Duncan Mavin - Meltdown: Greed, Scandal, and the Collapse of Credit Suisse

30:32Yeah. So I think because it started out, it was like a, was it like a 30 or 40 % partnership at the beginning? in terms of a joint venture, but they obviously shared customers and information with each other, which was kind of the main part of the joint venture. Let's see, yeah, because your point, I remember that there's like, what got them to 60 was like buyout bridge loans that went bad from buyout debt that just couldn't get moved, which obviously, I mean, that stuff still happens today where major buyout happens or take private and the banks are still left holding the paper. I know people on Wall Street today who still love the Credit Suisse First Boston, what's referred to as the CSFB brand.

31:13But from what I know of that history, my read is that Credit Suisse, through the joint venture, greatly allowed people to get brashly overcompensated at Credit Suisse First Boston. Is that your read too? Because it just seemed like there was too much gasoline on the fire and people loved the brand because they were making out like rainmakers. Yeah, absolutely. I mean, you talk to people who work at CSFB in London or in New York in the 90s and they loved it and they'll tell you how it was amazing. It was this brilliant brand. I felt so proud of it. Everybody who worked there was fantastic and you kind of point out that, yeah, because you guys got paid so much money.

31:58You wouldn't have loved it. And there was like, it appears there was like hardly any regulation, right? There was sort of a couple of guys at the top, a senior guys who would maybe check in and do the, you know, check your math was working. And that was like the risk committee, right? And so people loved that. They really look back on, people who work there will look back on that time generally when you talk to them as like the best time of their lives, like the incredible time where they were super innovative, that, you know, innovative, I guess in banking always kind of scares me a little bit, but, you know, they were innovative.

32:31They were taking risks, doing exciting stuff. I'm getting incredibly well paid for it. It's funny you mentioned that because because much of that history you just said right there and from a, you know, sentimental standpoint, I, you know, my dad first got in the investment business at Drexel Burnham Lombert in 1980. And so to your point, you know, when people look back at the Drexel era, it was an incredible era. It just ended up being sustained for various reasons, but everyone was making, you know, a lot of money, to your point. So why not feel good about eras that you make a lot of money? Let's see, this then kind of begins the process of US Senator Alphonse D 'Amato, who began looking into Swiss banking, you know, for all the right reasons, but for all the wrong, you know, historical occurrences, which was the idea of not only Nazi banking, but then ultimately Jewish accounts sitting on the Swiss books, you know, held as deposits or assets.

33:30And yet the families and descendants of those assets had no way of touching them. Yeah, I mean, this bit was almost the most shocking bit to me. And it's weird, because, you know, in some ways, Swiss banks and Nazis is like a cliche, right? We've all kind of heard that phrase and, you know, that idea. it. But I don't know that many of us really understand exactly what happened. And when you start to really look at it, it is truly shocking, right? So on one level, the Swiss banks were taking money from the Nazis. So when the rest of the banks in Europe or around the world said, we won't deal with the Nazis, the Swiss banks were.

34:08So they would take any money and they would launder it essentially. And so the Nazis could go and buy armaments from Spain or Portugal or whoever they were getting the armaments from. So that was one thing. There was also kind of, they would help them, you know, where the Nazis had taken money or taken riches from victims of the Holocaust, so, you know, stolen paintings or jewelry or whatever. The Swiss banks would take that too, right? So this is the kind of amorality we're talking about. But I think it gets much worse than that, right? So what they also did was, you know, in the run-up to, in the 1930s, the run-up to the war, uh jewish people around europe fearful of what the nazis were going to do were taking their money and depositing it in banks around europe to try and keep it safe and in particular you know there was that appeal at the swiss banks right they were neutral secret you could put your money there and there's one like really compelling story about what happens to that sort of money uh that i mentioned in the book and um it's this woman who her father was a uh factory owner in eastern europe and he could see what was coming.

35:15And so he took his money and he put some of it in Barclays in London, some of it in a bank in Paris, and some of it in a precursor of Credit Suisse in Switzerland. And after the war, she was sort of grown up at this point. She went to Barclays. They gave her the money. She went to Paris. They gave her the money. She goes to Zurich and they say, oh, yeah, okay. Yes, that's your account number. That's your name. we now need your father's death certificate and she's like well he died in auschwitz i don't have a death certificate and they say well sorry you know we can't give you the money then and what happens that the money she's deposited there over decades is they just take fees out of it it just they just sort of you know keep taking fees until there's nothing left and in the 90s this sort of stuff comes to light you know i mean this is what's shocking to me is that this is in my lifetime right you know this is not history this is this is relatively recent it's in my working lifetime and you know uh when the uh when senator mato and others start to dig into it um even then the swiss banks principally credit suisse and ubs try to uh you know get away with not not paying up and they they sort of launch their own kind of counter-offensive to to block information coming out.

36:38Only when they're deeply humiliated do they admit to any of this. And in fact, you know, they sort of end up paying a fine, which sounds like a lot of money, billions of dollars. But a lot of people who are close to this stuff say not even close, didn't even get close to what they really owed. And in fact, you know, that story is kind of still going on because there are still debates over how much money is in the in Swiss bank accounts that relates to either victims of holocaust or it's nazi money um and it's i mean it's truly amazing you know that that is still a problem when it's interesting to think about again back to like a traditional bank structure you take in deposits and then you lend those out and the spread between what you get on your loan assets and your deposits which are technically liabilities that is your call it net interest margin as we know it to be right um if someone has deposits with you and you don't have to pay them anything and they sit there forever, it's like a dream depositor from a bank.

37:37It's free money. It was free money. And these were dream depositors, though it was unethical and immoral, which is bizarre to think about. At one point, just an example of how unethical they get, right? In the 90s, when there's all this sort of research into it, people are finally starting to really dig into it. um there's a there's a security guard at a uh a ubs goes into the basement of the building and he finds that there's a whole stash of documents you know thousands and thousands of documents about to be thrown in a furnace um to to hide the extent of these you know uh holocaust accounts linked to victims of holocaust and so on and he grabs a bunch of them and he sort of tries to become a whistleblower with them.

