It has been a stressful period at Credit Suisse. Last year, Tidjane Thiam was ousted as CEO after the bank hired private detectives to spy on his colleague and neighbor Iqbal Khan.
Subsequently, Credit Suisse suffered massive losses to its clients after creating funds filled with $ 10 billion in Lex Greensill’s questionable debt. As an encore, it suffered massive losses to its investors backing Bill Hwang’s Archegos Capital, which exploded later in March.
When he needs an extension, Eric Varvel, Credit Suisse’s senior manager who oversaw the asset management division, goes to his holiday home in Provence. We know this because his wife, Shauna, told The Times last week ahead of her upcoming book on renovating the house: Provencal style, decorate with French country flair.
The book is for sale: $ 50. The home is for rent: $ 12,000 per night. And there’s even an online store where you can buy pillows: $ 350. This is an elaborate high-end side hustle.
The timing of the publicity is unfortunate. There are many Credit Suisse customers who have lost a lot of money on Greensill. And although Varvel has been replaced as head of asset management, he will remain with the bank.
Yet this is hardly a “Where are the customers’ yachts?” situation. To begin with, this is Credit Suisse: the customers already to have yachts. And according to the ownership data, the house in Varvel was bought for only € 2.5 million. Even if the majestic renovation costs twice as much again, it is not a huge amount for someone who worked at Credit Suisse for three decades, much of it in senior positions.
However, the episode has once again focused on paying at the Swiss bank. While Varvel’s overall pay will not be disclosed, we know he benefited from a radical scheme to move toxic assets from the bank’s balance sheet to the bonus pool.
In retrospect, the plan, which was first conceived in 2008, went wrong. The goal was not to facilitate the purchase of seven-bedroom mansions that could spawn their own businesses and be rented to the Obamas.
But while the risk reward calculation may have been a bit wrong, the idea had merit. To recap, after the global financial crisis, banks suddenly had a variety of mortgage-backed securities and leveraged loans that no one wanted.
With creaky balance sheets of assets that were illiquid, difficult to value and subject to punitive capital requirements, banks were under pressure from regulators and shareholders. Credit Suisse came up with a great idea: get rid of them by using them to pay bankers!
The assets were put in a pool, with bankers receiving shares. If the assets were eventually sold for more than their value at the end of 2008, they would be paid out. If they were sold for less, the bankers instead of the shareholders would take the blow.
At the time, bankers were not entirely happy that their bonuses were paid out in the form of toxic assets. They would have preferred cash or, if absolutely necessary, stock of Credit Suisse. But they generally rolled into it because it was not a good time to start looking for a job.
This device – known as the Partner Asset Facility – hasn’t had many imitators, which is a shame. Stock awards help to match incentives for managers and investors to some extent. But there are many cases where parts of companies push valuations down. If you can divest them and use them to pay employees, it could be a double profit for shareholders.
In the Credit Suisse case, the bankers won. When fear subsided in 2009, the market decided there was some value in the toxic assets, and that was greatly appreciated. The securities full of soured mortgages aided in the purchase of the Credit Suisse director’s house in Provence, where he was able to relax after overseeing the division losing billions to Greensill. And so at least, after all the effort, there is a happy ending.