Credit Suisse

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Credit Suisse

Paradeplatz 8
Zurich, Switzerland
(01) 333-1111

Public Company
Employees: 15,055
Assets: SFrll3.38 billion
Stock Index: Frankfurt Zurich Tokyo

Credit Suisse began as a commercial bank in 1856, at a time when Switzerland was first embracing the industrial revolution. Today Crédit Suisse is one of the Big Three powerhouses of the Swiss banking industry, along with the Union Bank of Switzerland and the Swiss Bank Corporation. In that role alone, the bank ranks among the major players in the world financial arena.

Credit Suisse is further enhanced through its longstanding though often volatile partnership with the American investment bank First Boston, which dates to the mid-1970s and was substantially reorganized in 1988. But despite Crédit Suisses high profile in the investment-banking community, its heart and soul remain its full-service banking activities in Switzerland.

In 1856, Switzerlands federal constitution was only eight years old and there was little industry in the country as the shift from an agricultural to an industrial economy had just begun. Alfred Escher, a young Zurich politician from a prominent local family, was making slow progress in his talks with foreign banks about ways to finance a proposed north-eastern railway, so he decided to set up an independent bank in Zurich, putting SFr3 million worth of shares on public offer. The response was overwhelming: he received SFr218 million in subscriptions within three days, and Crédit Suisse opened for business on July 16.

The American Civil War had a great impact on the emerging textile industry in Switzerland, which suffered when cotton prices collapsed after the war ended. CS posted its first and only loss ever in 1867.

The growth of other industries in Switzerland and the continued expansion of the railroads provided ample opportunities for Crédit Suisse to grow, however. The bank helped develop the Swiss monetary system and, by the end of the Franco-Prussian War in 1871, Crédit Suisse was the largest bank in Switzerland.

The next 40 years, to the beginning of World War I, came to be known as the belle epoque for both the continent and for Crédit Suisse. A number of significant changes occurred during this period, including the revision of the federal constitution in 1874 and the resulting political changes that eventually led to proportional representation in local and federal government; an increase in savings, which enabled the country to become an exporter of capital by the mid-1880s and reduce its reliance on foreign capital; and the introduction of electricity, the telephone, and the telegraph, all of which required large infusions of capital for construction of factories, power plants, and phone systems.

The founding of the Swiss National Bank in 1907 and the growth in foreign investment by Swiss banks sowed the seeds for Switzerlands eventual role as the banking capital of the world. Crédit Suisse also branched out from Zurich during this period and had 13 different locations in Switzerland by the beginning of World War I.

With the outbreak of World War I, foreign investment stopped completely. As investors in hostile countries returned Swiss securities, Crédit Suisse played a crucial role in placing them on the Swiss market. CS also had to defend the interests of Swiss investors abroad, a delicate matter during such a chaotic period.

After World War I, Crédit Suisse continued financing the electrification of the country and, in response to a coal shortage, helped finance the national railroads conversion to electricity in 1924. Foreign investment expanded rapidly during the 1920s, a period that came to a devastating end with the stock market crash in 1929.

The Depression led to cataclysmic changes in Europe, including the rise of nationalist thinking, the imposition of a range of trade barriers like protective tariffs and import quotas, and other developments that resulted in lower production levels, less investment, and economic decline.

Increasing tensions in Europe led to Crédit Suisses emphasis on English-speaking companies, which resulted in the establishment of the Swiss-American Corporation in 1939 to focus on the securities business and the opening of Crédit Suisses first foreign branch in New York in 1940.

During World War II Crédit Suisse extended large amounts of Crédit to Swiss authorities, who were owed more than SFrl.7 billion by Germany by the end of the war. Despite the loss of almost half of the companys employees to war-related service, Crédit Suisse emerged from the conflagration financially sound and poised to capitalize on the impending economic upturn.

After the end of World War II, as normal banking activities resumed, reconstruction ol the war-torn continent got under way and Crédit Suisse again took up issuing paper for foreign debtors. At the same time, Crédit Suisse expanded its services to its regular customers by developing new and different types of savings accounts and broadening into activities that were formerly handled by subsidiaries, such as issuing Crédit cards and providing consumer Crédit.