38:26And the Swiss prosecute him under the secrecy laws for exposing this problem. And in the end, he gets asylum in the US. This is in the 1990s, right? I mean, incredible. So 96 was, I think, from your book, was really the first main merger opportunity that came up between UBS and Credit Suisse under Rayner's leadership. Why didn't things progress more than was it just the idea of, I mean, the Swiss are a very arm's length people when it comes to wealth and business relationships, I think. Was it just it was going to come out in the press and therefore that it just too much headline risk? Was that the main idea?

39:13Yeah, I think it's I think it's a combination of sort of, you know, and you're kind of alluding to it, that these merger talks come back every couple of years, really, for the next year after that for the next kind of 30 years yeah it's a combination of i think uh the egos involved right so who's going to be this you know these these two banks are kind of rivals which one's going to be the junior partner and and therefore which chairman and which ceo is going to get the top job and which one's going to leave the bank so i think that's that's a massive part of it i think there's a fear of what the politics will bring.

39:53So I think it's one of the things that was sort of a new learning for me was that we who don't live in Switzerland tend to associate Switzerland with its banks. But actually, that's like one canton, right? It's sort of in Zurich, banking's really big. But in other parts of Switzerland, people aren't as fond of the banks, right? They don't like the banks. They kind of tolerate them. And it's kind of, you know, other parts of Switzerland are a little ashamed even of the banks. They, you know, they'll tolerate this kind of culture of money making so long as they don't have to think about it too much.

40:28And so the idea that, you know, a merger of these two giant banks and the bankers themselves will benefit enormously from it, you know, coming out in the media is pretty, it's pretty toxic really. and so it tends to kill the mergers before they get going.

41:11future results. Investing involves risks, including loss of principle. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges, and expenses. Read and consider it carefully before investing. Smead funds distributed by Smead funds distributors, LLC, not affiliated. My ancestors are originally from the canton of Bairn and from a town called Langenthal or Langenthal as they say it there. and it's just a farming town, right? It's just like a traditional farming place. And obviously Switzerland very much protects its farmers. That's a big, you know, kind of a tariff protectionist thing in this, you know, tariff environment that we currently sit in for political discussion reasons, but it has absolutely nothing to do with banking.

41:57It's like the, you know, to your point and kind of like how people think of the sexiness of Switzerland being the banks, it's like the least sexy, you know, place that you could probably be in Switzerland. And I mean, almost as, you know, Most of Switzerland in my mind is very redneck. Very rural. Very rural. Very rural. I had a college friend of mine who was working for a major, a national industrial company up in Zug. And so I went up to see him for a weekend, stayed at his place. And what did we do? We went down to the river to a swimming hole where a bunch of Swiss people would go and we would walk out and go up on the bridge and we would jump off the bridge like we would do in redneck America, like very rural America.

42:41And that is very Switzerland. The other thing too that I find interesting about rural Switzerland is it's actually a lot more like rural America beyond like bridge jumping and just kind of having fun in the summer. Everyone in Switzerland that's been conscripted has a gun. It just doesn't have a firing pin. So it's like Texas without a firing pin. And that's your point. That's the culture outside of banking. Yeah. And the politics kind of reflect that as well, right? So Switzerland has what feels like a strange political system compared to the rest of the world where – Well, a big democracy. They vote on everything.

43:18They vote on everything, everything. And the cabinet, the ruling cabinet is usually made up of people from different parties and they sort of cycle around to different roles. And so, yeah, it's really probably much more democratic than most other countries, which means I think that that might be the biggest check on the bankers, right? Like they're sort of tolerated because they bring a lot of money into the country. But don't misbehave too much because the rest of the country doesn't really like it. Yeah. So the other idea that got popular at Credit Suisse, and this happened in all banking, particularly in Europe, was the idea of the bank assurance model.

44:03So I just want to – I know it sounds really simplistic to maybe you or me, but can you explain what the bank assurance model was? And then in Credit Suisse case, what did they get involved in insurance? Yeah. So yeah, I mean it's just effectively hooking up an insurance company with a bank. It's a bit about, essentially, I guess the idea is the thing that you pointed out a couple of times already, which is banks need a source of deposits, right? And that's how they finance the loans. And so our investments, so if you take an insurance company, it's just a massive pool of money that's just sitting there waiting to be deployed on something that's more useful.

44:48And so in theory, if you hook up a bank with an insurance company, that's like the dream. You've got these long-term deposits. People are taking out insurance policies for many years. You don't need them back quickly. And then you can go and lend them out to people to buy homes or build businesses or whatever it is. In theory, that works really, really well. Yeah, it does. And to your point, I mean, I was actually, you know, I think a lot about Buffett. Obviously, Buffett's had a lot of success investing in banks in his career. And he's also been in the insurance business, you know, for many, many years.

45:22And to your point, your policy premiums that you collect are like deposits. And the liabilities that you owe the insured parties are what you'd have to pay out in the future. In other words, that's your rate of return you have to beat in a way. So it's still a spread business. And particularly in places like Italy, the bank assurance model became kind of popular, which as we're kind of watching these Italian entities unfold themselves with like Generali today and obviously their ownership and involvement with Mediobanca, that was kind of the bank assurance model in Italy in a way. But to your point, like Wineter, who Credit Suisse bought, it worked terribly.

46:04Yeah. I think, I mean, part of it is culturally those two businesses are totally different, right? Yeah. Banking to some degree is kind of, you know, I mean, like it attracts a completely different person to work in banking than for the type of person who works in insurance. They're just totally different models. And when you try and put them together, it's like who's really in charge here and what are you trying to achieve? And it never seems to work that well or, you know, very rarely seems to work that well. I agree. And to your point, I think it's versus a model where someone's focused on one or the other.

46:37That focus, like for an investor, has always been a much more rewarding thing for the corporate entity. because to your point, I mean, if I'm insuring you, you pay me policy premiums, I re-indepthest those at a high enough rate and broadly against all my participants that if I, like using Buffett, he uses corporate equities. So he makes a much higher return on corporate equities relative to what he's got to pay out in future liabilities tied to the policy. So it's, again, it's still a spread business. And if you can make 2 % or 3 % over what your costs are, just like in banking, you're a genius.

