Summary List Placement
The Credit Suisse managing directors who dialed into a call last Monday afternoon with the bank’s chief executive and head of investment banking could not conceal their frustration.
CEO Thomas Gottstein and investment banking chief Brian Chin had convened the conference to take questions about how they planned to contain losses stemming from the spectacular blowup of Archegos Capital Management, one of the Swiss bank’s clients. At Archegos, a family office founded by the hedge-fund billionaire Bill Hwang, $8 billion in assets were vaporized when massive, concentrated bets held in swaps positions suddenly moved against it.
Dialed in from across the globe, the managing directors demanded to know how their bosses let the bank get so exposed to a mess that blew a multibillion-dollar hole in the balance sheet, according to a person on the call. They asked question after question in a tone that varied from pointed to aggressive: How could the bank’s executives have let this happen? Why was Credit Suisse so concentrated in one client? Why wasn’t it hedged? Who knew what, and when did they know it?
One person on the call bluntly asked if the losses would affect their bonuses, which can make up a huge proportion of managing directors’ total compensation. (Bonuses may already have been a sore subject, given the bank rewrote the structure for cash payouts in investment banking and capital markets last year.) Gottstein and Chin responded with a call for solidarity across business lines, a nonanswer that eroded their credibility, the person on the call told Insider.
By the end of the roughly 40-minute call, Gottstein’s tone turned flat and resigned, this person said. And Chin had left managing directors — the cadre of most senior dealmakers, rainmakers, and other leaders across divisions below the C-suite — with more questions than answers.
The Swiss bank had just told investors the month before that it had to freeze $10 billion of supply-chain finance funds linked to Greensill Capital over valuation concerns, a fiasco that has led the bank to reactivate a special crisis committee to oversee issues involving the now-insolvent lender, Bloomberg reported. (At least one person raised the Greensill ordeal on Monday’s call, the person on the call said.)
Archegos and Greensill followed a string of other disasters for the Swiss bank. In fall 2019, Credit Suisse found in an investigation that its chief operating officer had ordered an executive to spy on another leaving for its rival UBS. That led Credit Suisse’s CEO to resign four months later.
Over the next few months, two companies previously involved with Credit Suisse, Luckin Coffee and Wirecard, were swept up in accounting scandals, and Credit Suisse was forced to take a $450 million write down on its stake in a hedge fund.
The serial blunders point to a problem that’s bedeviled the bank for years: Credit Suisse, a core part of the Swiss economy with international businesses and an elite wealth-management clientele, can’t seem to tamp down what one Bloomberg columnist called “a capacious appetite for risk.”
Now Credit Suisse is considering replacing Lara Warner, its chief risk officer, and is also set to provide an update on top executives including investment banking chief Brian Chin, Bloomberg News reported Sunday, citing people briefed on the matter. Gottstein is expected to stay in his post, the report said. A Credit Suisse spokesperson declined to comment on the report.
Investors have taken notice of the problems. As the risk-management failures have piled up, the bank’s shares have tumbled in recent weeks.
The stock was trading around $13 on the New York Stock Exchange to start the year and was trading at just under $11 Monday morning. That’s down from its most recent peak of nearly $20 in 2018.
One of the largest Credit Suisse shareholders has spoken out against the quality of the bank’s risk controls, threatening last week to sell if problems are not resolved. And S&P Global Ratings, Fitch Ratings, and Moody’s all downgraded their outlooks on Credit Suisse to negative over risk management concerns.
Some analysts are now telling clients the bank may halt buying back its stock to preserve cash as it faces fallout from investments and relationships that went the wrong way. Other industry participants want to see investors vote against top leaders’ compensation at the firm’s annual shareholders meeting on April 30.
A Credit Suisse spokesperson declined to comment for this story.
The bank’s exposure to Archegos means it will likely post a loss for the first quarter, Daniel Regli, a senior equity-research analyst at the Swiss brokerage and research firm Octavian who views Credit Suisse shares favorably, said in a research note.
