Credit Suisse finds multiple failings but no criminal conduct in Archegos debacle

NEW YORK (NYTIMES) – Credit Suisse suffered humiliation and shareholder wrath this year when it lost US$5.5 billion (S$7.4 billion) from the collapse of the Archegos Capital Management investment fund.

On Thursday (July 29), the bank admitted that its own failings were to blame, releasing a report that chronicled the “fundamental failure of management and controls” behind the debacle.

Perhaps the only bright spot for Credit Suisse in a report full of painful details was that the New York law firm hired by the bank to conduct the autopsy attributed the losses to incompetence and fear of alienating a big client. The investigators concluded that none of the bank employees “engaged in fraudulent or illegal conduct or acted with ill intent”.

The 165-page report, by the law firm Paul, Weiss, Rifkind, Wharton & Garrison, amounted to a case study in everything that can go awry inside an investment bank and lead to financial disaster. At Credit Suisse, the problems included an overworked and underqualified staff, miscommunication between departments, inattentive senior managers and a system geared to increase sales rather than monitor risk.

Credit Suiss was hardly the only bank to do business with Archegos, which managed the wealth of Bill Hwang, a one-time star money manager. But after Archegos collapsed in March, done in by a US$20 billion wager on shares of ViacomCBS that went sour, Credit Suisse was slower than Goldman Sachs and other creditors to liquidate the fund’s positions, and it had the biggest losses.

Credit Suisse probably also suffered the biggest hit to its reputation, in part because it was caught up in another disaster at almost the same time. Greensill Capital, which organised funds that Credit Suisse marketed to investors, filed for bankruptcy in London only weeks before Archegos’s meltdown. Credit Suisse said Thursday that it expected to return at least US$5.9 billion to investors in the Greensill funds, which had been valued at US$10 billion.

Credit Suisse, which also reported a big quarterly drop in profit on Thursday, said it would use the Archegos debacle “as a turning point for its overall approach to risk management.” The bank said that 23 employees would forfeit or be required to pay back US$70 million in bonuses, and that nine in the group would be fired.

“We are determined to learn all the right lessons and further enhance our control functions to ensure that we emerge stronger,” Mr António Horta-Osório, who took over as chairman of Credit Suisse in April, said in a statement.

The blame went beyond individual cases of negligence, according to the Paul, Weiss report. The bank’s zeal to cut costs and increase profit was also a factor, the report said.

Starting in 2015, rounds of staff cuts left senior managers at Credit Suisse “wearing so many hats, receiving so many reports and being inundated with so much data that it was difficult for them to digest all of the information and discharge their responsibilities effectively.”

Seasoned managers were replaced by junior employees. The team responsible for overseeing Archegos and other clients “struggled to handle more work with less resources and less experience,” the report said.

Archegos’ collapse came as a shock to outsiders, but the risk of doing business with the fund had been apparent for years, according to the report. In 2012, Hwang, the founder, pleaded guilty to a US charge of wire fraud while running another fund, and settled insider trading allegations with the Securities and Exchange Commission. He had also been barred in 2014 from trading in Hong Kong.

In 2015, Credit Suisse employees “shrugged off” Hwang’s history after reviewing the risk of doing business with him, the Paul, Weiss report said. In subsequent years, the bank allowed Archegos to make big bets using mostly borrowed money – moves that generated interest income and fees for Credit Suisse. In 2020, though, Archegos began chronically exceeding limits on the amount of risk it was allowed to assume.

Credit Suisse executives ignored or downplayed the breaches and other red flags because they were aware that Archegos was working with other banks. They were afraid of alienating an important client.

“No one at C.S. – not the traders, not the in-business risk managers, not the senior business executives, not the credit risk analysts and not the senior risk officers – appeared to fully appreciate the serious risks that Archegos’s portfolio posed to C.S.,” the report said. “These risks were not hidden. They were in plain sight.”

This week, Credit Suisse appointed David Wildermuth, a veteran Goldman Sachs executive, as its chief risk officer, the latest in a series of high-level management changes. Lara Warner, who served as the bank’s chief risk officer and chief compliance officer, stepped down in April.

Archegos remains a burden on Credit Suisse earnings. The bank said on Thursday that net profit in the second quarter fell nearly 80 per cent, to 253 million Swiss francs (S$377.9 million), or US$278 million. It booked an additional loss from Archegos of US$653 million in the quarter, and also absorbed an 18 per cent decline in sales, to 5.1 billion francs.