Inside Credit Suisse’s $5.5 Billion Breakdown

Credit Suisse Group AG has been in the news a lot lately, as the bank has announced a $5.5 billion loss, after deciding to freeze $6.2 billion in trading losses and not to report them to investors. The bank has been the subject of intense scrutiny from investors and regulators. The bank in August had reported a $2.4 billion trading loss. In June 2014, Credit Suisse agreed to reimburse investors who suffered losses in Bernard Madoff’s notorious Ponzi scheme. The bank has also been involved in numerous other scandals.

The U.S. Securities and Exchange Commission alleges that Credit Suisse Group AG sold thousands of private-label loans without disclosing that the borrowers’ names had been changed , fraudulently altered, or even stolen, in order to hide the fact that many of the loans bought from Housing Federal Credit Union.

Credit Suisse has been in the news a lot lately – not just for its financial mistakes, but also as a result of its complicated relationship with the US government. The Swiss financial services giant is a favorite target of the US Department of Justice, which has filed lawsuits against it in several jurisdictions and is currently in the midst of a long-running dispute over the bank’s role in the Bernard Madoff Ponzi scheme.

mid-March, the shares of ViacomCBS Inc. and Discovery Inc. ascended. This was good news for Bill Hwang. His company, Archegos Capital Management, has borrowed billions of dollars from… Credit Suisse Group AG CS -0.58%. To bet on different stocks, including entertainment companies. As usual, Archegos transferred cash to Credit Suisse to cover its bets. As the company’s shares have more than doubled since the beginning of the year, Archegos has asked for some of that money back which was credited, according to people familiar with the matter. The transfer essentially meant that Archegos had even less money to support his position. However, some of Credit Suisse’s competitors have gone in the opposite direction. Bank officials said they perceived a growing risk in the concentration of the company’s positions and demanded that the company cover its investments with additional cash. A few days later, ViacomCBS went bankrupt, Archegos collapsed and the Swiss bank suffered huge losses. Today Credit Suisse is trying to understand what went wrong. The main issues are: Why did she give the money back to Archegos? And more generally, why did it maintain subprime interest rates at levels that far exceeded all the standards and projections it had announced? A year earlier, the bank’s executives had even received a stern warning about the way the bank managed risk, but the recommended changes were not implemented. This is a preliminary conclusion: According to current and former employees of the bank, Credit Suisse’s risk management systems have failed, leaving the bank highly vulnerable to human error. Trading data examined by risk managers in the run-up to Archegos’ bankruptcy in March was out of date. Credit Suisse staffers were not so quick to analyze the increase in individual stock holdings.

Bill Hwang, pictured in 2012. The collapse of his company Archegos in March led to billion-dollar losses for Credit Suisse, which funded it.

Photo: Emil Wamstecker/Bloomberg News An internal audit conducted in April 2020, when the bank had already suffered a loss of about $200 million due to the hedge fund collapse, revealed the main problems reflected in Archegos’ failure. But the bank was in no hurry to make the planned improvements. When employees reported risks, they did not report them to management. According to persons familiar with the situation, the reason for the breach of risk controls was the change of key personnel in the bank’s prime brokerage unit, which managed the Archegos account, following the death of a senior executive in a ski lift accident. The events that led to Archegos’ losses, which we disclosed in our first-quarter results, are being investigated by the board, which is studying them all, a Credit Suisse spokesman said in an emailed statement. We undertake to report on the results of this study (including any lessons learned). A representative of Archegos and Mr. Hwang declined to comment. According to the Wall Street Journal, Credit Suisse has more than $20 billion in investments in Archegos, which amounts to half of the bank’s capital in case of potential losses. At one point, however, the bank forced Archegos to hold only a tenth of that amount to hedge and protect the bank if its investments deteriorated, according to a person familiar with the matter. Taking such a big risk seems to have paid off only moderately. Archegos, which managed Mr. Hwang’s assets as a hedge fund manager, generated millions of dollars in revenue for Credit Suisse over several years, according to people familiar with the matter. The collapse of Archegos, combined with the failure of another of Credit Suisse’s major clients, Greensill Capital, has plunged the bank into crisis. Credit Suisse reported a $5.5 billion loss on Archegos, the largest loss associated with the company’s collapse on Wall Street. He fired his chief risk officer, the head of the investment bank and other staff and turned to investors for $2 billion in fresh capital to strengthen the bank’s balance sheet. Swiss regulator Finma said it had opened a civil suit against Credit Suisse. Regulators in the US and UK are investigating Archegos’ losses at several banks, the Journal reported. Another Credit Suisse spokesman referred to remarks made by the new chairman, former banker Antonio Horta-Osorio, on June 30, April, in which he said the bank needed to develop a culture of risk management and personal responsibility. The Bank has stated that it will work closely with Finma and all relevant regulators on this issue. Just over a year before the collapse of Archegos, the CEO of Credit Suisse Tijan Tiam presented the bank’s best result in nine years and then bid farewell to his colleagues at the Zurich headquarters. The bank’s board of directors fired him after the lieutenant gave the order to spy on a Credit Suisse executive who had left for a competitor. Mr. Thiam denied any knowledge of espionage. Mr. Thiam, a former insurance executive, has been in the turnaround business for five years. It has kept risk under control in Credit Suisse’s volatile investment banking business and invested resources in its more stable wealth management business, which helps high net worth individuals manage their money. Mr Thiam was hired after Credit Suisse paid $2.6 billion in 2014 and pleaded guilty to a settlement with US authorities for helping wealthy Americans evade taxes. During the reorganization, Mr. Thiam retained the bank’s prime brokerage operations, which provide loans to hedge funds and other large investors, because they supported greater equity trading. This was critical because high net worth clients needed access to the equity markets to invest and raise funds for their businesses through Credit Suisse. But Mr Thiam said the unit should be more disciplined in risk-taking and focus on fewer customers. His team split from other departments at the investment bank Credit Suisse, and dozens of senior staff left the company. They were often replaced by less experienced colleagues – a consequence of the juniorization that made the company more prone to mistakes, according to former Credit Suisse executives and investors. On the same day Thiam left the bank, in February 2020, Jason Varnish, a top risk manager in Credit Suisse’s prime brokerage, took a lift at the ski resort in Vail, Colorado. His coat became matted and the 46-year-old father of three died. word-image-3537

