In mid-March, shares in ViacomCBS Inc. and
rocketed skyward. That was great news for
His firm, Archegos Capital Management, had borrowed billions from
to make wagers on a handful of stocks, including the entertainment companies.
As is standard practice, Archegos had handed over cash to Credit Suisse to secure its bets. With the stocks more than doubling since the start of the year, Archegos asked for some of that money back, and it was credited, according to people familiar with the matter.
The transfer essentially meant Archegos had even less cash on the line backing up its positions. Some of Credit Suisse’s rivals, meanwhile, moved in the opposite direction. They noticed an increasing risk in the concentration of the firm’s positions and demanded it back up its investments with additional cash, according to executives at the banks.
Days later, ViacomCBS plunged, Archegos collapsed and the Swiss bank was stuck with a colossal loss.
Now Credit Suisse is picking over what went so badly wrong. The central questions include, why did it give the money back to Archegos? And more broadly, why did it back risky bets to a level that went wildly beyond all its stated norms and projections? Bank executives had even received a stark warning a year earlier on how the bank was handling risk—but the recommended changes hadn’t been made.
A preliminary conclusion is emerging: Credit Suisse’s creaky risk-management systems didn’t do their job as the bank’s guardrails and left it highly exposed to human errors in judgment, according to current and former people at the bank.
Trading data reviewed by risk managers in the lead-up to Archegos’s March failure was out of date. Credit Suisse’s staff didn’t quickly analyze its growing exposure to single stocks.
An internal audit in April 2020—made after the bank earlier had a loss of about $200 million from a hedge fund’s collapse—identified key problems that would come into play in the Archegos failure. But the bank was slow to roll out the planned improvements.
When employees flagged risks, they didn’t communicate them to higher ups. Contributing to the breakdown in risk controls was a key personnel change in the bank’s prime brokerage unit, which handled the Archegos account, after the death of an experienced manager in a ski-lift accident, people familiar with the matter said.
“The events that led to the losses in the Archegos case which we disclosed in our Q1 results are the subject of a Board level investigation which is looking into all these issues thoroughly,” a Credit Suisse spokesman said in an emailed statement. “We are committed to report the conclusions of that investigation (including the lessons learned).”
A spokesman for Archegos and Mr. Hwang declined to comment.
Credit Suisse amassed more than $20 billion of exposure to investments related to Archegos, equivalent to half the bank’s equity cushion against potential losses, The Wall Street Journal has previously reported. Yet the bank at one point made Archegos hold just a 10th of that amount to back up its bets and protect the bank in case its investments soured, according to a person familiar with the matter.
Taking on such a huge risk appears to have been for only a modest reward. Archegos, which managed the fortune Mr. Hwang made as a hedge-fund manager, produced for Credit Suisse revenue only in the tens of millions of dollars over several years, according to people familiar with the matter.
The collapse of Archegos, piled on top of the insolvency of another key Credit Suisse client, Greensill Capital, has plunged the bank into crisis. Credit Suisse took a $5.5 billion loss on Archegos, the largest related to that firm’s collapse on Wall Street.
It ousted its chief risk officer, investment bank head and others, and turned to investors for $2 billion in fresh capital to shore up the bank’s balance sheet. The Swiss regulator, Finma, said it opened civil enforcement proceedings against Credit Suisse. Regulators in the U.S. and the U.K. are probing the losses from Archegos at multiple banks, the Journal previously reported.
Another Credit Suisse spokesman pointed to comments on April 30 by its new chairman, veteran banker António Horta-Osório, that the bank needs to foster a culture around risk management and personal accountability. The bank said it would have “close engagement with Finma and all relevant regulators” over the matter.
Just over a year before Archegos’s collapse, Credit Suisse Chief Executive
presented the bank’s best results in nine years, then said farewell to colleagues at its Zurich headquarters. The bank’s board had ousted him after a lieutenant ordered a spying operation on a Credit Suisse executive leaving for a rival. Mr. Thiam has denied knowledge of the spying.
Mr. Thiam, a former insurance executive, had undertaken a five-year cleanup job that tamed risks in Credit Suisse’s volatile investment-banking arm, while piling resources into the steadier business of wealth management, helping rich people with their money. Mr. Thiam had been hired after Credit Suisse paid $2.6 billion and pleaded guilty in a settlement with U.S. authorities in 2014 for helping wealthy Americans evade tax.
