10/22/2009 The Banker: Clear view curtails crisis f…

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Clear view curtails crisis fallout

Published: 02 January, 2008

Credit Suisse fared well during the subprime crisis. Brian Caplen asks CEO Brady Dougan what underlies the bank’s
new stability and what it is planning for the year ahead.

With the subprime crisis still unfolding, definitive statements about who has best survived it are as risky as the structured investment
vehicles themselves. But for certain, Credit Suisse has fared better than it would have done five years ago when the bank was noted
for being at the centre of any and every major market fallout. In the third quarter of 2007, it reported a net profit of CHF1302m
($1085m) after write downs of CHF2.2bn on structured products and leveraged finance. Analysts received the results favourably,
although some noted that they were helped by a CHF622m income boost from marking to market the bank’s liabilities. “This is, in our
view, nonsense. It is an example of the concept of fair value accounting taken to extremes,” said a CreditSights report.
Brady Dougan, Credit Late last November, the bank’s new CEO Brady Dougan – who was promoted from his post as head of the investment bank to take
Suisse CEO
over from the retiring Oswald Grubel last February – told The Banker’s editor Brian Caplen how he viewed the markets in 2008 and
the role he expected Credit Suisse to play. He also gave his version of fair value accounting and explained why the bank
repurchased securities from its money market funds – from which CHF27bn flowed out in the third quarter – even though it had no legal obligation.

Q You have said that with the one bank policy you “have just scratched the surface”. What have you achieved and what more is there to
do?

A We continue to see huge value in operating as an integrated bank. Events over the past three to four months in the markets have stressed the
importance of having a balanced business model, and confirmed its strength in terms of what we have been able to accomplish for our clients. We believe
the benefits for our clients and shareholders are huge.

On the revenue side of the equation, we continue to work hard to increase the collaboration between the different areas of the bank. We are seeing
tremendous progress on the amount of business that is done between investment banking, private banking and asset management. In the first nine
months of the year [2007], 10% of our net new assets in private banking came from cross-divisional referrals, which was well up on the previous year. For
example, about 40% of our initial public offerings (IPOs) ended up with a private bank account being opened.

On the expense side, we also benefit significantly from our integrated business model. Our information technology (IT) spend has been pretty much flat
over the past two years, and operating on an integrated platform gives us an advantage, for example in terms of purchasing of IT.

Q The cost-income ratio of the investment bank has come down to about 70%. How much further can you go?

A We have made a lot of progress in the investment bank, and focusing on cost management is more important than ever. But we have also taken a close
look at our costs overall and we think we can get more efficiency out of our organisation as a whole. As a result, we are extending the most successful
efforts across the bank.

A lot of the cost reductions we have achieved so far have been the easy things that you can do quickly. But there are three levels of cost reduction. One
is standard cost reduction, just being more efficient. The second is applying more technology. For example, our brokerage and clearing expenses amount
to roughly CHF2.4bn a year and we think we can reduce that by 10% to 20% by improving the efficiency of our technology platform. This means
enhancing routing order flow and renegotiating brokerage arrangements. We have a special group that is addressing those costs.

The third level of cost reduction is restructuring and making processes more efficient, and that is something we achieve by operating as an integrated
bank. We can combine processes and make them more efficient across the bank and that is something we have only just started on.

Our goal is to be one of the most efficient banks. It is not so much that we want to have a cost-cutting culture, more that we want to have a culture of
efficiency and productivity. A good example is our Centres of Excellence programme. This is the name we give to the centres we have created around the
world to tap local expertise in areas where we can access lower-cost talent. We have centres in Pune, India, in Wroclaw, Poland, in Singapore and in
Raleigh Durham, North Carolina in the US. This has allowed us to lower costs and also to be more efficient because we can restructure processes as we
move into these centres.

Q What are the growth areas in investment banking in 2008?

A This depends partly on what happens in the US and European economies. There are a number of businesses that we expect to perform quite well. Our
cash equity businesses have been very successful this year and we expect that to continue in 2008. Equally, in fixed income we expect to achieve good
growth in our interest rate products and foreign exchange businesses. In commodities, prime brokerage and equity derivatives, we will continue to build
our presence aggressively.

We might even see reasonable activity in leveraged finance and commercial mortgages, and some of the areas that have had difficulties in the past few
months. It is too soon to write off those businesses in 2008.

Given our strong presence in the emerging markets, we also expect continued strong growth from markets where we already have a strong presence,
such as Brazil and Mexico, Russia, the Middle East, and India and China. The emerging markets businesses should continue to be a good contributor, not

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only to the investment bank result but to Credit Suisse as a whole.

Q Has the crisis done any long-term damage to any business areas?

A You have to differentiate. We have an issue around transparency in residential mortgages, collateralised debt obligations (CDOs) and structured
investment vehicles (SIVs). And clearly the whole residential/subprime area is going to be different. The scale and the volumes of origination and
distribution are not going to be there, but there may be good opportunities to invest. The business around CDOs is going to be difficult and that market will
probably change a lot. An area like SIVs will need to be restructured.

