Disclosure: I hold positions in Credit Suisse, and am extremely bullish.
I like Credit Suisse because unlike its competitors they have stayed away from much of the sub-prime crisis. Though I am worried about what Credit Suisse has just announced.
Credit Suisse has written $2.85 billion off the value of its asset-backed investments and found mismarking and pricing errors on its books, it revealed on Tuesday, sending its shares plummeting.
And the press release:
Further to its commitment to provide transparency, Credit Suisse today announced that in connection with the operation of ongoing control processes, it has undertaken an internal review that has resulted in the repricing of certain asset-backed positions in its Structured Credit Trading business within Investment Banking. The current total fair value reductions of these positions, which reflect significant adverse first quarter 2008 market developments, are estimated at approximately USD 2.85 billion (having an estimated net income impact of approximately USD 1.0 billion). In the first quarter to date, we estimate we remain profitable after giving effect to these reductions. The final determination of these reductions will depend on further results of our review and continuing market developments. We will also assess whether any portion of these reductions could affect 2007 results. Finally, our internal review, which has identified mismarkings and pricing errors by a small number of traders in certain positions in our Structured Credit Trading business, is continuing.
What I wonder about is what are they repricing? The way that it is worded is that it could mean more sub-prime guck, or it could mean the bonds that many investment banks were holding in their LBO’s.
I like Credit Suisse because they have stayed out of many risky deals. But what concerns me with this new problem is not Credit Suisse, but the ramifications on the overall market. I wrote in December how I thought that Private Equity is the next shoe to drop. The problem has been in the past that Private Equity overpaid for companies and with a slowing economy those overly optimistic cash flows and valuations I think is going to bite Private Equity in the butt. Credit Suisse was involved in LBO’s though not overly, at least more than this sub-prime guck.
If I was completely optimistic then the Credit Suisse is a write off of their sub-prime guck and thus the market is over reacting. Though I am not convinced. I think this might be the write off of parts of their LBO business. And that is a bad thing, not for Credit Suisse, but for quite a few other banks, and investment banking institutions. If Credit Suisse is starting to write off LBO business then welcome to round two of the downdraft in the market. This could get ugly ladies and gentlemen… (Though I am not completely sure)
UPDATE: This is about a few traders inflating their mortgage backed assets. That is good news… Is this the tip of the ice berg as the article says so? I don’t know, but I don’t think so. I know for a fact that Credit Suisse is keeping tight reins on spending and traders.