47:09It's just that it tends to be a pretty competitive business like banking too. And so there's a lot of people that end up doing foolish things from time to time. Under the heading of foolish things, to come back at the theme we talked about earlier, star player at the bank. So you mentioned Alan Wheat becoming a big name at Credit Suisse vs. Boston. And the old term that was very popular there, back to our kind of cultural at CSFB, was you eat what you kill was the popular ethos. What did Alan Wheat do at CSFB? Yeah. So Alan Wheat was really the – that was kind of – when Alan Wheat was in charge of CSFB, that was really a kind of high point of this idea of having a bunch of superstars, a sort of stable of superstars.

47:54And so he would go out and hire, you know, who is the best derivatives guy? And now I'm going to let him, you know, run wild, create as much revenue as he can, but he's going to get paid an enormous share for it. And so he essentially went out and hired in every kind of trendy bit of banking at that time would say, I'll get the best person there is. And some of these guys naturally were very kind of aggressive and also egotistical. And so it wasn't hard to go to somebody who's doing really well at Morgan Stanley and say, I'll pay you more. They were not particularly loyal, right? They would jump ship, if you're going to pay me more, I'm going to go.

48:34And they all kind of believe in themselves. So they don't think it's Morgan Stanley or Merrill or whatever name it is behind them that's helped them achieve their enormous revenues. They think it's them. They think it's their particular skill set. And so Wheat goes out and he hires a bunch of guys like this. And there's some degree of success, but one by one, they blow up. and there's trading scandals and there's people shredding documents and there's money tied up in emerging markets when the emerging markets blow up and all sorts of things go wrong, essentially. I mean, the biggest name of that era was Frank Catrone, who was, to some degree, the biggest name in the dot-com bubble.

49:22Frank Catrone was like the guy in Silicon Valley. He knew everybody in Silicon Valley and he made a fortune. I mean, we're talking kind of hundreds of millions of dollars in compensation, and he's on some of the biggest IPOs at that time. And when the dot-com bubble blows up, he's also kind of the most controversial figure. You know, he ends up in court. I mean, he was found guilty of wrongdoing at one point, then he appealed and he was cleared. But, you know, ultimately he becomes the sort of poster child for greedy bankers due to the dot-com bubble. and that's Alan Wheat's that's Alan Wheat's crazy spurs Boston yeah because Frank Quattrone as you mentioned in your book he was known as the Prince of Silicon Valley and to this day I mean if you look at it Morgan Stanley they have still have a massive legacy in tech banking to this day I mean they're still one of the if not the primary banker to Silicon Valley so to your point even though Frank Quattrone really created a lot of that legacy it ended up holding with the bank more than people expected another name you mentioned in that in that part portion of the history was Andy Stone you know can you can you teach us who Andy Stone was briefly yeah I mean Andy Stone is a sort of well he's a he's a he's a sort of a kind of mini Donald Trump of the 90s right he's a real estate developer you know building stuff all over the place flying around in private jets living the kind of lifestyles of the rich and famous banker lifestyle and, you know, and making a lot of money for a while, but eventually blows up like all the others do.

51:03And the bank has to kind of, there's a sort of nasty parting of the ways between the bank and Andy Stone too. Just as there is with Frank, it becomes, I guess if you hire these people and they're massive egomaniacs, you know, which is why you hire them, that's why they're good, then you shouldn't be surprised when things go wrong and where it turns nasty. And then Credit Suisse, really on the back of much of that, they go out and buy DLJ or Donaldson, Lufkin, Genrette in, I think it was August of 2000. And you even noted in your book the multiple they paid, which was three times book value. Now, Now, you know, C.S.

51:44Lewis, he has a term that I love. It's called chronological snobbery. And it's something we often can practice in our era. We look back and say, oh, they were so stupid. Or we look at us today and say, oh, gosh, we're so smart, right? And what I found interesting about you mentioning that book multiple is because between you and me, I've yet to find a bank that can regularly hold a multiple like that to have high enough returns on capital to ever justify that. Now, I'm not saying it's not impossible. I can see the world that can happen for periods, but I just can't see the world where it happens forever.

52:20I've looked back a few times because the weird part was there were many banks in the early 2000s in Europe that traded for anywhere from two times book to as high as four times book. And so to your point, there was during that environment or that period, that was not an anomaly. That was actually more common than people think. But that multiple now looks very foolish to us today where, I mean, it's hard to find a bank trading for two times book or more in fairness. Yeah, I know. I think that's a fair point, right? That it is easy to look back at it now and say, wow that's a crazy multiple to pay for a bank in an era where you know many banks don't even trade a book value right in europe um but i think uh i think they they clearly paid right at the top of the bubble right they clearly bought this thing right as the bubble was about to burst and then i think essentially it's back to that idea that they're kind of doubling down again on a problem right so their problem is lots of star bankers who keep blowing up and they buy dlj which is you know populated with star bankers it's like one of the most glitzy glamorous places on wall street everybody's paid incredibly well you know and again what what what happens is there's a sort of civil war when they buy it because you know dlj people hate the sfb people and they kind fall out uh the good guys which is sort of inevitable i think when when people start to leave it's like the good guys who can get jobs elsewhere they go and so they're sort of left over paying for like the meat the more mediocre talent in some ways um and then that takes it's sort of years of cleanup from the of these sort of resentful former dlj people who are being told no, you can't run expenses the way you used to.

54:15I mean, look, an example of the kind of expense culture, it actually isn't in my book, but somebody told me afterwards, the sort of expense culture they had at the time, so the early 2000s. Somebody said to me, you know, they recall an email going around from the HR department saying, if you're going to try and expense a lot, you need approval upfront to expense any lunch of more than$50 ,000. You know, for lunch, right? And then this guy said to me, well, what was amazing was that email went around again about six months later. So everybody just ignored it. Still spending 50 ,000 bucks on lunch.

54:54I mean, that's the sort of place we're talking about. That's wild. And also the other thing too, obviously Ken Mollis was at DLJ and he left. And obviously Ken Mollis has gone off to, you know, create Mollis and company and have a lot of success. So, you know, some people could see the writing on the wall. But I think the other thing, too, is, I mean, by nature, investment banks are cyclical businesses, right? In good times, they can boom. And in bad times, you know, they can take losses and or just run really low returns on capital. But again, these are also, I mean, investment banks, particularly on the advisory side, these are people businesses.