During the 1960s the bank also set up a farsighted business arrangement with White Weld, a leading American investment bank in Europe, which would eventually establish Crédit Suisses leading role in the Eurobond-issuing market and would ultimately lead to its relationship with First Boston.

Foreign-exchange dealings assumed greater importance during this time, along with the precious metals markets. With the emergence of a free gold market in 1968, Crédit Suisse became a major gold-trading house and, through its acquisition of the precious metals refinery Valcambi S.A., in Ticino, a manufacturer of ingots and coins. By the turn of the decade, Crédit Suisse had offices on every continent except Antarctica.

The 1970s brought the introduction of floating exchange rates and the subsequent devaluation of the dollar, a loss of investor confidence in the American market, and the oil crisis of 1973. The bank also experienced a major scandal in 1977 when authorities began investigating a fraudulent banking and foreign exchange trading scheme at the companys Chiasso branch involving more than $1.2 billion. The losses resulted in the resignation of the several top executives and left the current chairman, Rainer Gut, second in line following the retirement of Chairman Otto Aeppli in 1983.

Gut, who is Swiss born but trained in the United States, has brought a measure of stateside savvy and aggressiveness to Crédit Suisse. A former partner in New Yorks Lazard Freres, Gut has shifted the companys focus from traditional Swiss banking practices, which emphasize security and caution, to world investment banking and money management.

By 1986 the banks assets were $46 billion, and somewhere between $75 and $150 billion more were under active management by the bankwell ahead of the estimated $50 billion under the management of the leading American bank in the field, Citicorp. Under Gut, Crédit Suisse was the first Swiss bank to acquire a bank in West Germany, Effectenbank, and it is among only a handful of foreign operations doing trust banking in Japan.

In 1978 Crédit Suisse First Boston (CSFB), a joint venture with the New York investment bank First Boston, was formed after White Weld was purchased by Merrill Lynch. The terms under which CSFB was established caused the defection of CSFB Chairman and Chief Executive John Craven, who was replaced by Michael von Clemm.

Although he is consistently pilloried as a bad manager and was eventually replaced as chief executive by Hans Ulrich Doerig from Crédit Suisse, von Clemm is widely Crédited with helping the company achieve its undisputed dominance of the Eurobond market with innovative financing deals. However, he also oversaw one of the greatest financial disasters in the companys history, a $150 million issue bought by the company in 1980. The deal eventually cost CSFB between $20 and $40 million, and the three years during which von Clemm managed the company were its least successful.

Four years later six executives, including three executive directors, left Crédit Suisse First Boston. The exodus coincided with the appointment of Jack Hennessey, formerly of First Boston, as chief executive to replace Doerig, who returned to Crédit Suisse. A former assistant secretary of the treasury, Hennessey was brought in to reduce the friction and to assume management duties. Von Clemm remained as chairman. The problems were not over, however.

At the beginning of 1984, three CSFB executives defected to Merrill Lynch, taking seven others with them. Published accounts of the brouhaha suggested that the expansion of Deputy Chairman Hans-Joerg Rudloffs power base within the company offended a number of the executives, many of whom were accustomed to operating in a wide-open entrepreneurial environment.

But the company was growing too large, and as senior executives tried to figure out how to manage CSFB, the infighting grew nastier, and Rudloff was considered the consummate corporate infighter.

The final defection came in 1986, when von Clemm resigned quietly after 16 years with the company to devote more time to outside interests. Hennessey took over as chairman and chief executive.

At about the same time, full-service investment-banking companies like Salomon Brothers and Goldman Sachs, as well as Japanese and German concerns, started pushing their way into the Eurobond market. That forced CSFB to diversify into mergers and acquisitions, equity sales, and other specialties, as CSFBs share of the Eurobond market dropped from more than 16% to just over 11%.

Also, CSFB was encountering competition from, of all places, its own two parent companies, Crédit Suisse and First Boston. As the need for better cooperation between family members became apparent, CSFB moved one of its New York executives to London to establish better relations. For a while things seemed to be working. One of the first joint ventures among the three companies involved a $4 billion bond floated by General Motors Acceptance Corporation. While First Boston was lead manager, Crédit Suisse provided a letter of Crédit to back the notes and CSFB placed $400 million of the bonds in Europe.

