How The Swiss Built A Banking Empire, and Then Lost It

The mighty Credit Suisse. Europe's most scandalous bank has now been swallowed up by its rival, UBS, ending their decades long battle for Swiss banking dominance. This marks the end of an astonishing rise and fall story that traces its roots back to the bank's role in transforming Switzerland into the economic powerhouse that it is today. But while Credit Suisse had noble beginnings as a local Swiss bank set up to develop a backwardation, it gradually expanded into the high stakes businesses of managing the wealth of the global elite and then a Wall Street investment banking.

Ultimately, its desire to be the best got it to expand too quickly, which then led to a slow and steady decline marked by a series of scandals ranging from petty squabbles between executives at luxurious cocktail parties to assisting in hiding the money of infamous dictators like Libya's Gaddafi and Egypt's Mubarak. So without further ado, let's explore the dramatic story of Credit Suisse's rise to prominence and fall from grace. It's hard to imagine now, but in 1856, the visionary businessman and politician Alfred Escher described Switzerland as Europe's forgotten backwater, a relatively poor country that had just emerged from a civil war and was surrounded by great powers such as France and Prussia, born in a wealthy but disgraced family. Mr. Escher set out to restore his family's name by trying to modernize Switzerland, connecting it to the rest of Europe via rail. There was just one problem since Switzerland was so poor, it was thought at the time that railway construction was only possible with the help of foreign money and therefore foreign influence to prevent this.

Alfred Escher founded a Swiss bank and Citic, then known by its German name as tried, said he took credit and stood, which roughly translates to Credit Suisse in French. And even though the bank only formally changed its name to Credit Suisse in the 1970s, actually, for the sake of keeping the story simple. From here on, I'd refer to the bank as Credit Suisse. Anyway, what I found remarkable about Mr. Escher's motivation is that he seems to have understood one of the deepest mysteries of economics, a mystery that even up to this day, not many people seem to understand the power of private bank money creation.

After all, why would starting a bank in a poor country mean that? Mr. Escher No longer needed to rely on foreign investors to fund his railway company? Where would the money in the bank come from if not from wealthy foreigners? Well, it's simple. By starting a bank, Mr. Escher essentially began his own money printing business, enabling him to create money to employ Swiss workers for his railway projects. Okay, I know that sounds complicated. So here's how he did it. Step by step at a time, the Swiss economy largely ran on the Swiss franc coins that were linked to gold and silver. And with the promise of future riches, Mr. Escher was able to convince his to make connections to supply the initial coins needed to start the bank, meaning that the bank now had coins in reserve that were all owned by the shareholders. Now, as the first step of money creation, Mr. Escher's railway company would then borrow from the bank.

But instead of demanding coins, the railway company agreed to open a deposit account at Credit Suisse. Crucially, this now meant that the railway company and Credit Suisse were indebted to each other for the same amount. But what was the point of that? The railway company issuing debt to the bank and the bank issuing that to the railway company? Well, the point is that these types of debt are not the same. You see, the debt issued by the bank in the form of a deposit account could be exchanged for coins whenever the railway company wanted. Whereas the debt issued by the railway company would only lead to a coin inflow for the bank in a couple of years. On top of that, Mr. Escher convinced railway workers to accept payments in Credit Suisse's deposit accounts instead of coins, and that getting people to accept your debt as money is the magic ingredient that explains why banks can create money and people like you and me cannot. I think famous US economist Hyman Minsky made a really good point when he said everyone can create money. The problem is just to get it accepted. In other words, anyone can issue debt.

But even today, only debt issued by banks is accepted as money. Of course, there are good reasons that you and I, as well as Mr. Escher's workers accept this deal. First, banks have made it really easy for clients to transfer the debts between them. Second Bank Dapps can be exchanged for cash whenever we want. And third, banks are typically actually good for their debts. After all, if some workers wanted coins from the Swiss, the bank could pay them using its coin reserves. And then if its reserves were depleted, it still had valuable loans in a railway company. It could potentially use these then as collateral to borrow coins from other banks if it really needed it. In other words, from the perspective of the workers, the bank was good for their debt because they were backed both by COIN reserves as well as the loans to the railway company.

