Credit Suisse is a large global bank headquartered in Switzerland. In 2007, three Credit Suisse traders, including Kareem Serageldin, fraudulently inflated the value of mortgage-backed securities to avoid losses and receive larger bonuses. Their actions contributed to the 2008 financial crisis. What went wrong was that mortgage-backed securities were given misleading credit ratings and banks like Credit Suisse invested heavily in them using leverage, without understanding the risks of subprime mortgages. To prevent future issues, Credit Suisse should strengthen whistleblowing policies, internal controls, and manage conflicts of interest.
Credit Suisse is a large global bank headquartered in Switzerland. In 2007, three Credit Suisse traders, including Kareem Serageldin, fraudulently inflated the value of mortgage-backed securities to avoid losses and receive larger bonuses. Their actions contributed to the 2008 financial crisis. What went wrong was that mortgage-backed securities were given misleading credit ratings and banks like Credit Suisse invested heavily in them using leverage, without understanding the risks of subprime mortgages. To prevent future issues, Credit Suisse should strengthen whistleblowing policies, internal controls, and manage conflicts of interest.
Credit Suisse is a large global bank headquartered in Switzerland. In 2007, three Credit Suisse traders, including Kareem Serageldin, fraudulently inflated the value of mortgage-backed securities to avoid losses and receive larger bonuses. Their actions contributed to the 2008 financial crisis. What went wrong was that mortgage-backed securities were given misleading credit ratings and banks like Credit Suisse invested heavily in them using leverage, without understanding the risks of subprime mortgages. To prevent future issues, Credit Suisse should strengthen whistleblowing policies, internal controls, and manage conflicts of interest.
Credit Suisse is a large global bank headquartered in Switzerland. In 2007, three Credit Suisse traders, including Kareem Serageldin, fraudulently inflated the value of mortgage-backed securities to avoid losses and receive larger bonuses. Their actions contributed to the 2008 financial crisis. What went wrong was that mortgage-backed securities were given misleading credit ratings and banks like Credit Suisse invested heavily in them using leverage, without understanding the risks of subprime mortgages. To prevent future issues, Credit Suisse should strengthen whistleblowing policies, internal controls, and manage conflicts of interest.
CREDIT SUISSE Background of the Company Credit Suisse Group is a holding company that manages global wealth, operate as an investment bank and offers financial services. The firm was founded and based in Zürich, Switzerland and maintains offices in all major financial centers around the world. It is known for its strict bank–client confidentiality and banking secrecy practices and also included in nine global "Bulge Bracket" banks that provides services in investment banking, private banking, asset management, and shared services. In 2020, it was recognized by The Banker as the overall Investment Bank of the Year showing excellence performance in equity derivatives and securitization. The history of Credit Suisse dates back to July 5, 1856, when a reputable politician and business leader Alfred Escher, together with Allgemeine Deutsche Credit-Anstalt founded the Credit Suisse, once known as "Schweizerische Kreditanstalt” or Swiss Credit Institution. The primary purpose of its establishment was to finance the expansion of the Swiss railroad network to avoid French banks that wanted to exert influence over the railway system of the Swiss. Aside from its original objective, Credit Suisse also helped fund the effort to disarm and imprison French troops that crossed into Swiss borders in the 1870 Franco-Prussian War. Credit Suisse is also one of the key players in the creation of Switzerland's electrical grid and helped develop the Swiss monetary system. By the end of the war in 1871, the Credit Suisse had become the largest bank in Switzerland. Credit Suisse continue to expand and widely known in the banking industry through merger and acquisition. In 1876, Credit Suisse’ opened its first branch in Basel, Switzerland. Thirty-seven years later, it opened its first foreign representative office in New York. And in 1978, the Credit Suisse began its partnership with the First Boston Corporation of the United States in which it later acquires after it experienced financial stress in 1988. From 1990 to 2000, the company acquires Winterthur Group- one of the biggest Swiss-based insurance companies, Swiss Volksbank- Switzerland's fourth largest bank, Swiss American Securities Inc. (SASI), and Swiss Private Bank Leu, among others, that made Credit Suisse enter into the top ten financial services companies in the world. At the same time, Credit Suisse began to provide banking services by telephone and opened its own Internet banking service called “Direct Net” which was the first Internet banking in Switzerland. In the present, Credit Suisse operates in more than 50 countries across the globe. It serves its clients in three regionally focused divisions: Swiss Universal Bank, International Wealth Management and Asia Pacific. These regional businesses are supported by two investment banking divisions: Global Markets, Investment Banking and Capital Markets. Credit Suisse is governed by Board of Directors, Executive Boards and shareholders. Board of Directors has five standing committees; Governance and Nominations Committee, Compensation Committee, Audit Committee, Risk Committee, and Conduct and Financial Crime Control Committee, members of each committee are appointed for a one-year term.