55:28I mean, it's the relationship that leads the profits. And what I don't get is it's not uncommon for people to be like, oh, we're going to do a PE roll-up story. or we're going to add all the scale. And then to your point, like the smartest people in the room are like, if it's all about the people, well, I can go do this somewhere else. And therefore it's never a really good scale business at times. Yeah, I think that's right. And they end up in a sort of cycle of, as these scandals emerge, and we haven't really even got into most of the really big scandals yet, but they're trying to clean them up.

56:02And so they bring in like John Mack to be the CEO from Morgan Stanley, who's like a big personality um and you know known as mac the knight because he likes to for obvious reasons you know he cuts expenses and stuff although he also likes to fly around in private chats and things as well yeah but you know mac comes in and he suddenly is sort of saying right guys no more no more big bonuses unless you deliver you know we're going to cut back on everything and you know these are people who've been told you're superstars so they don't like to hear that message you know they don't they don't want to be told no you're no longer were a superstar.

56:37Sorry, you were, but you're not anymore. So, you know, people who can get something somewhere else, which will inevitably be the good people start to go and you're left with more and more mediocre people or, you know, slightly less talented people or people who are more junior or whatever it is, people who are less likely to bring in revenue in any case. And so I think that sort of becomes, again, kind of this vicious cycle. John did have, I mean, to your point, he wanted to cut expenses and, you know, cost income ratios are important in banking. You know, the metric I always think about across a lot of businesses is revenue per head, which sounds overly simplistic, but in reality, it teaches you about the scale of a business or not.

57:18And if I was gonna compare, you know, the European banks to the US banks, you know, what's been the biggest difference is obviously cost of income is just vastly, you know, better in the US banks, even down to the regionals in many cases compared to the European banks. So I think you mentioned that John, had even looked at merging with Barclays, which my first thought was like, well, good on Barclays for not doing that. But again, scale has, as we look back and what we see going on in European banking now, scale is an important factor in the cost-to-income ratios and being efficient is still something that, in this history at least, wasn't very much of a focus.

58:03Yeah, I think you're right. It's a challenge they have, right? It's like, how do you, on the one hand, clamp down on things you think are wrong in terms of people being wasteful with money. You want to clamp down on this superstar behavior. At the same time, you want to drive revenue, which you get from spending more money and having superstars. So it's like these two things, you know, you just can't get there. And it's one thing if you sort of, you know, if you're the number one bank, then maybe you don't need to even think about that. But because they're number two or even number three, you know, they're constantly fighting, you know, to try and get to try and be bigger while at the same time trying to cut back on expenses.

58:47It's kind of impossible. Hey, I want to give a big shout out to everyone who's been working so hard on this show. You know, we recently hit the top 10 in investing podcasts on Apple Podcasts and even number one in the business category in several countries. As you may know, this show is brought to you by Smead Capital Management. Smead Capital Management understands how frustrating and illogical the stock market can be. If you're searching for funds with a proven track record, give the Smead funds a look. Or better yet, reach out at SmeadCap.com. And don't forget to mention you're a fan of the podcast.

59:20Past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges, and expenses. Read and consider it carefully before investing. Smead funds distributed by Smead Funds Distributors, LLC, not affiliated. So after the great financial crisis, Credit Suisse finally had to deal with their tax dodging in effect. I remember, you know, it was the, I think it was the Treasury Department that announced an amnesty program back then. And that was some of the settlements that came out of, you know, those settlements really, you know, with the banks there, but obviously the Swiss government.

1:00:03they still couldn't violate Swiss banking secrecy. That was like the catch. You sit down with the US government and you're like, well, I mean, we'd love to help you, but we just can't violate the law. It was like the great kind of skateboard in a way. So what was the workaround that they ultimately came to with the Swiss government? Yeah, well, you're right. There's like sort of this, you know, we know we're helping your citizens avoid taxes, but we can't tell you who they are because if we do that, we're in trouble with our own government. so you know and so essentially the u.s government is saying well which government you want to be more in trouble with you know the one that runs the global currency or uh or your or your own and it becomes this sort of you know face off with the swiss banks in the middle between the u.s government and the swiss government really and i think that kind of uh you know is speaks a lot to the kind of culture of the banks i mean it happens as well you know you you're talking about an era when coming out of the financial crisis, the U.S.

1:01:06government was really kind of wielding its power, financial power over the financial industry much more. So you sort of get the U.S. authorities kind of trying to clamp down on sanctions busting as well, which is kind of a similar thing. And the Swiss, you know, don't really know how to deal with it. In the end, they sort of, you know, kind of end up handing over some details, but nobody knows whether they've handed over all the details. But I think the really important thing about that, you know, they end up paying fines and stuff like that. But I think the really important thing in the end on the tax stuff is it just kills the source of revenue, right?

1:01:46This is part of their business. And so that's the really, really important thing is like they become less attractive as a place to part their money because maybe it's not so secretive after all. And your sanctions are the same, right? They get busted for breaching sanctions, and now that business is gone too. You can't bank Iran forever. You know what I mean? No, you can't. And this is a real problem for them. If that's been a part of your business model, and now you're not allowed to do it, well, you need something else to replace that money, and there isn't anything. think. And I think, yeah, because I think their legal workaround, if I remember correctly, was they handed the customer information to the government and then the government handed it to the United States.

1:02:33So they are absolved because technically they didn't give that out. It was the government who oversees them that did the dirty work. But if I'm a client, he was trying to hide my ill-gotten gains, it doesn't really matter, right? It's irrelevant how that process will happen. I just want to do it again. So Dugan's leading the bank right after the great financial crisis, Rohnert's chairman at the time. Rohnert eventually gets tired of the Dugan era as though it was any better than the prior. I mean, funny to say, but in many ways true. So then TM comes in to run Credit Suisse. you know what was the idea behind tm and and also you know he's an insurance guy coming in from prudential he had success there you know how different was this coming to the top of the bank yeah it's interesting right so just a bit more so rona and rona's an insurance come from insurance industry he's but he's a lawyer uh brady dugan was a trader who'd worked in the bank for many years coming out of the financial crisis, they kind of had an opportunity to shrink the investment bank and double down on asset management, which is what UBS did pretty successfully in the end.