It is only if the railway company would get into trouble that the workers would really have a strong incentive to run to the bank to try to get the limited coins out as quickly as possible. And that was the magical money printing business of Credit Suisse. In a nutshell, Credit Suisse would in essence, turn railway company debt into bank debt, which workers and companies would use as money. But before you start crying foul, let's remember that up to this point, the deal has actually mostly been favorable to the companies, the workers and the Swiss economy, not the bank.

After all, the more deaths from this company's credit squeeze monetized, the more companies could build, which is good for the economy, and the more employment opportunities there would be, which is good for the workers. And the more the Swiss economy would grow. And on the other hand, the Credit Suisse bankers had to work hard to make sure they didn't monetize the debt from the wrong companies, because if they couldn't pay back, they could face a bank run.

Now, that is a job of a banker. So how does a banker get paid for this? Well, by turning a higher interest rate on loans to the companies that had paid out on deposits, and that is the local business of Credit Suisse in a nutshell, built on a layer of cash brought in by its shareholders. It helped the loans of companies building the Swiss economy and gave them, in return, low interest rate deposit accounts that could actually be used as money.

And this is how Mr. Escher achieved his dream. His bank, Credit Suisse, monetized the debts of his railway companies, which allowed them to hire workers without needing foreign money. This contributed greatly to the Swiss railway boom and thus the modernization of Switzerland. And so Mr. Escher would go down into the Swiss history books as one of its most influential business tycoons ever. And as a bonus, his bank would turn out to have a great future ahead of it. A great future that would soon take a doctor in Switzerland started promoting and strictly enforcing its banking secrecy laws. But before getting into Swiss banking secrecy of the past, let's talk about data secrecy today, because your data today is far from secret, something that today's video sponsor, Incognito, is trying to do something about. You see commercial data brokers collect your personal info such as employment history, home address, or SSN from the Internet and sell it to various businesses. For instance, health insurers might buy this data and increase your rates based on your online search habits.

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And with that, let's go back to how Swiss banking secrecy allows Credit Suisse to become more powerful than ever before. Even though Swiss banking secrecy, which made the sharing of client information punishable with up to five years in prison, was made official in 1934. The practice had already been encouraged by the Swiss government for decades. The goal of this Swiss policy was simple Convince wealthy foreigners to hold their money in Swiss banks at this point. You might be wondering, but I thought you said Mr. Escher had achieved his dream of developing the country without foreign money. When he created a Swiss bank capable of creating money locally. And yes, he did do that for the railways. But the thing is, small, open economies like Switzerland still need a lot of foreign money to pay for stuff that isn't in the country.

Meaning that a big foreign currency reserve is needed. Something can be built up if wealthy foreigners are convinced to hold their money in Swiss banks. And banking secrecy attracts wealthy foreigners for three main reasons. The first was tax evasion. The second was hiding illegally obtained money. And the third most noble one was hiding money from invading governments during the first and Second World Wars. Although, let's be honest, in practice, the biggest reasons were mainly tax evasion, tax evasion and tax evasion. Anyway, as a business, first and foremost, the promise of more profits persuaded Credit Suisse's managers to abandon Mr. Escher's simple banking model. This led to the emergence of this second great pillar of what would become the Credit Suisse banking empire Wealth Management. If you go back to the balance sheet of Credit Suisse, we can visualize wealth and asset management as an extra layer building on top of the traditional Swiss bank.

Managing the wealth for shady foreigners means taking in large deposits and investing these in various ways. Again, making money because these investments typically earn a higher interest rate than the bank pays on these deposits. But where wealth management differs from traditional banking is that it's also about just advising wealthy clients about how to manage their wealth without taking any on your own balance sheet. So at first glance, especially, this advisory part seemed much safer than pure banking, since it was just advice. However, given that the advice of these wealthy foreigners wanted typically, let's be honest, was about how to avoid taxes or how to hide ill gotten wealth. And this is why this new lucrative wealth management division would actually ultimately set up Credit Suisse to become Europe's most scandalous bank. The first major scandal involved several Swiss banks acquired by Credit Suisse, which were later found to have harbored stolen Nazi wealth. Upon Discovery, Credit Suisse refused to return this wealth to Holocaust survivors for decades.

