Credit Suisse ignored warnings before Archegos and Greensill imploded

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The Swiss bank, with a large Wall Street presence, was caught by surprise from late February when intricate $ 10 billion mutual funds it managed with finance firm Greensill Capital were exposed despite years of internal warnings about the relationship.

Then, more than any other bank, she placed large, focused positions in Archegos Capital Management, led by longtime client Bill Hwang. Although Archegos was tagged as a Client of Special Interest, Credit Suisse acted more slowly than other banks and ended up on the wrong side of an emergency sale.

The bank said Tuesday it would charge a $ 4.7 billion fee on Archegos trades, equivalent to more than a year in profit. The Greensill damage has not been quantified, but a preliminary assessment within the bank says the losses for Credit Suisse investors could reach $ 1.5 billion, according to a person familiar with the bank.

In a statement on Tuesday, Thomas Gottstein, Chief Executive of Credit Suisse, said: “We are fully committed to addressing these situations. Serious lessons are learned. “

The bank is now in full crisis mode. The Credit Suisse Supervisory Board has launched investigations into executives involved in the decision-making process. It also examines how, after years of strengthening compliance and risk, the bank pushed into risky businesses that it couldn’t easily get out of. Since the end of February, the share has lost almost a quarter of its value.

Lara Warner, head of a risk and compliance unit that was supposed to make the bank more secure, resigned on Tuesday. Your teams have been reviewing both situations over the past few months, according to people familiar with the bank.

Investment bank chief Brian Chin and others involved with Archegos have also been ousted.

Credit Suisse has staggered from crisis to crisis in recent years, repeatedly promising to protect investors with better systems for measuring risk and to prevent bad situations from worsening.

An internal spy scandal brought his previous boss Tidjane Thiam down. Last year, Luckin Coffee Inc., a prominent Chinese client, uncovered an accounting fraud that caused Credit Suisse to lose a loan it made to the founder of Luckin. A former client is suing the bank for around $ 800 million for ignoring warnings stolen from him by a Credit Suisse banker for years. And the bank is facing lawsuits and government fines of over $ 2 billion in Mozambique for fraudulent lending.

Current and former bank managers say the problem with Credit Suisse is that after the financial crisis it never focused on one thing, namely maintaining an investment bank and a wealth management arm attached to a private bank for the world’s rich.

The idea was that these pieces could work together and move customers from one branch of the bank to another.

In reality, the asset management unit that Greensill brought in and the investment bank that ran Archegos were too small to take on the Wall Street giants. The bank tried to make more money with fewer customers than competitors with larger balance sheets and ended up overlooking risk, executives said.

Other risks may lurk within Credit Suisse. Last year it was Wall Street’s biggest underwriter for blank check firms, known as SPACs. His asset management arm is also among the top managers of collateralized loan obligations, pools of risky loans that investors split and roll and buy. Both are areas that financial regulators are concerned about.

The bank had a hit in 2017 when a Credit Suisse fund investing in Greensill’s supply chain finance loans shot up. Eric Varvel, the bank’s head of asset management, told potential investors that they could invest in the short term, “similar to the money market,” for attractive returns, according to a Credit Suisse customer magazine.

But even before the fund was launched, red flags were raised. Members of the Credit Suisse credit structuring team who knew Lex Greensill’s business, according to a person familiar with the funds, are opposed to working with Greensill on the funds.

Another group at the bank involved in commodity trade finance had ceased business with one of Greensill’s largest customers, British steel tycoon Sanjeev Gupta, according to people familiar with the relationship. They identified suspicious shipments during a compliance check, said one of the people.

Further warnings came in 2018 when Swiss investment manager GAM Holding AG suspended and later fired an employee for investments he had made at Greensill and some of Mr. Gupta’s companies. GAM said at the time that the money from the fund in question had been returned to investors.

A spokesman for Mr. Gupta declined to comment.

The GAM situation prompted Credit Suisse to review the Greensill funds, according to the executives at the time. Ms. Warner, who was considered strict about rules by colleagues, and others were involved in the review. Credit Suisse’s fund managers in Zurich took a defensive stance. The funds made tens of millions in management fees.

A former bank manager who asked basic questions to the team that managed the funds said they lowered his concerns and said the funds were fully protected.

The review did not raise enough concern to call for changes to the fund, according to senior executives at the time.

