Credit Suisse Tackles Writedown Damage

Credit Suisse'sCS surprising revelation Tuesday that it would have to take a $2.85 billion writedown because of erroneously priced bonds sent CEO Brady Dougan into a frenzied campaign to restore confidence in the Zurich-based financial institution.

On Tuesday, Dougan, who has committed to being more transparent as the market dislocation has roiled many Wall Street firms, told analysts and reporters that the writedown -- on top of the $1.3 billion writedown it reported just last week -- was a result of a "small number of traders." The incorrect valuations could result in a reduction of a net income of about $1 billion by the Swiss bank, Credit Suisse said.

The mismarking comes at an unfortunate time for Credit Suisse, which has thus far dodged some of the more painful aspects of the housing slump and credit crunch. Dougan has been working aggressively to distance himself from rival firms who have slipped on subprime slime, including UBSUBS, which posted a $14 billion writedown in the fourth quarter.

Dougan told a group of managing directors at Credit Suisse during a Tuesday conference call that the bank decided to announce the mismarking publicly in part because of a $2 billion offering of subordinated notes, in order to provide full disclosure to potential investors, sources familiar with the situation told TheStreet.com.

Dougan said that he may review the terms of that pending bond deal offered for sale last week, the sources said. Late Tuesday, Bloomberg reported Credit Suisse increased the interest rate on the subordinated bonds by 25 basis points on notes due in 2018 bearing a coupon of 6%. The offering was meant to be completed Tuesday.

Dougan did not identify the traders involved in the mismarking, but curtly told Credit Suisse managing directors during his call that the traders were still employees of the firm, the sources said.

The Financial Times has identified the lead trader responsible for the mismarking as Kareem Serageldin. The trader did not return an email requesting comment.

The bank viewed the impact of the mismarking as not material and may have otherwise waited until its next quarter to announce the adjustment, the sources said. Credit Suisse also declined to comment for this story.

The losses incurred at Credit Suisse are said to be derived from a proprietary trading account in London handling esoteric debt known as collateralized debt obligations. According to a report by Fortune, the account was betting the firm's proprietary capital on hard-to-parse trading strategies.

"This was not some rogue trader these were trades the firm had clearly approved," the sources tell TheStreet.com. News of rogue trader Jerome Kerviel, who lost billions for French bank Societe Generale, last month put a spotlight on the fumbling of foreign banks.

During Dougan's call, some of the high level Credit Suisse employees wanted to be assured that there would be no other shoes to drop after Tuesday morning's surprising announcement. The CEO was quick to emphasize the company's strong performance relative to its peers and the fact that trading flap did not represent a failure of the company's risk practices, the sources said.

Indeed, while the news of Credit Suisse's writedown sent its shares down by as much as 6% in trading, its markdowns on soured subprime and other debt securities are about $4 billion compared to much larger sums at UBS and other firms like Merrill LynchMER and CitigroupC.

But the frozen credit markets and the expectations that more pain may be in the horizon in the mortgage arena and other financial sectors, has analysts and investors notching down quarterly-earnings estimates for banks and brokerages. Reduced revenue expectations are compelling many firms to estimate that revenues may be off by as much as 25% at the end of the year and that has prompted some banks including Credit Suisse to at least consider staffing reductions.