Credit Suisse Drops a Bomb

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Last week, European bank Credit Suisse (NYSE: CS) reported 2007 results that were indicative of an institution that was too savvy and sophisticated to become overly entrenched in the American-made subprime loan mess. This week, CS unexpectedly announced first-quarter writedowns that were indicative of an institution that is up to its eyeballs in the subprime loan mess.

Everything was jake
Credit Suisse announced fourth-quarter and full-year 2007 results last week. It wrote down $1.2 billion for the quarter, and year-over-year profits were down 72%. Not great news on the surface, but the results compared quite favorably with the likes of Citigroup (NYSE: C), Merrill Lynch (NYSE: MER), JP Morgan (NYSE: JPM), and, especially, Swiss and European rival UBS (NYSE: UBS), which wrote off $14.5 billion last quarter alone. The news was generally received as positive. Credit Suisse was perhaps considered the European bank most resilient to the credit crunch, and it seemed to be steering very clear of any major difficulties connected to the crisis.

Not anymore
This week, Credit Suisse dropped a bomb. It announced write-offs of $2.85 billion for the first quarter due to "mismarkings and pricing errors by a small number of traders" and adverse trading conditions. The stock sold off more than 8%. Not only was the news bad, it was also confusing.

CS said that a handful of traders have been suspended and are under investigation for overvaluing asset-backed securities. The company said it will cut $1 billion from net income on losses of $2.85 billion from a combination of trader error and poor market conditions resulting from exposure to commercial-mortgage-backed securities, retail-mortgage-backed securities and collateralized debt obligations. If all this sounds vague, that's because it is. Credit Suisse's report makes it impossible to ascertain where the actions of a few jerks end and the difficult market conditions begin. 

Ugh!
It's bad enough to unexpectedly announce huge write-offs just one week after announcing fourth-quarter earnings, but to have the nature of these write-offs be vague and confusing indicates that the company doesn't understand its own operations. Large write-offs and a poor understanding of what's wrong are two maladies that paint a rather ugly picture.

The subprime loan crisis has clearly spread beyond our shores. How deeply loans infected by the crisis have infiltrated financial institutions throughout the world is not yet known. But this Credit Suisse announcement portends bad news in the future.

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