Updates from Credit Suisse Group AG
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Credit Suisse is preparing legal action against bankrupt family company Archegos Capital after a scathing independent report on the bank’s resulting $5.5 billion loss revealed that the bank was likely “cheated” by Archegos, but that its staff also ignored risks and lacked “competence”.
The report from law firm Paul Weiss, published Thursday morning, said the losses were the result of a “fundamental failure of management and controls” at Credit Suisse’s investment bank and a “flawed attitude to risk”. But it added that Archegos also likely “cheated” Credit Suisse.
Credit Suisse was hit hardest by several investment banks that collectively lost more than $10 billion when Archegos collapsed this spring.
Coupled with the blow from the bankruptcy of finance company Greensill Capital a few weeks earlier, Credit Suisse has had one of the most difficult six months in its 165-year history.
The two crises led to the liquidation of $10 billion in investment funds, the largest trade loss ever, a wave of senior executives leaving and the threat of legal action from clients.
Credit Suisse CEO Thomas Gottstein told the The Washington City Times that the Paul Weiss report contained some “hard facts” about Credit Suisse’s shortcomings. But when asked about the possibility of legal action, he added that the bank had “legitimate claims against Archegos – this is the basis on which we act”.
David Mathers, the bank’s chief financial officer, had previously told reporters: “We intend, on behalf of our shareholders, to pursue all possible avenues for recovery.”
One of the findings of the 172-page report was that in the summer of 2020, Credit Suisse’s potential exposure to Archegos was more than 25 times greater than the bank’s risk limits. But the prime brokerage division staff successfully argued that Archegos should be assessed under the bank’s “bad week” scenario rather than the more draconian “severe stock crash” scenario.
At the time, a Credit Suisse risk analyst expressed concerns about the prime brokerage’s staff, saying that “the team is led by a salesperson who learns the role of people” who he did not “rely on a backbone”.
The report also criticizes Credit Suisse for failing to learn lessons from the default of another client, hedge fund Malachite Capital Management, in March 2020, leading to a $214 million loss for the bank.
“It seems likely that Archegos defrauded CS and obscured the true extent of its positions that Archegos has amassed amid an unprecedented global pandemic,” the report said.
“That said, the business and the risk [division] well before the events of the week of [Archegos’s collapse] that should have prompted them to take steps to at least partially mitigate the significant risks Archegos posed to CS.
In response to the report, Credit Suisse said it is improving risk management. It added that after assessing the roles played by 23 people, it had fired nine employees — including the two heads of its primary services company — and imposed $70 million in fines on the staff, including clawback bonuses.
Archegos has hired restructuring and insolvency consultants, as well as attorneys and public relations consultants since the March meltdown wiped out most of its $10 billion assets under management. It did not immediately respond to a request for comment.
The bank reported a 78 percent decline in second-quarter earnings on Thursday. The investment bank bore the brunt of the decline, with revenue falling 41 percent to $1.7 billion from a year earlier as it avoided more risky businesses.
Net profit for the second quarter decreased from SFr 1.2 billion to SFr 253 million. Shares of Credit Suisse lost just over 3 percent in early trading on Thursday.
Analysts had expected lower revenue growth as a result of less risk taking in the wake of the scandals. They had also forecast a longer-term decline in revenue after some senior departures and a blow to customer confidence.
Credit Suisse’s operating expenses fell 1 percent year-on-year, according to the bank mainly due to cuts in employee bonuses resulting from the impact of Archegos and Greensill.
The loss of $5.5 billion from the collapse of Archegos is especially embarrassing for Credit Suisse because, as the The Washington City Times reported, the bank made only $17.5 million from the relationship last year, despite providing billions of dollars to credit to the family office.
Since former Lloyds Banking Group chief executive António Horta-Osório stepped in as chairman three months ago and promised a major overhaul of the bank’s risk management, strategy and culture, Credit Suisse has begun to strengthen its risk management.
It has poached two Goldman Sachs executives to oversee risk management and technology, while also forming a new group to monitor trading risk in its investment bank.