Perhaps the best thing that can be said about Credit Suisse Group’s (CS) first quarterly loss in over five years is that CEO Brady Dougan isn’t content to play Pollyanna about the state of the mortgage and credit markets. His peers, including chiefs at UBS AG and Morgan Stanley, have gone on record recently suggesting that they expect things to get better in the back half of this year. “The number of times people have seen the light at the end of the tunnel, it turned out to be a train coming down the tracks,” Mr. Dougan said on a media call Thursday morning, after the Zurich-based bank said that it absorbed $5.2 billion (5.3 billion swiss Francs) in write-downs during the first quarter. The write-downs helped push Credit Suisse to a quarterly loss of $2.1 billion (CHF 2.15 billion), as its investment banking arm lost $3.36 billion (CHF 3.46 billion) in “an extremely challenging market environment.” Credit Suisse is the first major European investment bank to report its quarterly earnings this season. “Our first-quarter results are clearly unsatisfactory,” Dougan said in a press statement. Despite the losses, Credit Suisse said that the huge write-downs it absorbed during the quarter masked otherwise strong results in its investment banking arm and in other operating segments — and, most importantly for investors, signaled that it wasn’t likely to raise additional capital. As a result, shares on the NYSE were up nearly 2.5 percent in early trading Thursday, despite the loss. Mortgage-related losses Credit Suisse said it had reduced its net exposure to residential U.S. mortgages by 37 percent during the first three months of 2008, leaving it with CHF 5.5 billion in exposure ($5.34 billion) at the end of March; CHF 1.1 billion ($1 billion) of total mortgage exposure was subprime. Very little write-down activity hit the bank’s mortgage segment during the first quarter — only CHF 100 million ($97 million) was written off, meaning the rest was likely sold or hedged. By far, the majority of write down activity centered in the bank’s leveraged finance and CDO trading portfolios — CDO writedowns totaled far more than half of the $5.2 billion in write-downs recorded during Q1, Credit Suisse said. It’s interesting to note, as well, that Credit Suisse was net long on U.S. subprime at the end of the first quarter — long positions across RMBS and CDOs totaled CHF 12.6 billion, while short positions totaled CHF 11.9 billion. The bank held net exposure of CHF 1.1 billion ($1 billion) to US Alt-A RMBS at the end of Q1 — in addition to its CHF 1.8 billion ($1.75 billion) in net US subprime exposure. This exposure is important, HW sources said, because rating agencies have begun making (or warning of) significant cuts to the value of investment-grade ratings in both RMBS sectors. All of which means that Credit Suisse’s Dougan may have had a very good reason for suggesting that the crisis isn’t over yet. Disclosure: The author held no positions in CS when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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