Meme Melee Cost Credit Suisse $80 Billion In Outflows, Results Suggest

Unfounded rumors about Credit Suisse’s solvency contributed to a larger-than-expected CHF110.5 billion outflow during Q4.

That was one takeaway from a challenging quarter for the embattled Swiss bank, where CEO Ulrich Koerner is attempting to execute a sweeping overhaul.

The restructuring effort is proceeding “at pace,” he said Thursday. Credit Suisse cut headcount by 4% during the quarter on the way to a goal of a 17% reduction by 2025. So far, contractor and consultant headcount are down by 30% and 20%, respectively, while job cuts in the “reshaped” investment bank amount to 13%.

Late in October, Credit Suisse unveiled a long-awaited restructuring roadmap, which included the resurrection of the First Boston brand as an independent capital markets and advisory bank. Credit Suisse imagined an entity that’s “more global and broader than boutiques, but more focused than bulge bracket players.” In Q4, that nascent silo took on M. Klein & Company for $175 million. Michael Klein’s boutique gets an equity stake in CS First Boston through a convertible note and a warrant. The deal “adds significant revenue opportunities [and] accelerat[es] the path to establish CS First Boston,” the bank said Thursday.

It’s hard to know what to make of Credit Suisse’s operating results for the fourth quarter. Given the changes afoot, and the turmoil that unfolded in early October, when the Reddit crowd and finance-focused social media engineered a mini-panic, discerning signal among the noise is next to impossible.

Credit Suisse referred to the October drama as an “idiosyncratic event.” As noted here at the outset, net outflows from the bank during Q4 were almost CHF111 billion. Two-thirds of that came in October — so, around CHF73 billion.

As a reminder, social media became singlemindedly obsessed with the bank’s CDS spreads that month. Unfortunately, mainstream financial media outlets amplified the cacophony, resulting in a large headache for Credit Suisse in the weeks ahead of the restructuring unveil. Boaz Weinstein called the CDS speculation “unintentional scaremongering.”

On October 17, The New York Times deconstructed the social media frenzy at the heart of the rumors. “Reached via private message on Twitter [one netizen] said all he had looked at before sending out his tweet was Credit Suisse’s ‘low stock price and memes on Reddit,'” Maureen Farrell, Emily Flitter and Joe Rennison wrote, of one participant in the melee. “Twitter was the reason I found out about it,” said another. The Times summed up the shenanigans: “A storied institution had become a meme stock.”

Client outflows and higher costs were blamed for a CHF155 million pre-tax loss in Wealth Management, where the asset exodus was concentrated. A steep drop in client activity in IB, as well as restructuring expenses of $214 million and “major litigation” expenses, contributed to a $1.26 billion loss, almost double Q3’s red ink. FICC plunged 84% amid the bank’s de-risking efforts, while equities revenue dove 96% (to just $15 million), again related to “strategic actions,” alongside the bank’s unceremonious exit from Prime services in cash equities.

Again, there’s an apples-to-oranges dynamic here — there’s a sense in which these results can’t easily be compared even to the bank’s own prior quarters, let alone to European peers. Obviously, Koerner was keen to tout progress towards the goals of the overhaul. The bank raised $4 billion in fresh capital, closed on the sale of the securitized products business to Apollo (which should lead to a realized gain of $800 million this quarter), and so on.

The slide deck walked investors through the numbers on key initiatives, including deleveraging, rebuilding liquidity, de-risking and other steps down the road to “creating the new Credit Suisse.” Suffice to say Koerner is trying — hard, apparently, and the bank did show what it called “significant progress” on cost transformation, where that really just meant the staff cuts.

2023’s “priorities” include exiting non-core businesses and “de-scoping,” as well as simplifying the org structure, reducing complexity and aligning operations to the bank’s “new footprint.”

All in all, Credit Suisse’s Q4 loss, the fifth straight, was CHF1.39 billion. The shares dropped as much as 11.4% to a princely $2.88 at the lows.