However, a far more damaging scandal turned out to be the Gyatso scandal in 1977, which occurred in the Swiss town of Gyatso, which is in walking distance of Italy. What had happened is that the local office in this tiny village had allowed Italians to smuggle millions of dollars worth of money into the country. But instead of putting that money in official Credit Suisse accounts, this local manager, Mr. Ernst Kuma, had put the funds into his own operation in another notorious Alpine tax haven, Liechtenstein, instead. This caused a severe blow to the reputation of credit Suisse and Swiss banking in general. But strikingly, this wasn't due to the facilitation of tax evasion. It was because the funds were apparently not safe in Swiss banks. But rather than resolving these issues and returning to the boring old ways of local banking. Credit Suisse management was hungry for more, so they decided to use the scandal as an opportunity to rebrand Credit Suisse as an international bank, expanding beyond Swiss banking and wealth management, and venturing into the lucrative but high risk world of Wall Street investment banking and in the early 1980s, while the Swiss bankers had perfected the profitable business of tax evasion, they were still outclassed by a new breed of competitors the American Wall Street banker.

You see, Wall Street bankers had mastered an even more lucrative business model in investment banking. In theory, investment banking is more like wealth management than traditional banking, in that it is, for a large part, all about earning income from commissions for services rendered rather than about earning interest income. But instead of helping clients evade taxes. Investment bankers provide services aimed at helping clients obtain the funding needed to expand their businesses. Just to illustrate this, say that you were a growing global corporation in the 1980s and you wanted to expand. Sure, you could go to Credit Suisse to get a loan, but in this decade it became increasingly popular to instead go to a Wall Street investment bank like Goldman Sachs. Shearson Lehman Brothers, or the most illustrious of them all. First Boston, a bank that would serve as the springboard for many Wall Street titans such as former Lazard CEO Bruce Wasserstein and even BlackRock CEO Larry Fink.

Not one of the reasons investment banking became so popular is that a bank like First Boston could potentially get you a lower interest rate than a traditional bank could. They did so not by giving you a loan, but by helping you issue bonds on America's competitive bond markets. And alternatively, if you sought less risk and went to issue stocks. Investment bankers could also assist you with that. And finally, if you were in the market for buying up the competition, a bank like First Boston could help you to determine at what price you should make an offer. And all of this for a small commission, of course. At least this being an advisory business is how investment banking started out. But in the 1980s, investment banks increasingly got in the action themselves, issuing debt to buy the risky types of securities they helped their clients to issue or increasingly, they started providing loans that clients needed to take over these other companies. Risky, certainly. But the interest rates that investment banks could charge on these loans and the profits they could make on their trading activities were in the eyes of Credit Suisse's management absolutely worth the risk.

There was just one problem. How could a group of conservative Swiss bankers join this elite Wall Street club? Well, as it turned out, all they had to do was wait. When First Boston, the illustrious bank encountered trouble due to excessive lending to clients for acquisitions, Credit Suisse swooped in to rescue it. And this ultimately led to Credit Suisse completely absorbing First Boston and firmly joining the ranks of elite global banks like Jp morgan and Goldman Sachs under its own name, Credit Suisse.

This marked the completion of Credit Suisse as a global full service bank. A bank event like any other was built on top of cash reserves and shareholder capital. The first safest layer was then the traditional Swiss bank that provided loans and deposits to the Swiss. The second layer was the wealth and asset management business that invested deposits from wealthy individuals into various projects. The third and final layer was not a risky Wall Street investment bank, which issued debt on capital markets and invested in risky securities and provided loans to risky clients looking to take over other businesses.

