More than four months after the Archegos blowup rattled markets and dealt a serious black eye to Swiss megabank Credit Suisse, the law firm hired by the bank to investigate what went wrong has finally released a report on its findings.
Readers may remember that the half-dozen or so megabanks servicing Archegos apparently didn’t realize until it was already too late that their prime brokerage divisions would likely be left on the hook for the fund’s positions, as the entirety of the $20 billion in capital it had posted as collateral wouldn’t even begin to cover the wicked margin call.
Eventually, a plan to slowly unload the firm’s positions quickly collapsed when Morgan Stanley and Goldman broke ranks, leaving Credit Suisse – the most exposed, and the slowest to sell – on the hook with more than $5 billion in losses.
Making matters worse (for Credit Suisse, at least), the Archegos blowup coincided almost perfectly with the collapse of Greensill, a trade-finance firm that packaged assets used to stock $10 billion in Credit Suisse “trade finance” funds, forcing the bank to gate the funds. Clients were so furious that CS has reportedly considered covering their losses as several major clients – including sovereign wealth funds – threatened to cut off all business ties with the Swiss megabank.
Credit Suisse shares pulled back on Thursday after the firm confirmed the extent of the Archegos losses (though unsurprisingly its earnings report and presentation went to great lengths to obscure it).
The bank’s Q2 earnings report, also released Thursday morning, confirmed that it was indeed one of the worst quarters in the bank’s 160-plus year history. The firm reported a nearly 80% drop in profits YoY, as it reckoned with the fallout from the twin scandals. CEO Thomas Gottstein, who held on to his job as a handful of senior executives were unceremoniously fired, pointed to the report, compiled by white-shoe law firm Paul Weiss, as evidence that CS was taking pains to learn from its mistakes.
While the report exposed incompetence in the firm’s risk-management measures, it didn’t find any evidence of criminal wrongdoing.
“We take these two events very seriously and we are determined to learn all the right lessons,” said Thomas Gottstein, Credit Suisse’s chief executive. “We have significantly reduced our risk-weighted assets and leverage exposure and improved the risk profile of our prime services business in the investment bank, as well as strengthened the overall risk capabilities across the bank.”
The report mostly focused on the firm’s failure to effectively manage risks in the prime brokerage unit, which is considered a relatively “safe” business line – until there’s a blowup like this (the world saw a similar dynamic at play during JPM’s “London Whale” trading fiasco).
The parallels between Credit Suisse’s Archegos post-mortem and JPM’s London Whale post-mortem are astounding:
✅ Using “safe” business as profit center
✅ Ignoring risk limit breaches
✅ Risk personnel beholden to businessIt’s all in there.https://t.co/tmg9BnR3y6
— Jeremy Kress (@Jeremy_Kress) July 29, 2021
To remedy its mistakes, the firm said that after reviewing the roles played by 23 people, it had fired nine staffers, including the two heads of its prime services business, and imposed $70MM of monetary penalties on staff, including clawing back previously-paid bonuses. The cuts and clawbacks helped the bank reduce its operating expenses by a whopping 1%, it revealed.
As far as apportioning blame, the report didn’t name any executives by name, though it did single out the head of equities trading and the risk managers responsible for monitoring the Archegos trades as the bank employees who were responsible for preventing the disaster. The report says they “failed to heed these signs, despite evidence that some individuals did raise concerns appropriately.” More broadly, the entire prime brokerage business “had a lackadaisical attitude towards risk and risk discipline.”
The 165-page report also showed that CS employees “shrugged off” Archegos founder Bill Hwang’s checkered past, which included allegations of insider trading.
The bank promised that this would be “a turning point” for its risk management. Because CS was worried about losing Archegos as a client, it ignored red flags. When risk managers requested that the fund post an additional $1 billion of collateral, relationship managers over at the prime brokerage desk said that “would be like asking them to move their business”.
“The Archegos matter directly calls into question the competence of the business and risk personnel who had all the information necessary to appreciate the magnitude and urgency of the Archegos risks, but failed at multiple junctures to take decisive and urgent action to address them,” the report said.
Some of the details confirmed in the report had already been reported by the press. For example, the report confirmed that Credit Suisse earned just $17MM in fees last year from its work with Archegos.
CS is already taking steps to rebuild its risk management and prime brokerage business. A few months ago, CS hired a former CEO of Lloyds Banking Group and two executives from Goldman who oversee risk management and technology. while also forming a new group within the investment bank to ensure the “risk profile” stays within acceptable bounds. Whatever the bank ultimately decides, whether they succeed or not will ultimately come down to whether the bank will refuse to ignore similar red flags in the future in the name of keeping the clients happy.