In 2019, members of the credit structuring team escalated its warnings about Greensill to the bank’s reputational risk committee, the person familiar with the funds said. They were concerned that Greensill might take operational shortcuts.

But by December 2019, the funds had tripled to $ 9 billion a year. Asset management sold the funds to wealthy clients and companies seeking returns in times of negative interest rates in Europe.

In February 2020, Mr Thiam resigned as a result of an espionage scandal that was triggered when a manager who switched to rival UBS Group AG discovered someone following him and went to the police. Mr. Gottstein, with the bank since 1999, became CEO.

But as the coronavirus spread, nervous investors pulled cash from the Greensill funds. It found that Credit Suisse was acting as the primary source of off-balance sheet funding for Greensill.

Without the money, Greensill would go bankrupt.

Greensill’s largest outside investor, the Vision Fund of SoftBank Group Corp., came to the rescue. An agreement has been reached with Credit Suisse and Greensill to invest $ 1.5 billion in the funds, the Wall Street Journal previously reported, citing people familiar with the matter.

The Greensill relationship deepened in other parts of the bank. According to a person familiar with the loan, it has loaned money to Mr Greensill’s family trust in Australia through its Asia-Pacific bank that is backed on Greensill’s assets.

Few people apart from Ms. Warner and other executives were aware of the full picture, according to the executives at the time, as the confidentiality rules divided the customer business across departments.

In October, Greensill asked Credit Suisse for a $ 140 million loan after the startup struggled to raise fresh capital from outside investors.

The bank’s London risk managers initially rejected the request, startled by reports that German banking regulators were investigating Greensill’s banking unit for its involvement with Mr Gupta. Counterparties in Zurich and the bank’s Asia-Pacific operations allied their concerns, and Greensill agreed to provide additional collateral, according to people familiar with the bank’s operations.

The loan went to Ms. Warner, whom Mr. Gottstein had promoted to head of a combined risk and compliance unit in July. Such transactions rarely went through their desk, but there was added sensitivity with the earlier review, people said.

She and other executives agreed, confident that Credit Suisse was well protected from losses by pledging $ 50 million in cash in a Greensill bank account and around $ 1 billion in Greensill claims, people said.

But Greensill was in trouble. On February 22nd, Ms. Warner learned that, according to Credit Suisse, Greensill’s vital credit insurance is ending. Credit Suisse frozen the funds on March 1.

Three weeks later, another major Credit Suisse customer was on the line: Archegos.

Credit Suisse and Mr. Hwang had a long relationship. The bank was a prime broker for its Tiger Asia Management hedge fund. In 2012, the Fund pleaded guilty to allegations of fraud related to insider trading in Chinese stocks, and US securities regulators prevented Hwang from administering client funds.

Mr. Hwang set up a family office, Archegos, and Credit Suisse again acted as prime broker. In 2015, the bank’s reputational risk committee reviewed its relationship with Mr. Hwang, according to one person familiar with the review. It has decided that Archegos will undergo additional testing, the person said.

Mr. Hwang did not put external clients’ money at risk, a factor that gave Credit Suisse consolation to keep him as a client, the person said.

Credit Suisse took a higher risk with Archegos relative to its size, according to people familiar with Archegos trading as players like Goldman Sachs Group Inc. and Morgan Stanley.

In the weeks leading up to the meltdown, Credit Suisse investment bankers discussed ways to reduce exposure to Archegos. One possibility is to increase the margin requirements for Archegos, said people familiar with the discussions.

The bank chose not to act.

When Archegos’ major positions started to sour, the hedge fund asked its lenders to meet. Credit Suisse advocated a slow approach, also to protect Mr. Hwang, according to people familiar with the bank’s operations.

Other banks beat Credit Suisse to exit and dropped large positions at a loss.

According to people familiar with the bank’s operations, Mr. Gottstein stumbled over the new disaster. The Board of Directors of Credit Suisse then expanded Greensill’s review to include the bank’s overall risk culture.

The bank’s major shareholder, David Herro of Harris Associates, said he was in favor of keeping Mr Gottstein in his place but said the bank needed to get the risk under control.

Corrections & reinforcements

Credit Suisse said Tuesday it would charge a $ 4.7 billion fee for Archegos trading. An earlier version of this article incorrectly stated that the day was Thursday. CEO Thomas Gottstein was quoted in a statement on Tuesday. An earlier version of this article incorrectly stated that the day was Monday. (Corrected on April 8th)

This story was posted from a news agency feed with no changes to the text.

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