And in the next decade, this risky combination was about to get even riskier, as Credit Suisse's management set its sights on yet another rival, LA. In the 1980s, Credit Suisse's ambitious chairman, Mr. Rainer E. Gut. had one problem while he ran a prestigious global full service bank. He didn't run the most prestigious global bank in town, and that was UBS. Now, in this decade, both banks had adopted a so-called Hunter strategy, meaning that they mainly pursued growth by hunting smaller, weaker rivals and buying them up. So when the large Swiss bank known as Volk's bank, was struggling after the housing bubble in Switzerland burst, both UBS and Credit Suisse saw their chance to swallow it up to become the biggest Swiss bank. So they both courted Fox Bank and it initially sided with UBS. However, Mr. Good worked tirelessly in various backroom deals, eventually securing the deal for Credit Suisse, making it the biggest Swiss bank.

However, this was not to last very long. As less than a year later, UBS merged with Bank or becoming the biggest Swiss bank once again. However, for both organizations, this would cause big problems later on. You see these mergers combined. Several highly complex organizations make it very difficult to monitor what all employees were up to. And indeed, not long after these complexities began to catch up with Credit Suisse First, its wealth management division came under increasing scrutiny from the press after it came to light that they had helped dictators from Nigeria, the Philippines and even the notorious Japanese Yakuza gang to hide and launder money. Second, its investment bank got into big trouble and suffered heavy losses during the dotcom bubble, and this led to that.

In 2006, Credit Suisse became one of the first banks to have to get rid of their subprime mortgages when trouble arose in the US housing markets. However, this turned out to be a blessing in disguise, and it also meant that when the global financial crisis hit one year later, Credit Suisse had already gotten rid of most of its toxic assets. And as a consequence, Credit Suisse managed to do quite a bit better than both as a wall Street rivals.

And reportedly UBS, which needed a state bail out by the Swiss state. However, in hindsight, receiving a bailout and facing restructuring might actually have been a blessing in disguise for UBS as it was forced to slimmed down its excessive operations while Credit Suisse kept expanding its scandal ridden wealth management and risky investment banking operations. That being said, Credit Suisse did not escape the crisis unharmed.

In 2008, the company still suffered substantial losses due to bad investments made by its investment banking division. Fortunately, the bank's overall losses were limited thanks to the success of its wealth management division. Although the reasons for this success would soon become apparent, while the very nature of Swiss banking secrecy encouraged tax avoidance and theft, in this period, it became clear that Credit Suisse had taken it to another level, being the bank of choice for money laundering. Officials from regimes such as that of Libya's Gaddafi and Egypt's Mubarak. However, the scandals that were really hurting Credit Suisse were the ones that got the regulators to actually find the bank. Already in 2009. The bank was fined millions for helping Iran to evade sanctions, a fine that paled in comparison to the billion dollar fine the bank had to pay for helping US citizens evade taxes. On an industrial scale in 2014, fines it, together with further losses from its investment bank led Credit Suisse, to seek new management in the form of the charismatic CEO Tidjane Thiam, who pledged to deemphasize investment banking and focus the company's energy on helping the ultra wealthy to avoid even more taxes.

But now, with a focus on Asia and hopefully while staying within the law. Mr. Thiam’s, leadership at Credit Suisse started strong, but eventually led to one of the company's most high profile scandals, which involved him clashing with his head of wealth management, Mr. Iqbal Khan. The two men who apparently started on a friendly note, saw their relationship turn sour rather quickly as a result of Mr.

Khan's resentment of not sharing more of the spotlight with Mr. G.M.. But in a move that seemed to come right out of a reality drama show on Netflix, Khan moved in right next door to his boss team and spent 12 years loudly renovating the property. And then in retaliation, allegedly, Mr. Thiam planted trees that liked Mr. Khan's view of Lake Zurich, which in turn then led to a very public falling out that took place at Mr. Thiam's luxury cocktail party. Then when mr. Khan eventually left, he went directly from Credit Suisse to its biggest rival, UBS. And then in an almost movie like Plot Twist, Credit Suisse had private investigators tell Mr. Khan that into a high stakes chase throughout Zurich. A physical altercation and ultimately the suicide of the private investigators involved. In the end, this tumultuous scandal cost Mr. Tim his job and overshadowed the fact that revenues had actually begun to recover during his tenure. Now, that being said, during his tenure, the scandals within Credit Suisse's wealth management division definitely persisted, with the bank facing scrutiny over its role in Asian corruption scandals, such as Malaysia's one MTBE scandal and the bribing of Hong Kong officials to establish a foothold in the city.

