Credit Suisse Catches Subprime Virus

03/28/2008 02:46 am ET | Updated May 25, 2011

GENEVA — After seeming to have skirted the worst of the mortgage issues plaguing the financial sector, Credit Suisse revealed Tuesday that it had suspended a "handful" of traders for overvaluing assets and would take a $1 billion hit to its first-quarter results.

Switzerland's second-largest bank said it would still post a profit for the period, but the mispricing of asset-backed securities led to an overvaluation of about $2.85 billion.

Traders didn't update their figures to keep up with the market downturn, and this tardiness resulted in assets being marked higher than their actual value, Credit Suisse Chief Executive Brady Dougan said during a conference call.

Several traders are being investigated, but an outright fraud had not been detected, he said.

"There are no discrepancies around positions," Dougan said, adding that the circumstances were still under review. The bank earlier said a "small number" of traders had committed "mismarkings and pricing errors."

The news comes a week after Credit Suisse posted solid fourth-quarter results that defied the industrywide gloom stemming from the fallout of the U.S. subprime crisis, and a month after French bank Societe Generale SA said a futures trader racked up losses of more than $7 billion before being found out.

Credit Suisse shares tumbled nearly 7 percent to close at 53 Swiss francs ($48.28).

Analysts said the discovery of overpricing by traders at Credit Suisse _ which until now had managed to evade the worst of the problems that ensnared its crosstown rival UBS AG _ raised questions about the bank's internal oversight.

"Whilst we had received some assurance that the Credit Suisse balance sheet is not as laden with problem securities as UBS, this disclosure just raised the prospect that they may be simply bad at knowing what problems they do have," said Peter Thorne of independent brokerage Helvea.

Other analysts warned that regulators were likely to consider forcing financial institutions to demonstrate tighter controls of the complex _ and often vast _ investments handled by small groups of traders.

"From the viewpoint of financial stability as a whole, regulators are likely to see the (current) situation as unacceptable," said Cubillas Ding at Celent.

"A limited number of individuals handling esoteric instruments can have the capacity to wipe out a disproportionate chunk of a bank's profits," he said.

In reporting its fourth-quarter results last week, Credit Suisse said it was taking a 2.07 billion Swiss franc ($1.88 billion) write-down for subprime-related assets in that period, but still posted a net profit of 1.33 billion francs ($1.2 billion).

The charges were small compared to those at UBS, which wrote down 15.6 billion Swiss francs ($13.7 billion) in mortgage-related investments last year and reported its first full-year loss.

But Credit Suisse warned that last year's results may still be affected by the overvalutions, which were discovered during an internal probe into how its traders marked the value of products such as commercial mortgage-backed securities, residential mortgage-backed securities, and collateralized debt obligations, or CDOs.

"The final determination of these reductions will depend on further results of our review and continuing market developments," the bank said.

Credit Suisse said its findings will be completed by mid-March, when Credit Suisse is scheduled to publish its annual report.

More bad news could pave the way for further buy-ins by foreign investors.

So-called sovereign wealth funds operated by cash-rich governments in Asia and the Middle East have been quietly accumulating shares in western financial institutions in recent months.

According to unconfirmed reports, the Qatar Investment Authority recently acquired over 2 percent of Credit Suisse's shares, a move that follows plans for heavy investments in UBS by Singapore's government fund and from an unidentified Middle East investor.

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