The $ 12,000-a-day house in Provence built by toxic assets


It has been a stressful time at Credit Suisse. Last year, Tidjane Thiam was ousted from his post as managing director after the bank hired private detectives to spy on his colleague and neighbor Iqbal Khan.

Then Credit Suisse racked up huge losses for its clients after creating funds filled with $ 10 billion in dubious Lex Greensill debt. As a reminder, he racked up huge losses for his investors by backing Bill Hwang’s Archegos Capital, which later exploded in March.

When he needs a break, Eric Varvel, the senior executive at Credit Suisse who ran the asset management division, goes to his vacation home in Provence. We know this because his wife, Shauna, told the Times last week before his next book on home improvement: Provencal style, decoration with a touch of the French countryside.

The book is on sale: $ 50. The property is For rent: $ 12,000 per night. And there is even an online store where you can buy cushions: $ 350. This is a complete high-end secondary activity.

The timing of the advertisement is unfortunate. Many Credit Suisse clients have lost a lot of money on Greensill. And although Varvel has been replaced as head of asset management, he remains with the bank.

Yet it is hardly a “Where are the customers’ yachts?“situation. On the one hand, it’s Credit Suisse: customers already to have yachts. And the Varvel house was bought for just 2.5 million euros, according to property records. Even though the majestic renovation still costs twice as much, that’s not a huge amount for someone who has spent three decades at Credit Suisse, much of it in executive positions.

The episode, however, refocused attention on the remuneration of the Swiss bank. While Varvel’s overall compensation is not being disclosed, we do know that he benefited from a radical plan to move toxic assets from the bank’s balance sheet to the bonus pool.

In hindsight, the plan, first devised in 2008, has gone awry. The aim was not to facilitate the purchase of seven-bedroom mansions that could set up their own business and be rented out to the Obamas.

But while the risk-reward calculation might have been a bit flawed, the idea had merit. As a reminder, after the global financial crisis, banks suddenly found themselves holding a variety of mortgage-backed securities and leveraged loans that no one wanted.

With their creaky balance sheets with illiquid assets that are difficult to value and subject to punitive capital charges, banks were under pressure from regulators and shareholders. Credit Suisse had a great idea: get rid of them by using them to pay the bankers!

The assets were put into a pool, with the bankers receiving the shares. If the assets were ultimately sold for more than their value at the end of 2008, they would pay. If they were sold at a lower price, bankers rather than shareholders would suffer the blow.

At the time, bankers weren’t entirely happy that their bonuses were paid in the form of toxic assets. They would have preferred cash or, if absolutely necessary, shares of Credit Suisse. But they usually followed him because it wasn’t a good time to go looking for a job.

This device – known as the Partner Asset Facility – hasn’t had a lot of imitators, which is a shame. Equity awards help to some extent to align the incentives of executives and investors. But there are many occasions when certain parts of companies lower valuations. If you can separate them and use them to pay employees, that’s potentially a double benefit for shareholders.

In the case of Credit Suisse, the bankers won. As the fear subsided in 2009, the market decided there was some value in toxic assets and they appreciated overwhelmingly. The securities filled with soured mortgages helped buy the Credit Suisse executive’s house in Provence where he could go and relax after overseeing the division that lost billions to Greensill. And so at least after all the trouble there is a happy ending.



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