take the loss is rooted more in necessity than strategy. Any recompense would eat into Credit Suisse's capital – just as the Archegos loss will.

Moody's and Standard & Poor's have downgraded their outlook for Credit Suisse to «negative», and countless equity analysts are lowering their expectations as well. Credit Suisse's board clearly views the capital issue as weightier than the risk to its reputation from affronting its wealthy clients or potential legal skirmishes. The resulting financial and other damages remain to be seen.