1:03:51Brady Dugan doesn't want to do that. Urs Rohn does want to do that. I kind of think it's understandable that Brady Dugan doesn't want to do it. He's a trader. Yeah, he's an investment bank guy. Yeah, it would be weird for him to say, I'm going to be the CEO of a bank that does the stuff i don't i don't like to do so it's sort of inevitable i think that he's gonna go um you know they have had a series of blogs about the tax stuff they've had sanctions breaches they've had other things going wrong um and rona turns to tjntm who is you know a fascinating charismatic guy who big shot in london um and you know was widely tipped as like next head of the imf or World Bank or something like that, you know.

1:04:35And it was a bit of a shock that he suddenly turns up running a bank in Switzerland, famously sort of xenophobic Switzerland, now has a African-born French-speaking, you know, kind of very, went to elite schools, you know, he stands out a lot with no background in banking. And it gets off to this kind of horrible star, where at a press conference somebody challenges him and says how are you going to understand complex derivatives and TJ and TM says something along the lines of there's nothing I can't understand here I understand math you went to elite Parisian schools I understand all of that and when I think about that I think he's right he's a super smart guy incredibly smart guy and I think he does understand all of the math you know he's done complex m &a deals he's done complex things in asset management there's no piece of the bank he can't possibly understand except the one thing i think he really doesn't understand is investment bankers um i don't think he understands the people he they're they're a totally different breed to the insurance people that he's worked with in the past so you know an example i would give you is i think he was baffled throughout his time as ceo why was there so much gossip?

1:05:55Why were there so many stories about little fights he had with people? Because when he was in the insurance industry, that never happened. And I can tell you why that happens. As a journalist, I know why it happens. Because every M &A banker talks to journalists all the time, even the most lowly M &A banker. But some guy on the low level of an insurance company doesn't. No journalist talks to that guy. They only talk to the CEO and the chairman of the insurance industry. But in the banking world, they talk to everybody. And so all sorts of stuff gets out. I think TJan didn't understand that piece of it.

1:06:26Well, I was just going to say real quick. So I think the other, you know, again, I was also trying to think about, you know, there's personalities and how you connect with people and things like that. And to your point, like there's no question whether he was a very intelligent person. But I also got the sense, and maybe you could touch on this, that in that context, in that environment, and in Switzerland, he wanted people to know how smart he was rather than wanting to connect with them. So, for example, like if you're in that situation, you might say, well, insurance is no different than a derivative contract.

1:06:59There's two parties that want two different outcomes. And, you know, one is paying one side of it and one has to pay out the other side of it depending on how the contract falls. that is just like a derivatives contract. That's a very different discussion than saying like, oh, I know this. Is that fair? I think that's right. I think he's sort of paranoid. You know, I think definitely by the end of the time he's there, he's become kind of paranoid. I think there's like an insecurity or something. You know, I mean, I'm not a psychologist. I probably shouldn't, you know, diagnose any of these things so far.

1:07:34But if you speak to people in Switzerland now, you'll get a lot of people who'll say the reason the bank collapsed was TGNTM. If you speak to some of the investment bankers, especially on Wall Street, who worked at Credit Suisse for many years and asked them why it collapsed, they'll say it was TGNTM's fault. So I think that is kind of unfair, only because I think the bank was a mess for many, many years before that. So I think to blame him for the bank's ultimate collapse is unfair unfair because if it was in great shape, you know, why did they hire him? They hired him because he was like this McKinsey guy who had restructured a big insurance company and they wanted to restructure this thing because it was always in a mess.

1:08:20Now, did he get that restructuring right? I mean, clearly not, right? Like the bank collapsed a few years later. So clearly he didn't get it right. But was it his fault? I don't know. Like it felt to me like it was already a mess when he got there and i think he probably made some things better and some things worse uh you know one thing i think was that that issue of speaking like that led to a lot of pretty senior people leaving and he ended up surrounded by pretty junior people much less experienced people who when some of the scandals some of which are to do with things that happened when he was the ceo but many of which are only actually happened much earlier but only emerged when he was ceo So when those things come to light, the team he's got around him really doesn't have the experience to deal with them.

1:09:04They don't maybe have the knowledge. They're not very convincing. And so all goes wrong. So I think if you could blame him for something, it is for falling out with people and having the wrong guys around them, which is a key part of being a CEO, right? It's to build a team. So that's pretty important. And the other thing I thought a lot about, because I remember when this whole saga, like to your point, this is in our lifetime. So we can directly remember back on our thoughts. With him coming in, the idea was very much, okay, he will get out of investment banking. That was a theme early on in his leadership.

1:09:39And it reminds me of all the US presidents that said like, oh, if I was president, I'll get out of Vietnam right away. And what do they all do? They stayed in Vietnam. They just continued to actually escalate. And in his case, they did not exit investment banking. And to your point, that continued to be really the Achilles heel of the organization over time. So it was like he wasn't decisive enough on that subject, while with people, he came off very decisive. So you tell the story of like Iqbal Khan and how they had their falling out. I think, to your point, I think he was very – he did not have a lot of trust in the people around him, and maybe that's because of what he experienced there.

1:10:19that would be a, it's not fair criticism to say he's a distrustful person. It's just that he had a lot of things that weren't fun for him in Switzerland as the person leading the bank that made him very skeptical and paranoid. If my COO or a lieutenant of mine lived close by me to where I could walk over to their house on Saturday and grab coffee and talk about something that we're working on, I would really like that personally. But in your story, that was not good in TM's case. I mean, he did not want Khan being anywhere near him. And from what you wrote, he could pretty much look into his backyard.

1:11:00Yeah. I mean, that's right. So yeah, I think it's one thing being able to walk down the street and meet up with somebody from work that you get on with and have a coffee or a drink in your backyard. This guy, I mean, Khan's house literally overlooks his house, right? in the sort of affluent part of Zurich. And so, you know, T-Gen likes a cigar in the evening, right? So T-Gen TM's out on his balcony having a cigar and he can look around and can't stare down at him. You know, it's pretty weird, right? It's a very strange thing to do. I think they both share some responsibility for kind of a really personal falling out.