In the overhaul, Mr. Thiam kept the bank’s prime brokerage business, which lends money to hedge funds and other big investors, because it supported a bigger equities business. That was seen as crucial, because rich clients needed access to stock markets for investments and to raise money for their own companies via Credit Suisse.
But Mr. Thiam said the unit should be more disciplined on risk-taking and focus on fewer clients. His team scaled back other parts of Credit Suisse’s investment bank, and dozens of senior people left. Less experienced colleagues frequently took their places, in a “juniorization” that former executives and investors who worked with Credit Suisse said left it more vulnerable to mishaps.
On the same February 2020 day that Mr. Thiam left the bank, Jason Varnish, a top risk manager in Credit Suisse’s prime brokerage, boarded a ski lift at Vail Ski Resort in Colorado. His coat became entangled, and the 46-year-old father of three was killed.
In a memo to staff at the time, the bank said Mr. Varnish “successfully struck the right balance between being commercially minded with clients while maintaining risk discipline for the bank.”
As at other banks, risk management had grown into an extensive operation inside Credit Suisse in recent years. The function gained stature and power after banks took large losses from complex trades during the financial crisis.
Risk management monitors the bank’s operations, seeking to avoid financial and reputational problems. Computer programs abide by rules and processes that are wired into the bank’s technology and must be followed by staff. In addition, at every level, the bank relies on human judgment.
Credit and reputational risk committees vet clients and transactions, and the bank puts limits on how much could be lost from a single client or counterparty. Bank executives, the board and board committees are in charge of the system and making sure it works, with assistance from internal-audit and credit-risk-review departments.
Regulators also play a role in assessing banks’ risk models, which draw on data, assumptions and scenarios to calculate expected outcomes. In 2019, the Federal Reserve said it found weaknesses in how Credit Suisse projected trading losses in an annual stress test and gave it four months to fix them.
The systems were tested when the spreading coronavirus pandemic spooked financial markets. In the volatility, Credit Suisse’s prime brokerage had a loss of about $200 million closing out investments for a flailing hedge fund, Malachite Capital, in March 2020, people familiar with the matter said.
then head of Credit Suisse’s markets business, oversaw the prime brokerage. An internal audit probed the loss, the size of which shocked some bank executives, the people said.
The audit flagged two failures, according to people familiar with the matter. The first was a lack of drilling down by the bank on Malachite’s trading strategy and how it would fare in volatile markets. The second was the use of an outdated margining system, which didn’t effectively monitor in real time how much risk a position created for the bank as the prices of the underlying securities changed.
Its recommendations included focusing on similar weak points with other clients, including those with high gross exposures through equity derivatives, which are based on the stock-price movements of the underlying asset, the people said. Plans were made to work on “process improvements” over two years, they said.
One effort was to move such trades to a more sophisticated “dynamic margining” system that would draw on additional real-time factors beyond price, such as volatility and concentration risk, according to the people. But changes weren’t in place for Archegos by the time it collapsed.
To fill Mr. Varnish’s senior risk-manager role in the turbulent markets, the bank turned to
a New York-based salesman in the prime brokerage unit. He had two decades of experience at the bank, carving a niche in financial derivatives that let hedge funds amp up stock bets with borrowed money.
His clients included Archegos, a heavy user of a derivative called a total-return swap, according to people familiar with the matter. The swaps let Archegos post a small amount of collateral to take large stock positions without owning the underlying securities.
Mr. Shah referred a request for comment to Credit Suisse, which declined to comment on his role. He didn’t respond to another request for comment.
Even with the Malachite stumble, Credit Suisse reported its best first-half net profit in a decade last July, mainly from resurgent markets and investment banking.
The new CEO,
who took over from Mr. Thiam in February 2020, said it was the right time to “capture growth opportunities.” His words were seen as a signal for the bank to capitalize on the market’s dizzying rally coming out of the pandemic, according to Credit Suisse executives. The Credit Suisse spokesman said Mr. Gottstein declined to comment.
