The Weekend Australian
Credit Suisse chose to ignore warnings
Credit Suisse’s double-barrelled financial crisis shares a common theme: a bank that looked the other way when warning signs argued for pulling back on lucrative corners of its business.
The Swiss bank with a big Wall Street presence was caught off guard starting in late February when $US10bn ($13bn) in complicated investment funds it ran with financing firm Greensill Capital unravelled, despite years of internal warnings about the relationship.
Then it lent more than other banks on big, concentrated positions to Archegos Capital Management, run by longtime client Bill Hwang. Though Archegos was flagged as a client of special interest, Credit Suisse acted more slowly than other banks, and ended up on the wrong side of a fire sale.
The bank said on Tuesday it would take a $US4.7bn charge on the Archegos trade, equivalent to more than a year’s worth of profit. While it hasn’t put a number on the Greensill damage, a preliminary assessment inside the bank says losses to Credit Suisse investors may hit $US1.5bn.
In a statement on Tuesday, Credit Suisse chief executive Thomas Gottstein said: “We are fully committed to addressing these situations. Serious lessons will be learned.”
The bank is now in full crisis mode. Credit Suisse’s supervisory board launched investigations into executives involved in decision-making.
It is also examining how, after years of beefing up compliance and risk, the bank pushed into risky trades that it couldn’t easily exit. The stock has lost nearly a quarter of its value since late February.
On Tuesday, Lara Warner, head of a risk and compliance unit that was supposed to make the bank safer, stepped down. Her teams reviewed both situations in recent months, sources said.
The head of the investment bank, Brian Chin, and others who handled Archegos were also pushed out.
Credit Suisse has lurched from crisis to crisis in recent years, repeatedly promising to protect investors with better systems to measure risk and prevent bad situations from getting worse.
An internal spy scandal brought down its previous chief executive, Tidjane Thiam. Then last year, Luckin Coffee, a prominent Chinese client, disclosed an accounting fraud that caused losses for Credit Suisse on a loan it made to Luckin’s founder. The bank faces lawsuits and regulatory fines over $US2bn in fraudulent lending in Mozambique.
Current and former bank executives say Credit Suisse’s problem is that it never focused on one thing after the financial crisis, choosing to maintain an investment bank and an asset-management arm tacked on to a private bank catering to the world’s rich.
The idea was that these parts could work together, moving clients from one arm of the bank to the other.
In reality, the asset-management unit, which brought in Greensill, and the investment bank, which handled Archegos, were too small to square off with Wall Street giants. The bank tried to make more money from fewer clients than rivals with larger balance sheets and ended up overlooking risks, the executives said.
More risks may lurk inside Credit Suisse. Last year it was Wall Street’s biggest underwriter in blank-cheque companies, known as SPACs. Its asset-management arm is also among the top managers of collateralised loan obligations, pools of risky loans that are sliced and diced and bought by investors. Both are areas financial regulators fret about.
A group in the bank working on commodity trade finance had stopped doing business with one of Greensill’s biggest clients, British steel magnate Sanjeev Gupta. The group had identified suspicious shipments during a compliance check, a source said.
More warnings came in 2018, when Swiss investment manager GAM Holding suspended, and later fired, an employee over investments he made with Greensill and some of Mr Gupta’s companies.
The GAM situation prompted Credit Suisse to review the Greensill funds, according to executives from that time. Ms Warner, who was seen by colleagues as tough on rules, and others were involved in the review. Credit Suisse’s fund managers in Zurich took a defensive stance. The funds were making tens of millions in management fees. A former bank executive who asked the team running the funds basic questions said they belittled his concerns, and said the funds were fully protected.
The review didn’t find enough concerns to demand any changes to the funds, according to the executives from that time.
In 2019, members of the creditstructuring team escalated their alerts about Greensill to the bank’s reputational-risk committee. They had become concerned Greensill might be taking operational shortcuts.
But by December 2019, the funds had tripled in the year to $US9bn. The asset-management arm sold the funds to rich clients and companies looking to eke out returns in an era of negative interest rates in Europe.
In February 2020, Mr Thiam resigned in the fallout of a spying scandal, triggered when an executive leaving for rival UBS Group spotted someone following him and went to the police. Mr Gottstein, at the bank since 1999, became chief executive.
But as the coronavirus spread, jittery investors pulled cash from the Greensill funds. It turned out Credit Suisse was acting as Greensill’s main source of off-balance sheet financing. Without the money, Greensill would go bust.
Greensill’s biggest outside investor, SoftBank Group’s Vision Fund, came to the rescue. It struck a deal with Credit Suisse and Greensill to inject $US1.5bn into the funds.
The Greensill relationship deepened in other parts of the bank. It lent money to Mr Greensill’s family trust in Australia through its Asia-Pacific bank, secured on Greensill’s assets.
Greensill was in trouble. On February 22, Ms Warner learned its credit-insurance coverage was ending
Few people beyond Ms Warner and other senior executives were aware of the full picture, according to the executives from that time, because confidentiality rules compartmentalised client business across divisions.
In October, Greensill asked Credit Suisse for a $US140m loan after the start-up was having trouble raising fresh capital from outside investors.
The bank’s London risk managers initially rejected the application, spooked by reports that Germany’s banking regulator was probing Greensill’s banking unit over its exposure to Mr Gupta. Counterparts in Zurich and the bank’s Asia-Pacific operations soothed their concerns, and Greensill agreed to put up additional collateral.
The loan went to Ms Warner, whom Mr Gottstein had promoted in July to head a combined risk and compliance unit. Such transactions rarely crossed her desk, but there was extra sensitivity because of the earlier review.
She and other executives approved it, confident that Credit Suisse was well protected from loss by a pledge on $US50m cash in a Greensill bank account and about $US1bn in Greensill receivables, sources said.
But Greensill was in trouble. On February 22, Ms Warner learned Greensill’s vital credit-insurance coverage was ending, according to Credit Suisse. Credit Suisse froze the funds on March 1.
Three weeks later, another major Credit Suisse client was on the rocks: Archegos.
Credit Suisse and Mr Hwang had a long relationship. The bank was a prime broker to his hedge fund Tiger Asia Management, which was caught inside-trading in 2012. Mr Hwang was barred by US securities regulators from managing client money.
Mr Hwang formed a family office, Archegos, and Credit Suisse again served as a prime broker. In 2015, the bank’s reputational-risk committee reviewed its relationship with Mr Hwang and decided Archegos would receive extra scrutiny, a source said.
When Archegos’s big positions began to sour, the hedge fund asked its lenders to meet. Credit Suisse argued for a take-itslow approach, partly to protect Mr Hwang, sources said.
Other banks beat Credit Suisse to the exit, leaving it with large positions to dump at a loss.
Mr Gottstein reeled at the fresh disaster. Credit Suisse’s board then broadened a review of Greensill to include the bank’s entire risk culture.