The market fears the issues surrounding the complex financial products which led Credit Suisse to suspend traders and nurse millions of dollars in losses this week, could spark a wave of similar writedowns in the banking sector.
One analyst in the market said: "Collateralised debt obligations are difficult to value, and many banks have little clarity on their exposure. There could be a few more announcements following Credit Suisse this week."
Credit Suisse said yesterday that it had suspended "a small number of traders" on Tuesday relating to their "mismarking and pricing errors" in its structured credit trading business.
The announcement form-ed part of the bank's revelation that it had been forced to write down $2.85bn (£1.5bn) in the first three months of the year. This led to a direct $1bn hit to its first-quarter profits. It added that the traders had been responsible for a minority of the losses, brought on by worsening market conditions.
It emerged that the team affected was the group's synthetic collateralised debt obligation, or CDO, team headed globally by Kareem Serageldin. It is understood that a number of the London-based team, along with Serageldin, had been suspended pending the results of an internal review. It is still unclear of the exact cause of the trading losses.
This is not the first time Credit Suisse traders have been investigated. In 1999, it sacked three, including James Archer, the son of Lord Archer, part of the notorious "Flaming Ferraris" dealing team, named after a cocktail. The decision came after an inquiry into alleged improper share dealings.
This latest news comes only weeks after Société Générale was hit by the worst rogue trading scandal ever, with losses of €4.9bn (£3.7bn), prompting banks to tighten their controls. This is not the first time that traders in Canary Wharf have been caught up in losses.
Should it turn out that Credit Suisse's traders suffered because of human error, the group found some sympathy yesterday.
One bond trader at a rival group said: "It is easy to see how this could happen; there are a lot of variables in valuing these securities. It could be to do with their assumptions on default and recovery, as well as the way it is modelled."
CDOs are securities made up from a portfolio of fixed-income assets. These are held as collateral with the cash flows sold on to investors. The asset is divided into different levels of risk. These divisions, or tranches, are separated into senior, mezzanine and equity which have different levels of risk. Synthetic CDOs add an extra layer of complexity. Rather than owning a part of the actual underlying assets they use a derivative, called a credit default swap, to gain exposure to the portfolio.
The trader said: "Valuations are really sometimes little more than a finger in the air operation."
The CDO market has grown hugely from $157bn in 2004 to over $2 trillion at the start of last year. One analyst said banks were happy to take the risk of investing in an opaque structure when the returns were rolling in. The assets began to suffer in the credit crunch leading banks to significant writedowns across the banking sector.
David Stark, corporate finance director at Deloitte, said: "The structure and ownership of the CDO can be very opaque: if there is a fallout, how do you identify your assets? An additional worry for some is that CDOs are unregulated and normally run out of a separate offshore special purpose vehicles."
Credit Suisse's announcement on Tuesday came a week after it had reported relatively strong full-year results. It announced write downs of Sfr2.07bn for the year, which compared favorably with its closest rival UBS, which wrote down Sfr15.6bn in the last quarter alone.
Tuesday's announcement was related to the closing of a $2bn bond placed last week, as the errors were discovered following an audit of the bond.
De Montfort leaves Credit Suisse
One of Credit Suisse's senior investment bankers in the UK has left the group to join an investment banking boutique in the City, although the move comes as "little surprise" to insiders.
Gleacher Shacklock, the advisory group, said yesterday that Piers de Montfort, the chairman of Credit Suisse's UK investment banking business, had been appointed to the company as a partner. A Credit Suisse source said: "It is no secret that de Montfort has been looking at his options recently, but he is leaving on good terms." It is understood that the Swiss bank will not appoint a replacement to the role.
Mr De Montfort joined Credit Suisse in 2004 after 17 years at Morgan Stanley to head the group's UK investment banking division. He became chairman last year after the media banker Sebastian Grigg joined from Goldman Sachs to take over the UK operation. Gleacher Shacklock has worked on several big deals in the past year, including advising BAE Systems on its joint venture with VT Group over surface warships.Reuse content