Former Credit Suisse CEO Tijan Thiam tried to manage risk at the bank. He left in February 2020.

Photo: Fabrice Coffrini/Agence France-Presse/Getty Images A memo to the bank’s staff at the time stated that Mr. Vernis had managed to strike the right balance between a commercial approach to customers and maintaining risk discipline for the bank. As in other banks, risk management at Credit Suisse has evolved in recent years into a comprehensive operational structure. This feature became more important and strengthened after banks suffered significant losses on complex transactions during the financial crisis. Risk management oversees the Bank’s activities to prevent financial and reputational problems. Computer programs are subject to rules and processes that are embedded in the bank’s technology and must be followed by employees. It also relies on human judgment at all levels. Credit and Reputational Risk Committees examine customers and transactions, and the Bank sets limits on the amount a customer or counterparty can lose. The bank’s management, board of directors and board committees are responsible for the system and oversee its proper functioning, with the support of the internal audit and credit risk assessment departments. Supervisors also play a role in assessing banks’ risk models, which rely on data, assumptions and scenarios to calculate expected outcomes. In 2019, the Federal Reserve said it had found errors in the way Credit Suisse predicted trading losses in its annual stress test, and gave it four months to fix them. The systems were tested when the spread of the coronavirus pandemic alarmed financial markets. Amid the volatility, prime brokerage Credit Suisse suffered a loss of about $200 million and closed an investment for embattled hedge fund Malachite Capital in March 2020, said people familiar with the matter. Brian Chin, then head of market operations at Credit Suisse, headed the prime brokerage business. She said an internal audit confirmed the losses, the magnitude of which shocked some bank executives. The audit revealed two errors, according to people familiar with the matter. The first was the bank’s lack of research into Malahit’s business strategy and how the company would perform in volatile markets. The second reason was the use of an outdated marginalisation system that did not allow the bank to effectively monitor its exposure to changes in the price of the underlying securities in real time. The firm’s recommendations include a focus on similar weaknesses at other clients, including clients with high gross exposure to equity derivatives based on market price movements of the underlying asset, the callers said. They said they plan to improve the process over the next two years. An attempt was made to translate these transactions into a more sophisticated dynamic margining system that would use additional real-time factors, such as volatility and concentration risk, in addition to price. But when Archegos collapsed, there was no change. To take over Mr. Varnish’s role as chief risk manager in turbulent markets, the bank turned to Parshu Shah, a salesman in New York in the Prime Broker division. He has two decades of experience at a bank, where he created a niche in financial derivatives that allowed hedge funds to profit from bets on stocks. Its clients included Archegos, which actively used a derivative called a total return swap, according to persons familiar with the matter. The swaps allowed Archegos to take large equity positions with a small amount of collateral, without owning the underlying securities. Mr. Shah sent a request for comment to Credit Suisse, which declined to comment on its role. He did not respond to a further request for comment. Despite the malachievement, Credit Suisse reported its best first-half net profit in a decade in July, thanks largely to a recovery in markets and investment banking. The new CEO, Thomas Gottstein, who succeeded Mr Thiam in February 2020, said the time was right to take advantage of growth opportunities. Credit Suisse executives said his comments were taken as a signal that the bank wanted to profit from the post-pandemic market boom. A Credit Suisse spokesman said Gottstein did not want to comment. Mr. Gottstein, who previously headed Credit Suisse’s in-house high net worth division, appointed Mr. Chin as head of the investment bank and gave him power of attorney. Lara Warner, Chief Risk Officer at Credit Suisse, an increased role in risk and compliance oversight. word-image-3538

The current CEO of Credit Suisse, Thomas Gottstein, said last year that now is the time to seize growth opportunities.