“We believe investors must not underestimate the second-order effects of these issues” on Credit Suisse, Eoin Mullany, a Berenberg analyst, said in a research note, pointing to a Financial Times report suggesting the bank’s expected loss as a result of Archegos was between $3 billion and $4 billion.
Another Credit Suisse watcher has a more pointed take.
Vincent Kaufmann, the CEO of the Swiss proxy advisor Ethos, wants to know why and how the bank became so involved in the Greensill and Archegos messes.
“Is it failure of risk management? Is it just bad luck? What is it?” he said in an interview with Insider. “It starts to be a lot.”
The biggest margin call in history?
Credit Suisse was not the only firm involved with Archegos, which quickly showed failures in risk management across Wall Street. The triggering event was not a pandemic or natural disaster but something far less threatening: ViacomCBS had decided to raise capital.
A domino effect led to a $35 billion sell-off — what may be the biggest margin call in history — thanks to extreme leverage and opaque derivatives. The stock fell after analysts downgraded it on the news of the stock offering and other factors. Hwang had exposure to the stock through opaque derivatives that concealed the extent of his and his prime brokers’ exposure.
Credit Suisse was not the only bank to lend to Hwang, the billionaire protégé of Tiger Management founder Julian Robertson whose hedge fund Tiger Asia pleaded guilty to insider trading less than a decade ago. Goldman Sachs, Morgan Stanley, Wells Fargo, Deutsche Bank, Nomura, and UBS were all confirmed lenders to Archegos.
But Credit Suisse, Bloomberg reported, was the one that organized a call with other banks and Hwang to come to temporary standstill on unloading the positions to avoid market panic. Other lenders ultimately ignored the plea, leaving Credit Suisse and the investment bank Nomura to bear the brunt of the sell-off.
The spectacular fall of Greensill Capital just weeks before was nearly as swift and punishing in its ripple effects.
Greensill, the London firm started by Lex Greensill, had been a prominent player in the supply-chain-financing arena, effectively acting as a middleman for companies looking to secure cash to pay their suppliers on time without having to use their own working capital.
CS put client funds it had marketed as low risk into debt linked to the now-insolvent supply chain funder. Now CS is trying to recoup some of the money but faces difficulties because of the funds’ complex structure.
Credit Suisse overhauled its asset management division’s leadership and suspended senior bonuses over the mess.
Credit Suisse said in its annual report last month that its “priority remains the recovery of funds” for investors and that it was working to facilitate the recovery.
Victor Meyer, the chief operating officer for the risk-intelligence firm Supply Wisdom, told Insider that broadly speaking, senior managers at firms didn’t spend enough time practicing how they would respond to calamities like Greensill and Archegos.
“It’s not illegal to run highly leveraged positions. It’s just not good risk management,” said Meyer, who previously held senior leadership roles at Deutsche Bank for more than a decade, including group head of operational risk and its group anti-fraud unit.
“The larger the positions and the more complex the exposures, the harder it is to unwind in an elegant way,” he said.
Turmoil at the top
Credit Suisse’s more recent problems were all the more disappointing for its investors, who had pinned their hopes on the previous CEO, Tidjane Thiam, to shepherd the bank back to profitability after years of decline in the wake of the Great Recession.
Thiam was tapped to lead Credit Suisse in March 2015. While the Ivorian banker, the lone Black CEO of a major investment bank, was loved abroad and retained the support of many Credit Suisse shareholders, he struggled to earn backing in Switzerland and within his company, where many regarded him as an outsider, Finews reported in 2018.
Still, even critics had to concede that Thiam had improved some things by the end of 2019.
The bank had wrapped up a massive restructuring in 2018 that eliminated thousands of jobs and got rid of some risky investment activities. Its net revenue attributed to shareholders jumped 69% compared with 2018, and Credit Suisse Chairman Urs Rohner expressed optimism about the bank’s future.
But behind the scenes, scandal was unfolding.