To make matters worse, the investment banking arm then began making headlines for all the wrong reasons. First, there was a colossal collapse of Archegos capital, which then cost Credit Suisse billions. And as if that wasn't enough, British finance firm Greensill Capital met a disastrous end soon after striking another blow to the bank's balance sheet. So in 2021 and 2022, both the investment bank and wealth management divisions of Credit Suisse experienced massive losses, losses that could not be offset by the good old Swiss banking division that was still profitable. Therefore, it made sense that already in 2022, the bank suffered massive deposit outflows, especially from its wealthy clients. Outflows that got worse when banking turmoil started in the United States. And given that we now know that other banks and the Swiss Central Bank were unwilling to save the bank, these depositors were right to flee the bank, in my opinion, as their various assets backing its deposits had lost too much value. And so the bank would have entered bankruptcy. If it was a normal business. However, as we've seen at the start of this story, banks are not normal businesses.

They play a vital role in our economies. In the case of Switzerland turning Swiss, that's into money. Money that is the lifeblood of the Swiss economy. And so, of course, the bank had to be saved. Or did it? When discussing whether or not the bank had to be saved, there was just one problem. The Swiss people were still pretty pissed about the government bailing out UBS in 2008.

So the government assured them this is no bailout. They just negotiated a deal with UBS, which was to take over Credit Suisse for a reduced price from existing shareholders and then risky foreign bondholders from the US and Asia would lose their investments while deposit holders, as well as many key staff members, would be protected. Oh, and the government promised to protect us from further market panic via a very cheap loan and it would provide a guarantee of bearing a large share of the losses if Credit Suisse turned out to be worth way less than what the US bought it for. So yeah, it's not a bailout. The government just provided cheap loans and guarantees which are worth millions of dollars. And all of this was done for the good of regular Swiss people. According to the Swiss finance minister, who said without a solution, payment transactions with Credit Suisse in Switzerland would have been significantly disrupted, possibly even collapsed, and the wages and bills could no longer have been paid. The problem with that statement, though, is that the Swiss retail bank was only a small part of Credit Suisse, and that small part could have been saved on its own.

After all, during the great financial crisis, this is exactly what the Belgian and best governments did when the bloated Fortis ABN Amro combination collapsed. They only bailed out the local banking units that were crucial for their national economies. The other parts were allowed to collapse or be sold off at bargain prices to the highest bidder. And this was actually a viable option for credit Suisse as well, because, as the Financial Times reported, ex first Boston banker and now BlackRock CEO Larry Fink had actually already sent some of his top ranking lieutenants to Zurich to explore the option to buy precisely these risky parts of the company. But this takeover was allegedly blocked by the Swiss government. Instead, they preferred that UBS would become an even bigger, too big to fail mega conglomerate that is twice the size of the Swiss economy, a behemoth that would dominate Swiss retail banking, Swiss wealth management and Swiss investment banking, a conglomerate that at the time of the takeover was led by a foreign CEO who was then swiftly replaced by a Swiss banker.

After the deal. So could there be something more going on here? Was this takeover actually in the best interest of the Swiss people or just in the best interest of the influential Swiss banking class that faced only minor consequences in the form of reduced bonuses thanks to this collapse? Unfortunately, because I am not part of the Swiss banking circles, I cannot answer that question for you. But perhaps you can help me answer it down in the comment section, or you can join the discourse server for money and macro if you support the channel via Patreon or become a member. Oh, and if you're interested in more rise and fall stories, check out this playlist over here. Or if you want to know more about how private banks create money, take a look at this video over here.

Tries to say Credit Suisse in German Actually says Credit Suisse in German.

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