Photo: ahmed yosri/reuters The Archegos portfolio is also in high demand in the hot markets. The fund’s position with Credit Suisse rose sharply between last summer and March 2021, according to people familiar with the matter. In September, Mr. Shah, who has been employed for about six months, drew attention to Archegos’ growing risks in the credit risk department of an investment bank, said one of the people familiar with the matter. It was not possible to determine whether the team of specialists in charge of monitoring the health of Credit Suisse’s clients responded. According to people familiar with the matter, Mr. Shah, the counterparty credit risk team or officials in the investment bank group did not raise the issue. According to interlocutors, Mr Shah received regular reports of increasing risks in Archegos’ positions. According to her, the manager did not properly share these reports with senior management. In a total return swap, the bank receives commissions and owns the shares. Credit Suisse has become a major holder of certain Archegos shares, according to documents the bank filed with the Securities and Exchange Commission. At the end of 2020, it held about 6.5% of ViacomCBS’s Class B shares, according to FactSet. However, according to persons familiar with the matter, the bank made the investment too late and failed to appreciate the importance of the increased positions, as reported in the Journal. In mid-March, Credit Suisse’s notional exposure, or the value of the shares underlying Archegos’ positions, exceeded $20 billion. Some bank officials thought the size of the risk was a fraction of that figure, in part because of the slow tracking system, as the Journal previously reported. Mr. Gottstein and Ms. Warner, a risk manager, discovered that the bank had done business with Archegos in the days before the fund’s forced liquidation, and none of them knew the fund was a major client in advance, the Journal reported. A few days before the Archegos explosion, shares of ViacomCBS and Discovery reached record highs. Credit Suisse returned margin calls to the fund in mid-March, according to these people. A client with a diversified securities portfolio that has increased in value may experience a recovery of collateral. But in the case of Archegos, this was a problem because most of the shares were owned by a handful of people. This was a particular risk, as the fall in a share could lead to the demise of the company. Archegos also bet other investment banks on some of the same leveraged stocks. According to Credit Suisse executives, they were not aware of these measures. According to current and former employees of the bank, the bank did not fully assess its risks because actions were focused on one name and one sector. On Monday, March 22 In March, shares of ViacomCBS fell when the company announced it was releasing new shares to invest in streaming services Archegos entered a downward spiral when its shares collapsed and it could not meet margin calls. Other stocks related to the Fund’s trading positions also declined. word-image-3539

Lara Warner, chief risk and compliance officer at Credit Suisse, pictured in 2019. She left the bank after the collapse of Archegos.

Photo: Mike Blake/Reuters. In Zurich, Mr. Gottstein and Ms. Warner at the center of another crisis. Greensill Capital, Credit Suisse’s $10 billion investment fund partner, has filed for bankruptcy, putting billions of dollars in assets at risk. Greensill ran into trouble when it failed to renew credit insurance for loans it had made to companies in its supply chain compromising Credit Suisse’s oversight of the funds. (The company’s founder, Lex Greensill, told a British parliamentary committee in May that he was responsible for Greensill’s bankruptcy and that the company had relied too much on an insurer.) During that week in March, Credit Suisse was inundated with questions about Greensill from regulators, shareholders and fund investors. Archegos met Thursday with half a dozen of its backers to try to work out a plan for survival. Credit Suisse has suggested that the banks work together to wind down Archegos’ operations within a month. Some were considering this possibility, according to people familiar with the discussion. But no agreement was reached, and some quickly sold their positions to other investors. Next Monday, the 29th. In March, Credit Suisse warned of significant losses. In April, the company said the exit would cost $5.5 billion and raise $2 billion in new capital. Mr. Chin, Mr. Shah and Ms. Warner were among those laid off. The magazine had earlier reported that the bank was considering introducing dynamic margins on client positions. According to persons familiar with the matter, the system has still not been implemented at some posts in recent weeks. Credit Suisse recently hired McKinsey & Co. to identify and address weaknesses in its risk management, according to people familiar with the bank. -Juliet Cheung contributed to this article. E-mail Emily Glaser at [email protected], Maureen Farrell at [email protected] and Margot Patrick at [email protected] Copyright ©2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8Credit Suisse, the world’s sixth largest bank, is facing a $5.5 billion write-down on its investment portfolio. An official announcement of the credit has been expected since the end of 2017, but was delayed due to a disagreement with the bank’s auditors.. Read more about credit suisse archegos what happened and let us know what you think.

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