Mr. Gottstein, who had previously headed Credit Suisse’s domestic unit catering to the rich, promoted Mr. Chin to run the investment bank and gave
Credit Suisse’s chief risk officer, a bigger role overseeing risk and compliance.
The Archegos portfolio rode hot markets, too. The fund’s positions at Credit Suisse dramatically multiplied from summer last year until March 2021, according to people familiar with the matter.
In September, Mr. Shah, who had been on the job for about six months, flagged the growing Archegos exposure to the investment bank’s counterparty-credit-risk team, one of the people familiar with the matter said. It couldn’t be determined if the specialist team, meant to monitor the health of Credit Suisse’s clients, reacted. The matter wasn’t escalated further by Mr. Shah or the counterparty-credit-risk team within the investment bank or to group-level managers, people familiar with the matter said.
Mr. Shah received regular reports indicating growing risks in the Archegos positions, the people said. The executive didn’t adequately flag these reports to senior personnel, they said.
In a total-return swap, a bank receives fees and owns the stock. Credit Suisse became one of the largest holders in some of Archegos’s stocks, according to the bank’s filings to the Securities and Exchange Commission. By the end of 2020, it owned about 6.5% of ViacomCBS’s Class B shares, according to FactSet.
But the bank’s tracking of the shareholdings had a lag, people familiar with the matter said, and the significance of the growing positions wasn’t picked up on, the Journal previously reported.
By mid-March, Credit Suisse’s notional exposure, or the value of the stocks underpinning the Archegos positions, was above $20 billion. Some inside the bank thought the exposure was only a fraction of that figure, in part because of the lagging tracking system, the Journal previously reported.
Mr. Gottstein and Ms. Warner, the chief risk officer, became aware of the bank’s exposure to Archegos in the days leading up to the forced liquidation of the fund, and neither had been aware of the fund as a major client before that, the Journal previously reported.
Days before Archegos blew up, ViacomCBS and Discovery stocks hit new highs. Around the middle of March, Credit Suisse released margin payments back to the fund, the people said.
Returning collateral might be a normal thing to do for a client with a diverse portfolio of holdings that had risen in value. But in the Archegos case, it was a problem because most of what it held was in a handful of stocks. This created special risks since any one stock falling could torpedo the firm.
Archegos also was making highly leveraged bets on some of the same stocks with other investment banks. Credit Suisse wasn’t aware of those moves, according to Credit Suisse executives.
The bank wasn’t fully assessing its risks in the stocks being so concentrated by single name and sector, according to the current and former people at the bank.
On March 22, a Monday, ViacomCBS shares fell when the company said it would issue new stock to invest in streaming services. Archegos got caught in a downward spiral as the stock fell and it couldn’t make margin calls. Other stocks tied to the fund’s trading positions also had been dropping.
In Zurich, Mr. Gottstein and Ms. Warner were entrenched in another crisis. Greensill Capital, a financing partner for a $10 billion set of Credit Suisse investment funds, filed for bankruptcy, putting billions in fund assets in doubt. Greensill ran into trouble because it couldn’t renew credit insurance on supply-chain finance loans it made to companies, exposing holes in Credit Suisse’s oversight of the funds. (The company’s founder, Lex Greensill, in May told a U.K. parliament committee he bears responsibility for Greensill’s collapse and that it relied too much on one insurer.)
In that March week, Credit Suisse was being pelted by questions from regulators, shareholders and fund investors over Greensill.
That Thursday, Archegos summoned its half-dozen lenders to try to hash out a survival plan.
Credit Suisse suggested the banks work together to unwind Archegos’s trades over a month. Some considered it, according to people familiar with the discussions. But no deal was reached and some swiftly unloaded their positions to other investors.
The next Monday, March 29, Credit Suisse warned of a significant loss. In April, it said exiting the positions cost $5.5 billion, and it raised $2 billion in fresh equity. Messrs. Chin and Shah and Ms. Warner were among the staff pushed out.
The Journal previously reported the bank has plans to roll out dynamic margining across client positions. In recent weeks, that system still wasn’t being applied to some positions, people familiar with the matter said.
Credit Suisse recently hired McKinsey & Co. to help identify and fix weak spots in its risk management, people familiar with the bank said.
—Juliet Chung contributed to this article.
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