Credit Suisse reveals $2.85bn subprime credit writedown

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Credit Suisse has reported a $2.85 billion writedown due to mis-markings and pricing errors in structured credit products exposed to US subprime mortgages. Despite the losses, Brady Dougan, chief executive of Credit Suisse, ruled out any major changes to the bank's valuation and risk management procedures, describing the writedown as an isolated incident and adding he felt "comfortable with our internal controls".

The discrepancies were revealed on February 19. Following an internal review, Credit Suisse said it would re-price various asset-backed securities positions by $2.85 billion on the back of "significant adverse first quarter 2008 market developments".

These revelations come just days after the bank announced a less than expected Sfr1.3 billion ($1.2 billion) writedown on leveraged finance and structured debt and mortgage investments in the fourth quarter of 2007, signalling it had managed to ride the wave of the credit crisis better than most of its competitors. The new revaluations occurred "across several areas", Dougan said, but "does not include CMBS or leveraged finance".

The losses centre on the bank's residential mortgage-backed security and collateralised debt obligation (CDO) portfolios. The trading team - who have now been suspended with pay, along with global head of CDOs, Kareem Serageldin - apparently used out-of-date pricing to value the portfolio, which may have included the bank's prop trading book of super-senior tranches of CDOs of asset-backed securities.

"There was a delinquency of updating pricing, and hence mis-marks. Most of it is attributable to market movements in the first quarter," Dougan said during a conference call on February 19. The losses came from "directional moves and some basis moves between our long positions and our hedges," he added.

Credit Suisse operates a three-tier portfolio valuation system. Individual traders mark their own books, supervised by their managers. The marks are then verified by the investment bank's accounting and product control groups. Wilson Ervin, head of risk at Credit Suisse, says the bank reviews risk daily and monthly, and also performs additional ad hoc checks in stressed markets.

The bank declined to comment on how long it had been mis-marking its positions. However, Dougan said he had no idea of the problem when he announced the bank's fourth-quarter 2007 results on February 12.

The latest writedowns will cut the 2008 first-quarter profits by about $1 billion. The bank is still assessing the impact of the revaluations on the 2007 results. Ervin says "a material portion" of the losses occurred in the first quarter of 2008, but left open the possibility that mis-marking had also inflated results in 2007 - implying traders had been mis-pricing their books for several months before anyone noticed. So far, however, the review has found no sign of mis-marking before January. "Based on the reviews we have done, there is no indication of any restatement at end-2007," Ervin says.

Rival dealers express surprise that these exposures have only come to light now, particularly given the focus on subprime-related losses since July and the raft of writedowns at other investment banks. Following the losses at other institutions, it is surprising Credit Suisse did not examine its exposures with a fine-tooth comb, says one dealer.

Others point out these instruments are extremely complex to value, and it's not beyond the realms of possibility that a mis-mark would not have been spotted. "They seem to have been pretty lax, but instruments like these are very complex. And if they don't trade very often, who can say what their value is?" asks one London-based banker.

There is no suggestion the instruments were mis-priced on purpose. Dougan emphasised that there was "no discrepancy around the positions - they're all in the books. It's really around tardiness in updating marks".

Alexander Campbell.

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