Financial Scandal: The Issue
Kareem Serageldin a former senior trader at Credit Suisse Group: 1. fraudulently inflated the value of subprime mortgage-related bonds; and 2. falsified books and records and misstated the value of mortgage securities on their books. With the help of his accomplices, David Higgs and Salmaan Siddiqui; they mismarked their positions to avoid losses in their investment portfolio at the end of 2007. Therefore, they became one of the highest-ranking Wall Street executives to admit to crimes related to the 2008 financial crisis. The assets overvalued by the three former Credit Suisse traders were mortgage-backed securities. The traders inflated the value of the bonds to increase their 2007 year-end bonuses. Mr. Serageldin secured a cash bonus of more than $1.7 million and a stock award of more than $5.2 million. While the real estate market was imploding and the financial crisis emerging, Kareem Serageldin and his co- conspirators concealed significant subprime mortgage-related losses in order to secure multimillion- dollar paydays. These complex bonds that caused hundreds of billions of dollars in losses across the banking system and brought global markets to its knees and caused the residential housing market to free fall/collapse, and shock waves were reverberating throughout the economy so, many people were losing their homes and their jobs.
Financial Scandal: What Went Wrong?
In order to understand what happened, the following terms are to be considered: Leverage is use of borrowed funds to increase one’s trading position beyond what would be available from their cash balance alone. Synthetic CDOs is a variation of a CDO (collateralized debt obligation) that generally means a derivative of a derivative. A derivative is a type of an investment whose value is based on another investment. Mortgage backed securities is a debt security that is collateralized by a mortgage or a collection of mortgages that is traded on the secondary market, and that enables investors to profit from the mortgage business without the need to directly buy or sell home loans. Lewis Ranieri was considered as the “father of MBS” since he pioneered it and was named as "one of the greatest innovators of the past 75 years” on 2004, but eventually strongly criticized for his role in the subprime mortgage crisis of 2007-2009. “Subprime” refers to the credit score of the individual taking out the mortgage. S&P is an American publicly traded corporation. An S&P credit rating is a letter grade. The best is "AAA." This rating means it is highly likely that the borrower will repay its debt. The worst is "D," which means the issuer has already defaulted. Fair Isaac Corporation, or FICO, creates a variety of credit scores for use by lenders, credit card issuers and other creditors. Your FICO scores — which typically range from 300(low) to 850(high) — could affect whether your credit application gets accepted, and the terms and rates you’re offered. The higher the FICO score, the better. What went wrong? Credit Suisse invested or capitalized in MBS from other banks, repackaged it and sold it to the public at a profit. They used leverage to do this too. However, the credit-rating of MBS was misleading. Sub-prime MBS with FICO scores of 110 put together was rated A & AA and considered diversified. The one who discovered that MBS are becoming subprime (low credit rated) investments was Michael Burry. As Burry investigated the files of MBS, which was highly rated using S&P scale, he found out there are several mortgages rated as 110 by the American FICO score. Generally, MBS caused hundreds of billions of dollars in losses across the banking system and brought global markets to its knees and caused the residential housing market to free fall/collapse. This happened because companies including Credit Suisse were misled by credit ratings of MBS and invested in this security with leverages and many synthetic CDOs were made. Which is why when MBS fell the whole economy fell thus creating the 2008 financial crisis.
Recommendations: What Should Have Been Done?
The identified mismarks and pricing errors by the small group of traders occurred as Credit Suisse is exposed to a risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which result to serious reputational or financial harm. It is not always possible to deter employee misconduct and the precautions taken to prevent and detect this activity may not always be effective. In light with the foregoing events faced by Credit Suisse, it is recommended that the employee misconduct be exposed by implementing a whistleblowing policy where employees, regardless of their level of seniority, can report any alleged incidents of financial or professional misconduct without fear of reprisal. Employers should not also be hesitant to report incidents of financial misconduct and theft to the authorities. It is also recommended that enhanced internal control system be implemented to establish safeguards to an organization's assets and minimize the opportunities of committing fraud and allowing errors to go undetected in an organization's daily operations. Firms should also implement effective management strategies to minimize development of actual conflicts of interest and ensure impartiality in internal audit and accounting practices. Group 4: BSA 3-1 Balmes, Christine Nathalie M. Delfin, Hanah Grace R. Gargarita, Ma. Jeslyn G. Pernia, Aila Marie L. Villalobos, Allyson F.