Credit Suisse Report Details Failings in Archegos Debacle
Credit Suisse released a report on Thursday that dissected in great detail the “fundamental failure of management and controls” that led the bank to lose $ 5.5 billion from its business with investment fund Archegos Capital Management earlier this year.
But investigators at the New York law firm hired to perform the autopsy attributed the losses to incompetence and fear of alienating a large client, and said none of the bank’s employees ” did not engage in fraudulent or illegal behavior or act with bad intentions “.
Credit Suisse, which also reported a sharp drop in profits on Thursday, said it would use the Archegos debacle “as a turning point for its holistic approach to risk management.” The bank said 23 employees would lose or be required to repay $ 70 million in bonuses, and nine group members would be made redundant.
Archegos collapsed in March after its stock market bets, funded with money borrowed from Credit Suisse and other banks, deteriorated. Credit Suisse was slower than Goldman Sachs and other creditors to liquidate Archegos’ positions and suffered the biggest losses.
But the risk of doing business with Archegos had been apparent for years, according to the 165-page report released on Thursday. In 2012, its founder, Bill Hwang, while running another fund, pleaded guilty to a US wire fraud charge and settled the insider trading allegations with the Securities and Exchange Commission, according to the law firm report Paul, Weiss, Rifkind, Wharton. & Garrison. It was also banned in 2014 from trading in Hong Kong.
In 2015, Credit Suisse employees “ignored” Mr. Hwang’s story after considering the risk of doing business with him, according to the Paul, Weiss report. Over the following years, the bank allowed Archegos to make big bets using mostly borrowed money, and took no action as the fund chronically exceeded the limits for the amount of risk it was allowed to take. to assume.
Credit Suisse executives ignored many red flags because they knew Archegos was working with other banks and feared alienating an important client. When Credit Suisse risk managers suggested in February that Archegos be required to pay an additional $ 1 billion in cash to reduce its leverage, those charged with working with the fund said it would be “roughly ask them to move their business “, according to the report.
“The Archegos case directly calls into question the competence of the sales and risk management staff who had all the information necessary to assess the scale and urgency of Archegos risks, but repeatedly failed to take decisive and urgent measures to deal with it, ”he added. Paul’s report, Weiss said.
This week, Credit Suisse appointed David Wildermuth, a veteran Goldman Sachs executive, as chief risk officer, the latest in a series of high-level management changes. Mr Wildermut succeeds Lara Warner, who resigned in April.
Archegos continues to weigh on Credit Suisse earnings. The bank said Thursday that second-quarter net profit fell nearly 80% to 253 million Swiss francs, or $ 278 million. The bank recorded an additional loss from Archegos of $ 653 million in the quarter, and also absorbed an 18% drop in sales, to 5.1 billion francs.
Credit Suisse also updated its progress in clawing back $ 10 billion that investors had invested in funds organized by bankrupt company Greensill Capital. Credit Suisse, which markets so-called supply chain finance funds, said it would return at least $ 5.9 billion to investors, including a payment slated for August.
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