The true survivor of CSFB remains Rudloff, who took the company into Amsterdam with a bank acquisition there in 1986, and then became a director and officer of Crédit Suisse itself in early 1987. Rudloffs return to Switzerland was viewed by the staid Swiss banking establishment as a harbinger that the cozy days of gentlemanly Swiss banking had come to a close.

One result of the newly deregulated and ever-fluctuating markets of the 1980s is that the relationship among Switzerlands three major banks, collectively known as the syndicate, can no longer be so friendly. Once a fairly tightly knit trio, they have recently adopted new guidelines giving each other flexibility to withdraw from deals the others are involved in if they have doubts about the borrower and even to return up to 60% of their allocation of bonds after a deal is done.

Credit Suisse has been characterized in the financial press as a lone wolf rather than a pack hunter sharing the spoils of its deals with other members of the syndicate, conduct that further indicates the end of an era in the Swiss banking industry. And although Switzerland currently has some of the highest commission fees for investment-banking deals anywhere in the world, the breakdown of the syndicate could make the market more competitive and, consequently, the fees lower.

Some of the first signs of the new conditions came when restrictions on gray market trading (trading before the valuation date) were relaxed. Crédit Suisse moved aggressively into this area of finance, one it had previously shunned. The other two major Swiss banks sat back and waited and watched. There were also reports in mid-1988 that the syndicate was opening its ranks to smaller, more flexible banking houses in an effort to broaden its market share of new issues, which is up around 70%.

Since that time there have been two other significant developments in Crédit Suisses history. The company has been tainted by charges of laundering drug money from Turkey and Bulgaria. Although the company has denied the charges and, technically, money laundering is not illegal unless the money is used to buy drugs, the stain remains.

Also, Crédit Suisse and First Boston restructured their troublesome marriage under a new company, CS First Boston, a move that has been described as a virtual takeover of First Boston by Crédit Suisse. The move followed a bad 1988 for CSFB, including an estimated $15 million loss on a debt swap with Italy in 1987.

As one of Switzerlands biggest banks, Crédit Suisse has had a strong international orientation since its founding. With its recent aggressive posture in the domestic market and the reformation of its partnership with First Boston,

Credit Suisse seems poised to capitalize on the rapid pace of internationalization in the financial industry.

Principal Subsidiaries

Affida Bank; Societe anonyme de participations a des enterprises privees (88.8%); Bank for Commerce and Securities (75%); Bank Hofmann Ltd.; Bank in Luzern; Bank Neumunster (92.3%); City Bank (81.8%); CS Leasing Ltd.; Finanz AG Zurich; Krefina Bank AG; Crédit Hypothecate Suisse pour la Navigation SA; Swiss-Kuwaiti Bank (70%); Crédit Suisse Canada; Crédit Suisse (Bahamas) Ltd.; Crédit Suisse Finance Ltd.; Crédit Suisse (Luxembourg) S.A.; Crédit Suisse France; Crédit Suisse Finance (Panama) SA; Crédit Suisse (Guernsey) Ltd.; Crédit Suisse Trust & Banking Co., Ltd., (95%); Crédit Suisse Buckmaster & Moore Ltd. (United Kingdom) (85%); Schweizeriche Kreditanstalt (Deutsch-land) AG (80%); Gibraltar Trust Bank Ltd. (95%); Swiss American Securities Inc. (80%); Electro watt Ltd.; Fides Holding Co.; Premex AG; Savoy Hotel Baur en Ville AG; Societe Internationale de Placements; Crédit Suisse Asset Management International Inc.; Valcambi S.A.; Zurich Bonded Warehouse Co., Ltd.; CS Real Estate Leasing Ltd.; CS Auto Leasing Ltd.; Crédit Suisse Finance Services; Crédit Suisse Finance (Guernsey) Ltd.; Crédit Suisse Finance (Gibraltar) Ltd.

Further Reading

125th Anniversary of Crédit Suisse: An Historical Survey, Zurich, Crédit Suisse, 1981.