You can design formulas for managers to share the risk of trapped investors
Credit Suisse’s story contains a lesson for its Greensill problem. After the crash of 2008, it paid bonuses on instruments linked to risky assets acquired during the previous boom. Reviving that system is a way of sharing the damage with investors in funds linked to the bankrupt financial.
The funds, which had about $ 10 billion in assets when they were suspended earlier this month, contain $ 3 billion in bad loans, says the FT. The bank predicts that actual losses, after taking into account recoveries and insurance payments, could be as high as $ 1 billion. It is a thorny issue: doing nothing would mean passing the losses on to investors, who, in theory, could only recoup between 70 and 90 cents on the dollar. This could sour relationships with large, wealthy corporate clients who thought they were buying a cash-like product.
The bank could assume 50% of the load. Absorbing half of the possible 1,000-3,000 million losses could subtract between 17 and 51 basis points from your CET1, from 12.9% by the end of 2020. The problem with this plan is that the Finma supervisor could also force you to reserve more capital for the future.
There is a third way. A vehicle could buy problem assets from investors. Directors and senior executives of the asset and wealth management businesses would receive shares in that fund instead of bonuses, effectively putting them at risk of insurers refusing to pay.
Another option would be to structure the cash flows from doubtful assets as collateralized loan obligations, a specialty of Credit Suisse. Investors would be the first to receive repayments, while the riskier tranches would be left to the bank and its senior officials. Aside from the nice karma of such a deal, it could soften relations with angry investors. Credit Suisse’s structured finance experts have a chance to show off.