1:11:41And I put a lot of that in the book because one of the points I wanted to make clear was like what goes wrong at Credit Suisse, back to something I said right at the start, is not like liquidity coverage ratios and it's not tier one capital ratios. It is a series of scandals of silly, you know, feel like kind of silly behavior. Sometimes it's multi-billion dollar scandals, which essentially erode the trust between the staff, between the bank CEOs and the regulators, between the bank and its investors, between the politicians that don't trust them, the clients don't trust them. And at the core of banking is not tier one capital ratios and liquidity coverage ratios.

1:12:23And the core of banking is trust, right? I give you my money because I trust that you will give it back to me or you're gonna be there for me when I need a loan and all that kind of stuff. And all of this sort of behavior, falling out with your lieutenant because he lives next door to you or spying on him as they do, all of that kind of stuff erodes the trust they have with their clients and with their regulators and with their politicians. And ultimately, you can't run a bank if nobody trusts you. Yeah. On the idea of trust, I think you posed this, and I want to ask if this is what you're getting at because I feel like you kind of gave it a wink.

1:13:01So the regional banks start collapsing in 2023, really in the spring. You talk about Silicon Valley Bank. You talk about Signature Bank. You talk about their collapses. And obviously, that's very fresh. And I remember looking at that. But you talked about how you believe that the effects of social media really might have caused the first run not only for them, but for Credit Suisse. you mentioned under the heading of trust that, you know, you know, it was put out there that there was a bank that could have be having issues out on social media. And the news at the time, you know, even to follow up on, you know, that occurrence, and people started associating that with Credit Suisse, the news would run what was really poor journalism, I would argue, and I think you might agree, where it's like, you know, SNB won't provide any more capital, which was the Saudi National Bank had already put 10 % in, they were below the, you know, a higher regulatory threshold of 10%, but people took that as like the Swiss National Bank.

1:14:05Is that fair? Yeah, yeah. I mean, I think social media has this really weird role to play. You know, obviously Silicon Valley Bank, everybody knows about the kind of WhatsApp groups and the idea that their deposit holders were not a broad base. They were actually a sort of club of people who all kind of knew each other. And when you put into a WhatsApp group, or I'm scared about some kind of value banking. I want my money out. It kind of escalates really quickly. But that had happened, you know, the sort of first instance of that kind of thing, it happened with Credit Suisse a few months earlier where this Australian journalist had tweeted out this thing.

1:14:42And this is a journalist who doesn't normally cover global investment banks, right? He's a journalist who normally covers like the Sydney real estate market or you know uh australian employment data maybe maybe you know that might be the most macro thing he looks at and he tweets something like uh source credible source tells me major global investment bank on the brink and that's it that's all he says and within hours because of social media social media decides that that's pretty sweet especially actually chinese social media initially starts to really bid up um and people start to add charts of credit suites stock price and you know uh people retweet it but they rewrite it so they'll write things like you know uh abc because the guy worked for australian broadcasting corporation abc colon major credit suites on the brink right which is not what he said at all and you know this thing starts to like go around the world and within hours they are losing billions of dollars and tens of billions of dollars within days of customer deposits being pulled out.

1:15:51And that is, you know, they have no idea what to do about that. I made the point in the book that because of this sort of cycle of scandals they'd got in, they'd lost all their senior executives that were new. It was hardly anybody in a senior position who'd been there more than a year. And so they were sort of particularly kind of frozen in the headlights. And they just didn't know what to do. I mean, they had no idea. And there were even things like one really senior executive told me that he didn't know what was happening until his teenage son or daughter came and was like, hey, I just read on Twitter that your bank's about to collapse.

1:16:30And he's like, what? You know, that gets in touch. It's like, wow, we lost$10 billion in the last couple of hours. It's bizarre. And they have no idea what to do about it. The really strange thing, I think, is that I don't think anybody's really figured out what to do about it still. You know, that this is a sort of digital bank run era where you can move your money, you know, in seconds, less than a second. You don't have to go and line up outside a physical branch anymore. That was 2008, right? 2008, you wanted your money out as the financial crisis hit. You went to a branch and you stood in a line and you took your money out.

1:17:09You don't do that anymore. You open your phone up and you move the money quick. And, you know, that combined with the kind of herding behavior that social media encourages is really dangerous, right? Nobody quite knows what to do about it. When I think about that more recently, you know, hear what happened in the spring with obviously Liberation Day and, you know, you look at, you know, what, how news moves and, And even down to where politicians are using social media and it's kind of like it becomes like a conspiracy and rumor game. And to your point, I've yet to see where you give humans a lot more information and they deal with filtering that very well.

1:17:49I think that's the one thing that I don't think we're good at where we tend to not be good at filtering. Some are. Very, very many aren't because what's conspiracy and rumor, what's truth? I mean, only God knows at times. I think the old saying is true is like, you know, the truth can hardly get its pants on by the time a lie is spread across the world. Right. And the risk of moving your money is so low, right? So why wouldn't you? You might look at that Credit Suisse tweet thing and go, I think that's nonsense, but you know what? I'm just going to move the money anyway, right? Because why wouldn't I?

1:18:28I can do it in seconds. I can move it back if it turns out it's not false. But if everybody does that, it becomes self-fulfilling. Yeah. Your book did a really good job of explaining that the Swiss National Bank and FINMA, they were actually on top of this pretty appropriately in 2023, where they were kind of doing the precursor exercises. And ultimately, those exercises were important to do. yeah i think they were aware of uh yeah they were aware that it was a big problem coming down the lane i think that the the thing they didn't quite get right and i don't know whether i would have any advice on how to get it right but is how do you communicate that and who do you communicate it to right so they were sort of aware that there were problems at credit suites that could result in the bank collapsing but if you say that out loud again it's self-fulfilling so they sort of data really communicated even to the um uh the finance minister who took over her position in january 2023 she sort of moved in you know the regulators and the national plan swiss national bank have been looking at this for months she moves into her slot and into her position in january 2023 and she didn't know that that was the case right so she suddenly is presented on her first day of a job with kind of a file that says, by the way, one of your biggest banks is in danger of collapsing.

