Credit score Suisse probe into Archegos scandal reveals a number of failings

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LONDON – An investigation into Credit Suisse’s dealings with the collapsed US hedge fund Archegos Capital revealed Thursday that the Swiss bank had failed to “manage risk effectively”.

The Archegos saga dominated the headlines in March, with Credit Suisse being hardest hit by several international banks involved.

Archegos built massive holdings in certain stocks through swaps, a type of derivative that investors trade over-the-counter or among themselves without having to publicly disclose their holdings and which are heavily leveraged. But a sell-off of those stocks meant the hedge fund was forced to put more money into it, resulting in a forced liquidation of more than $ 20 billion.

A report released on Thursday based on an independent external investigation commissioned by the bank’s board of directors found that the prime services business of Credit Suisse’s investment banking unit was “both first and foremost” the second line of defense as well as the lack of risk escalation. “

“It also found that limit overruns were not controlled across both lines of defense, which is due to an insufficient exercise of supervisory duties in the investment bank and in the risk area as well as a lack of prioritization of risk reduction and improvement measures,” the statement said .

One of the conclusions of the investigation was that “it is likely that Archegos has deceived Credit Suisse and concealed the true extent of its positions, which Archegos has amassed amid an unprecedented global pandemic”.

“However, long before the events of the week of March 22, 2021, the Company and Risk had extensive information that should have prompted them to take steps to at least partially mitigate the significant risks Archegos posed to Credit Suisse.” , added her.

The investigation also indicated that no one at the Swiss bank “seemed to fully appreciate the serious risks inherent in the Archegos portfolio”, although “these risks were not hidden. They were visible from at least September 2020”.

Nonetheless, the investigation concluded that there was no “fraudulent or illegal behavior” or malicious intent on the part of you or your employees.

In the wake of the sandal, the head of the investment bank Brian Chin and the chief risk and compliance officer Lara Warner resigned. The board of directors has decided to forego bonuses for 2020 and also to cut the proposed dividend.

Thomas Gottstein, CEO of Credit Suisse, told CNBC on Thursday: “We are taking this event very seriously, both in terms of scale and course, and we want to draw the right lessons.”

He also told CNBC’s Geoff Cutmore that Credit Suisse wants to make sure “an accident like Archegos doesn’t happen again”.

78% drop in profits

The result of the investigation was published at the same time as the publication of the Swiss lender’s second quarter results.

Credit Suisse announced that its net income for the three-month period ended June reached 253 million Swiss francs ($ 278.3 million), falling short of expectations in its own analyst survey. At 1.16 billion Swiss francs at the same time last year, net profit fell by 78% over the course of the year.

At the end of the first quarter, Credit Suisse reported a hit of CHF 4.4 billion due to the Archegos saga. However, Credit Suisse announced on Thursday that it had to accept an additional pre-tax loss of CHF 594 million in connection with the collapse of the hedge fund. Credit Suisse has also dealt with yet another Greensill Capital scandal that was submitted for administration earlier this year.

In the future, the bank wants to pursue “a more conservative risk approach” and work with a hard core capital ratio, a measure of the solvency of banks, of at least 13%.

The stock lost more than 4% in early European trading hours on Thursday.

— CNBC’s Yun Li contributed to this report.