The report by law firm Paul Weiss, which was released Thursday morning, said the losses were the result of a “fundamental failure of management and controls” by Credit Suisse’s investment bank and a “lax attitude towards risk”. But he added that Archegos had also probably “cheated” Credit Suisse.
Credit Suisse was the hardest hit of several investment banks that collectively lost more than $ 10 billion when Archegos collapsed this spring.
Combined with the blow of the bankruptcy of financial firm Greensill Capital a few weeks earlier, Credit Suisse has experienced one of the most difficult six months in its 165-year history.
The two crises resulted in the liquidation of $ 10 billion in investment funds, its biggest ever business loss, a wave of senior executive departures and the threat of legal action from clients.
Credit Suisse chief executive Thomas Gottstein told the FT that Paul Weiss’ report contained “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, previously told reporters: “We intend, on behalf of our shareholders, to pursue all potential avenues of recovery.
One of the conclusions of the 172-page report was that in the summer of 2020, Credit Suisse’s potential exposure to Archegos was more than 25 times the bank’s risk limits. Still, staff in the senior brokerage division have successfully argued that Archegos should be assessed under the bank’s “bad week” scenario rather than the more draconian “severe stock market crash” scenario.
At the time, a Credit Suisse risk analyst raised concerns with his supervisor about senior brokerage staff, saying that “the team is led by a salesperson learning the role of people” in whom he is not. ‘was’ not confident to have a backbone’.
The report also criticizes Credit Suisse for failing to learn from the failure of another client, hedge fund Malachite Capital Management, in March 2020, which resulted in losses of $ 214 million for the bank.
“It seems likely that Archegos has deceived CS and obscured the true extent of his positions, which Archegos amassed amid an unprecedented global pandemic,” the report said.
“That said, the business and the risk [division] had ample information long before the events of the week of [Archegos’s collapse] this 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 was improving risk management. He added that after looking at the roles played by 23 people, he laid off nine staff – including the two heads of his main service business – and imposed $ 70 million in penalties on staff, including clawbacks. bonuses.
Archegos has hired restructuring and insolvency advisers, as well as lawyers and public relations advisers since the March collapse wiped out most of its $ 10 billion in assets under management. He did not immediately respond to a request for comment.
The bank on Thursday announced a 78% drop in profits for the second quarter. Its investment bank suffered the brunt of the decline, with revenues down 41% to $ 1.7 billion from a year earlier as it avoided riskier activities.
Second quarter net profit fell from 1.2 billion Swiss francs to 253 million Swiss francs. Credit Suisse shares lost just over 3% at the start of the session on Thursday.
Analysts had expected revenue growth to decline, due to less risk-taking in response to the scandals. They had also predicted a longer-term drop in earnings after a number of senior executive departures and a blow to customer confidence.
Credit Suisse operating expenses fell 1% year-on-year, which the bank said was mainly due to reductions in staff bonuses following the fallout from Archegos and Greensill.
The loss of $ 5.5 billion from the collapse of Archegos is particularly embarrassing for Credit Suisse because, as reported by the FT, the bank only earned $ 17.5 million from the relationship last year, despite granting billions of dollars in credit to the family office.
Since former Lloyds Banking Group CEO António Horta-Osório joined the presidency three months ago promising a comprehensive review of the bank’s risk management, strategy and culture, Credit Suisse has started to strengthen its risk management.
He recruited two executives from Goldman Sachs to oversee risk management and technology, while forming a new group to monitor trading risks at his investment bank.