1:19:57And that's not great. And I think she's been sort of widely criticized for maybe acting too quickly and not supporting the bank, not supporting Credit Suisse enough. I personally feel like that's pretty harsh and you make decisions in real time, I guess, and under a lot of pressure. And if you put yourself in her shoes, she walks into this job and somebody says, one of your two biggest banks is going to collapse unless you do something quickly. You could either say you've got the banks back and you'll do whatever it takes, Mario Draghi type stuff. We'll do whatever it takes to support Kresswitz.

1:20:36Or you could nationalize it and look how that's worked out in many countries. or you could look at these two guys you know or you could leave it to croat suites to see if they can solve it themselves as i said earlier everybody's been there less than a year the banks had like scandal after scandal after scandal um disastrous run after disastrous runs hardly made any money doesn't seem to have a plan on how to make any money or you could give it to these two other guys you know give it these other guys at ubs who actually are kind of running their bank quite well seem to know what they're doing they got a chairman who ran morgan stanley through the crisis and kind of you know to some degree kind of has a lot of experience that's really useful which one of those is the right decision i don't know i'm not really sure i'm in a good place to judge her decision to give it to ubs but i think it's understandable that she did that that was like, you know, I choose that option.

1:21:33I trust that guy to fix it, you know? Yeah. And I, as I mentioned to you before we started the podcast, I was in London that Sunday, the day that obviously UBS took over Credit Suisse. And as you point out in your book, that ultimately the equity was sold for like three and a half billion dollars, which was, you know, to quote the Monty Python compared to what the bank used to be, that was tis merely a flesh wound. And in many ways, the stock market it was telling you more about what was going on to your point about the run. But well, obviously, the controversial part to that was the government cut out what they call the AT1, which is like a hybrid security, but we all know them as cocoa bonds.

1:22:12They were just wiped off the face of the earth. There was nothing hybrid about it. And that was maybe the most controversial thing that happened in that deal closing. And I remember looking at, you know, just the rough math, It was like a back of the envelope kind of calculation. And UBS, in many respects, I would say, got Credit Suisse for roughly free because there were government guarantees, at least at the beginning, that ended up not really needing to be realized. But I think you had the Lehman quote, who was their chairman, who brokered the deal to sell. His quote was, it's good to, a quote, it's good to finally have a solution, end quote.

1:22:49Isn't that just the most climactic statement to that story? I mean, I just took that as like, it's phenomenal that that's what he said at the end. Yeah, yeah. After 160 years, this kind of, wow, this thing's been so broken. Finally, we've got an outcome that ends it, right? It's how it feels. Like, almost like a relief, right? You know, put it out of its misery. That's what it felt like to me. I mean, I think your analysis of the value that UBS got, cryosice for, is exactly right. um you know there's this controversy over the at1 bonds or cocoa bonds and i don't know like again you know you can argue that it was in the documentation so the cocoa bond holders should have allowed for the fact they could be wiped out or you could argue that you know uh that's never happened before and that equity holders got something and and uh bondholders got nothing um But I think, you know, ultimately, UBS did get it for essentially next to nothing.

1:23:50I think what's interesting is whether they're paying for it a little bit now with, you know, the Swiss regulators and the Swiss politicians talking about pretty tough capital requirements, which will obviously reduce their profitability. um there you know i think the integration of the two banks is probably much more challenging than uh you know well i think it's probably as challenging as you'd expect right two massive banks uh one of which had a very broken culture um trying to put those two things together i think is really probably quite tough for them so i think they got it really cheap but it has come with a bunch of sort of costs that are not part of the price, if you know what I mean.

1:24:32Yeah, no, I totally agree. And to your point, I hadn't thought about that, but that's a wonderful point as they talk about, I mean, that's a big discussion right now is the capital ratio is going up for UBS. And to your point, I mean, their return on capital is going to naturally decline. And, you know, I, I, the multiple of that business on a book multiple basis hasn't been built around higher capital ratios. It's very funny too, because, you know, here in, in the current, you know, American administration, they're about to reduce capital ratios. It's the exact opposite, you know, of what's dealt there.

1:25:06By the way, I, again, I, this, I love, I love the history of your book, because you also get so much sense of what's gone on in banking, you know, looking back for really the last 60 years of how much fluidity there's been in banking. Like we talked about the bank assurance model. I'm really intrigued right now. And again, back to your point on like the Swiss coming back to really, you know, bite UBS in a way is, you know, there's been this idea of like pan-European banking. It's never really been realized. And it's so interesting to watch like Germany say, no, you can't buy our bank. And I think the question is, will those dreams ever be realized?

1:25:45Or, you know, in the true Swiss way, it's like, will it stay more fragmented where there's like a national champion, but you're never allowed to go above that national champion, in which UBS is a national champion, but obviously has a big business in Asia, big business in the United States, but that is the kind of Swiss universal bank today. Yeah. I mean, you'd think with the sort of Trump worldview on economics, that would be the key driver for European bank regulators to relax a little bit and maybe say, maybe it's time we should let European banks merge, right? I mean, you got to think it's going to be tougher and tougher for European banks to compete in a world that's developing the way it's developed in the last few months.

1:26:25I agree. But, you know, who knows? I mean, the politics of that are really, really difficult too. You know, I don't know if the Europeans, you know, it seems a couple of months ago that European politicians had understood the situation and were probably going to act fairly quickly in a whole bunch of different places. I'm not sure that's true anymore. They seem to have gone back to their old ways a little bit. So I don't hold out a lot of hope for European bank mergers, if I'm honest. Well, so it's funny you mention that. So I have a very different take on that, and I'll use an analogy. If I was the pope and I want to spread Catholicism, I'm not going to do that very well through just pure apologetics and proselytization.

1:27:12I'm better off having a Charlemagne conquer the world or having like the Habsburg dynasty be the seat of the Holy Roman Empire. Okay. And so I run on a very different theory. My theory is that, and I'll use, I mentioned Orchell earlier, and as I'm sure podcast listeners know, we own Unicredit. So this is, you know, talking my book, as they say, but I personally believe that Orchell is the modern day Charlemagne for the ECB. You know, they're kind of the holy sea of banking in a way. And he will deliver banking reform because they're better off regulating him rather than regulating hundreds of European banks separately.