When a former Credit Suisse banker was tailed by private investigators after accepting a job at UBS, an internal investigation blamed Chief Operating Officer Pierre-Olivier Bouée, who resigned.
Though Thiam was cleared of any wrongdoing, his reputation suffered, and he resigned in February 2020.
Trouble followed quickly for Gottstein, the 20-year Credit Suisse veteran who took over as CEO after Thiam’s departure. Just two months after he took the helm, a Chinese company called Luckin Coffee — whose public offering the bank led the year prior — told investors its books were cooked.
Thiam had once called Luckin, co-founded by the Chinese billionaire Lu Zhengyao, a “dream client.” Credit Suisse was the lead underwriter in Luckin’s May 2019 initial public offering, which raised $561 million, and helped Zhengyao and Luckin on other deals and financings over the years.
The bank maintained close ties with Luckin throughout the relationship: The company’s chief financial officer had been a Hong Kong analyst and investment banker at the bank, and Zhengyao’s daughter worked for the bank in Hong Kong, Bloomberg reported last year in April.
But the dream client eventually turned out to be a nightmare. When Luckin said in April 2020 that many of its sales — up to $310 million — had been faked by senior executives, the stock plunged overnight. The company soon delisted from Nasdaq, and it filed for bankruptcy protection in February.
In June, Credit Suisse found itself in the headlines yet again, this time over its ties to the scandal-racked German fintech company Wirecard. The bank facilitated SoftBank Investment Advisers’ $1 billion convertible-bond investment into the company — a vote of confidence that proved disastrous after Wirecard said in June that it was missing $2 billion in cash that likely didn’t exist.
SoftBank ate the losses, Wirecard went bust days later, the fintech’s CEO was arrested, and Credit Suisse was left to deal with yet another stain on its reputation.
Just a few months later, in November, Credit Suisse said it had to take a $450 million write-down on its noncontrolling stake in the hedge-fund manager York Capital, which was founded by the billionaire Jamie Dinan in 1991.
Credit Suisse had paid $425 million for a 30% stake in York in 2010.
A ‘wake-up call’
The troubles engulfing Credit Suisse in many cases boil down to an existential issue for financial services: how seriously firms take corporate governance at each level.
Jim Finch, clinical associate professor of finance at New York University’s Leonard N. Stern School of Business and the former head of US loan capital markets at Credit Suisse, said there is intense pressure on risk committees tasked with overseeing deals involving clients of the bank across business lines — for instance, a wealthy private banking client who is also serviced by the investment bank — and to set risk parameters.
“There needs to be a review of their whole risk management system, especially as it relates to cross-business risks and risk concentrations with clients using products from various divisions of the firm,” he told Insider.
For now, Credit Suisse is still figuring out how large the fallout is going to be from Archegos and Greensill — and how much it is going to be able to recoup.
While the hit from its exposure to Archegos can be tabulated once those positions are unwound, the fallout from Greensill “is much more ‘qualitative’ in nature and less quantifiable short term,” Octavian’s Regli told Insider in an email.
David Herro, the chief investment officer of Harris Associates, one of the bank’s largest shareholders, said this week that he hadn’t given up on Credit Suisse yet — but that he needed to see sweeping changes for the relationship to continue.
Herro said he hoped the fallout from the Archegos crisis would be a necessary “wake-up call” to root out cultural issues at the bank and on its management team. He expressed support for Gottstein and incoming Chairman António Horta-Osório, who will replace Rohner this year.
Rohner’s departure is an important first step to break free from “the people who are responsible for accepting a culture that doesn’t balance risk and return,” Herro said. But Credit Suisse is far from out of the woods.”What you have to see is an inability to repair the organization,” he said on Bloomberg Television Wednesday. “If we believe that the management team we are invested with are not capable of producing value in the future, then we will sell the stock.”
Originally published at https://www.businessinsider.com/credit-suisse-archegos-greensill-viacom-thomas-gottstein-brian-chin-bill-hwang on .