With commercial mortgages and leveraged finance [unlike SIVs and CDOs], however, there is not an issue of transparency. There have not been
underlying credit problems, it is mainly an issue of repricing. The underlying assets in leveraged finance are related to companies and you can have a
positive or negative view on their credit. And commercial mortgage-backed securities (CMBS) are very different from residential ones. With residential
ones, you have complex structures: pre-payment speeds matter, there are convexity issues and large pools of assets that lead to less transparency. With
CMBS, there are much larger individual underlying assets.

When you provide and syndicate a loan to rebuild the Plaza in New York, you can know the hotel building right across from Central Park and you know
how the condominiums are selling and what the demand is. These businesses are therefore much more transparent. Overall, I think in leveraged finance
and CMBS the market will resume normal levels more quickly and there are reasonably good prospects for 2008.

Q How did Credit Suisse manage to avoid excessive subprime exposure?

A It was a result of our risk management processes, in which the business was closely involved. We have solid processes, part of which are weekly calls
to monitor our exposure. Yet our positioning also had to do a lot with the experience of the people involved in the process and with common sense.

One of the odd things about the whole subprime crisis is that it is probably the longest anticipated crisis we have ever seen. The truth is we took some hits
a year ago back, in November and December 2006, and we dramatically adjusted the size of our positions and the size of our business, and also did more
hedging. We were a little surprised that the market became fine again in January and February [2007]. In March, we had a bad spell, then it was good
again in April and May and by the summer there were serious problems.

But all along we had a clear view that this was a market that was going to have difficulty. The people involved in the business [at Credit Suisse] said we
needed to have a more defensive position and so we kept our exposures under control.

Q Has your trading background helped you to identify risk?

A At the time, I was running the investment bank. Ossi Grubel [Oswald Grübel, former CEO of Credit Suisse] was in charge of the bank and he has got a
strong trading background as well. Avoiding excessive exposure was a result of good risk management systems, good people in the business who
recognised the trends and flagged them, and good decision-making processes.

We do have a lot of focus on our risk profile and in that period, we would have a weekly call. Ossi Grübel would be on it, I would be on it, looking at all our
risks and exactly where we were. That kind of focus helped us to flag up the issues and make sure we were well positioned.

Q In the third quarter, you marked to market your liabilities and added CHF622m to the income? Is that fair value accounting taken to the
extreme?

A We do not have a choice in the matter. It is fair value accounting and it is something we elected to do at the beginning of the year. We did not opt to
mark our liabilities to market because there was a crisis. Everyone who reports under US Generally Accepted Accounting Principles (GAAP) has to follow
the same requirements. On the other hand, this accounting treatment certainly reflects the way we think about the business and the balance of our risks. If
overall credit spreads move out, our liabilities will also move out and that offsets our overall risk position. It is part of how we manage the business. It is not
an artificial accounting thing.

Q Why did you see such strong outflows from your money market funds in the third quarter?

A We have been focused on rebuilding the fixed income side of the asset management business. The flows in those money markets funds are volatile
and in the third quarter, a lot of people took money out of these funds and put it in short-term government funds. We were not in a position to offer all of
our clients an alternative; as a result, some money was put elsewhere.

In terms of the money market lift outs, from a reputational point of view, we thought it was the right thing to do, to purchase some of these assets out of our
money market funds to make sure they maintained their liquidity and functioned normally.

Q How have you changed the culture at Credit Suisse?

A In the past couple of years, we have made tremendous strides towards changing the culture in a positive way. The move to becoming an integrated
bank has been very important. Three or four years ago, the thought of going to a single brand would have been controversial, and dropping the First
Boston name would have been difficult. Two years ago, we went to the single brand Credit Suisse for all our businesses and it went extremely well.

This has had a big impact on how we work overall. We always had a reputation for silos. We now work together better than most of our competitors.
Historically, we had a reputation for doing well in the good markets and for doing much worse in bad markets. Coming into this job, I thought it was
important that we outperform in a downturn – not expecting that two months after I took the job, we would have as much excitement as we did.

I thought that performing well in a downturn would create a lot of opportunity for us as a franchise. We would get a flight to quality in the private banking
business and shake off our historical image. We have come into the current crisis extremely well capitalised, extremely well funded, conservatively
positioned and hedged.

Q How would you describe your management style?

A I like to think I have a thoughtful approach. I believe in the power of diversity of ideas and getting a lot of information and ideas from the people who
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work here. But I also think that you need to weigh them up and, ultimately, be decisive about things. There is a balance between obtaining consensus and
soliciting opinions and then making decisions and driving things forward.

Innovation and doing things differently are very important but it is something you have to work hard at. It is not human nature to want to do things
differently, to change, but for us it is a constant requirement.

Q Will you need to make acquisitions to strengthen your emerging markets franchise further?

A Taken as a whole, I think we have one of the strongest emerging markets platforms in the industry. An opportunity that comes out of this whole crisis is
that we are better capitalised than our competitors. We are well positioned and we do have the opportunity to make an acquisition if it makes strategic and
financial sense.

In general, we do not think that transformational acquisitions make a lot of sense. There could be some things tactically – Hedging-Griffo is a good
example [a Brazilian private bank and asset manager in which Credit Suisse took a 50% plus one share stake in December 2006 for CHF358m] – but
against that, prices are not cheap in the emerging markets. We need to be prudent.

© The Financial Times Limited - 2009.

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