1:27:55Yeah, I'm sure Andre Orchell would love to be compared to Charlemagne. Well, yeah. You know, again, for what he's done already, he's done something remarkable in the sense of European banking. What I also find interesting is people are now copying what he's been doing, right? Everyone seems to be like, oh, we can scale and get bigger through mergers and whatnot. And given the big difference, like you pointed out in the prior era, was they did that at high multiples. These are going on at much lower multiples. And therefore, I would argue from a historical and I'll call it a societal economic perspective, doesn't carry the same risk.

1:28:30So we'll see to your point what the outcomes of this are. But yeah, I mean, at least here's the one thing we can say about him. He's got the best tan of any banker in Europe. Isn't that fair? Yeah, he's got a really good tan. He's a charming, charismatic guy. He is. He's super ambitious. The one thing I remember was when he was going to be CEO of Santander, if you remember that moment. Oh, yeah. They hired him and then didn't hire him because I guess they decided after saying he was the guy for them. he wasn't the guy for them anymore in the in the interim period when he was ceo and waiting uh some of the criticism was like how can this guy who's a career investment banker run a retail bank right yeah which is what santana is and he said something along the lines of no no no everybody's got me wrong i'm just a guy who wants to run a retail bank you know i i love the daily grind of running a you know boring old retail bank i'm paraphrasing obviously but that was essentially his message.

1:29:32So then he rocks up a unit credit. And is he an investment banker making deals all over the place or a guy running a dull retail bar? I think he's at heart an investment banker, a dealmaker. Here's the thing I've found really shocking. To your point, the risks he's taking have a certain aggression to them that I agree with you, only a banker or a person who enjoys risk would do. But I think the one thing that I've been shocked at, and again, I, I'm, this has probably got to be your next book. I mean, like, in all honesty, I think this is going to be a massive 10 year story. But so I remember when we first, I'll touch on this real quick before we kind of close out is, you know, the way I first interacted with Andrea was, you know, his pay package came up.

1:30:20And so, you know, in a classic American way, I called up our PR person and said, let's call the news organizations. I'm really mad about this pay package. And so, you know, sure enough, you know, we talked to some reporters and they said, so we heard you're really unhappy. What are you unhappy about? And I said, well, you know, this pay package doesn't make any sense. They said, oh, you know, please tell us. It was like red meat, right? They're like ready to hear someone get angry. And I said, yeah, it doesn't make any sense. We're paying him so little, we might lose him. And that's exactly what they didn't expect me to say, obviously, and which was true.

1:30:49And so, you know, in interactions, not only his public statements, but just what he says, you know, on calls, he said, listen, we got to drive our cost income ratios down. We need to run, run higher returns. That's always been what he said. Now, to your point, he has said they will do deals when they get the right multiple for the bank. Well, so below book, there may no sense to do deals. Now they trade it like I'll call it one and a half times book. There's other banks they could buy that trade for lower multiples and, you know, his cost to income ratio point or return on capital point aren't as profitable.

1:31:22And what I think is different than the past is banking in the era where you don't need bank locations is more of a technology scale business, which is different to your point about moving money around. It's not going into a bank and having it shipped off through a correspondent bank service. It's really much – very much like you can move your money around. Therefore, the location is important. And I think because of that, when you move a bank onto another, I think of it more of like there's so much cost reduction because the hosting of one bank that they pay, say, Amazon Web Services to host, it's marginal for a new bank or the systems are marginal costs for a new bank to walk in.

1:31:59And that's different than the bank that has to pay for those systems from the beginning. So it's like variable expense versus fixed expense. I think a lot about that function. But again, I think it's interesting because I think everyone has the horrors of the past mergers. But again, if you compare the multiples, can this play out as badly when you're paying so much lower multiples? And I mean, pet theory, I'd love to hear your two cents on this. I think he will close on Commerce Bank. I think he'll close on Bank of BPM. And I think he'll close Alpha Bank in Greece. And what that could set up is really a pan-European bank that we've never seen.

1:32:36And by the way, that's very contentious, as you probably know. Most people don't think he'll ever close Commerce Bank. Yeah. I mean, I think Commerce Bank will be really tough for political reasons, right? Which are then, you know, when politics get involved, I think it's sort of, it's not necessarily rational, right? But yeah, I don't know. He's a very determined guy. So if anyone can do it, you're probably back the right guy. We'll see. We will see. So next question for our listeners is, Duncan, where can people follow you going forward? Are you active on social media? Where's the best place for them to keep track of what your next book or story will be?

1:33:15Yeah, I'm on social media, on Twitter, but I'm working at Bloomberg these days on a product called Bloomberg Weekend, which is kind of full of essays and ideas that are where we're trying to take the news and really push things forward and into interesting places. So you'll see me writing there and I edit there a lot. A lot of the stories on there are things that I think and my colleagues think are really important. Awesome. Well, Duncan, thank you for your time. Your book argues heavily for investors to really study and understand the corporate histories of companies. The saying is a rising tide floats all boats.

1:33:50As you put it in your book, Credit Suisse was, and I'll quote, quote, a victim of the frenzied pace of modern finance. yet it had been decades in the making, end quote. It's analogous to what Hemingway once said about his own bankruptcy. He said it was two ways, gradually, then suddenly. Go get a copy of Meltdown by Duncan for your library. If you enjoyed this podcast, go to Apple, Spotify, YouTube, wherever you listen to a book with legs, give us a review, tell others about the books and great authors like Duncan that we have the opportunity to understand and study the world with and through.

1:34:26For our tribe, if you have a great book that you'd like to recommend, email podcast at smeedcap.com. That's podcast at smeedcap.com. You can also send your suggestions to us on X. Our handle is at smeedcap. Thank you for joining us for A Book With Legs podcast. We look forward to the next episode. Thank you for listening to A Book With Legs, a podcast brought to you by Smeed Capital Management. The material provided in this podcast is for informational use only and should not be construed as investment advice. You can learn more about Smeet Capital Management and its products at SmeetCap.com or by calling your financial advisor.