Saudi Arabian, Abu Dhabi Sovereign Wealth Funds Eyeing Investment in Scandal-Hit Credit Suisse

By Jacob J
October 18, 2022 10:55 +08

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Middle East's to major sovereign wealth funds are exploring the option of funneling money into the investment bank business of embattled Swiss bank Credit Suisse. Abu Dhabi's Mubadala Investment Co. and Saudi Arabia's Public Investment Fund are separately holding discussions with Credit Suisse, Reuters reported.

The Credit Suisse crisis, which basically stemmed from the collapse of Archegos Capital Management left a $5 billion dent on its portfolio, had threatened a Lehman Brothers-like crisis, before the management was able to pull off a temporary reprieve, citing restructuring plans that would save the bank. Credit Suisse has said it will unveil the plan on October 27.

Depressed Value

Reports say the Middle Eastern nations are looking to seal a deal ahead of October 27, taking advantage of the depressed value of Credit Suisse assets. Neither Credit Suisse nor the Gulf sovereign wealth funds have confirmed the move.

"We have said we will update on progress on our comprehensive strategy review when we announce our third quarter earnings ... It would be premature to comment on any potential outcomes before then," Credit Suisse said in a statement, according to Yahoo News.

The beaten down Credit Suisse shares had got a fillip last week when bidders expressed interest in buying Credit Suisse securitized products unit. The bank's offer on October 8 that it would buy back up to $3 billion of its own debt also helped the sentiment.

Legal Setbacks

However, a slew of legal setbacks in the following days hit the recovery plan. Shares plunged as much as 5 percent on October 13, on news that the US Justice Department was investigating the bank over charges that it helped its US customers hide hundreds of millions of dollars.

A day earlier, the 'Yen Cartel' accusations had rocked the bank as a federal court in Manhattan started the trial on currency rigging allegations. The class action suit that was launched in 2013 accuses the embattled Swiss banking giant of rigging the foreign exchange market and hurting customers.

The lawsuit says Credit Suisse traders shared nonpublic pricing information with traders in other banks and colluded to fix prices in the foreign exchange market. Chat rooms such as 'Yen Cartel' operated between 2007 and 2013 and traders from various banks participated in it to manipulate spreads for currency pairs.

On Monday, Credit Suisse shares rose 8.7 percent in New York and 4 percent in Zurich.

The Credit Suisse Scandal

The first major shock for Credit Suisse was the bankruptcy of Greensill, a British supply chain company to which the Swiss banking major was heavily exposed. When Greensill filed for bankruptcy in 2021, Credit Suisse lost a whopping $10 billion of its investor money.

The second crisis to hit Credit Suisse later in the same year was the unraveling of Archegos Capital Management, which was promoted by Bill Hwang. While Hwang managed $10 billion, he convinced Credit Suisse and other banks to approve a $30 billion investment.

The crisis unfolded when Archegos engaged in the fire sale of about $20 billion of assets after it defaulted on a margin call by Credit Suisse and others. Shares of Nomura and Credit Suisse plunged, erasing a combined $9 billion in market value on the back of the market chaos following the collapse of Archegos Capital Management. Major investment banks like Deutsche Bank, UBS, Morgan Stanley, Goldman Sachs etc were also hit by the liquidation of Archegos.