The paltry fees Credit Suisse received from Archegos, whose implosion was one of the most devastating in recent history, raise further questions about the risks the lender was prepared to assume in the pursuit of relationships with ultra-rich clients.
Archegos, which was headed by former hedge fund manager Bill Hwang, has borrowed tens of billions of dollars from at least nine global banks to speculate in volatile stocks. Lenders collectively lost more than $ 10 billion in fallout.
Despite granting billions of dollars in credit to Archegos, Credit Suisse only drew $ 17.5 million from the relationship last year. The low fee level and high risk exposure have raised concerns among the board and senior executives, who are investigating the arrangement, according to two people familiar with the process.
The bank’s management is particularly alarmed after learning that Hwang was not a client of the group’s private bank, which suggests that there was little incentive to continue his prime brokerage business, the officials said. people.
Credit Suisse also demanded a margin of just 10% for the equity swaps it traded with Archegos and allowed the family office to increase leverage on certain transactions by 10, according to people familiar with the transactions. and first reported by Risk.net. This was roughly double the leverage offered by its blue chip colleague Goldman Sachs, who suffered minimal losses when unwinding his positions.
Credit Suisse had to raise $ 1.9 billion from shareholders to consolidate its balance sheet because of the losses, while staff bonuses were cut.
António Horta-Osório was confirmed as the new chairman of Credit Suisse on Friday and promised an urgent review of the bank’s risk management, strategy and culture.
“The current and potential risks of Credit Suisse must be given immediate and careful consideration,” said the former managing director of Lloyds Banking Group. “I firmly believe that every banker should be a risk manager at heart.”
Credit Suisse’s board of directors had previously removed several senior executives, including chief risk and compliance officer Lara Warner and chief investment banker Brian Chin. Andreas Gottschling, who headed the board’s risk committee, was forced to resign last week pending a reaction from shareholders.
Thomas Gottstein, chief executive of the bank, also announced that he would reduce by a third his exposure in his blue-chip services business, the unit specialized in serving clients of hedge funds and which was at the center of the crisis. d’Archegos. The two heads of the main division also resigned.
Credit Suisse does not disclose the amount of revenue generated by its blue chip services division, but JPMorgan analyst Kian Abouhossein estimates that the unit made $ 900 million in revenue last year, somewhat more than a third of the total of its equity activities.
Abouhossein said prime brokerage generates larger profit margins than other parts of investment banking. “We see the withdrawal as a significant setback for the overall long-term viability of Credit Suisse’s investment bank,” he added.
While Credit Suisse is Europe’s largest premium service provider, it lags significantly behind global leaders Goldman Sachs, Morgan Stanley and JPMorgan.
The largest investment banks generated $ 15.2 billion in blue chip brokerage income last year, slightly less than the $ 16.5 billion they made in 2019, while hedge funds reduced their borrowing during the pandemic, according to Coalition Greenwich, the data company. European banks accounted for less than a third of revenue.
Credit Suisse declined to comment.