Credit Suisse ignored warnings before Archegos and Greensill imploded

The banking giant is examining how, after years of beefing up compliance and risk, it pushed into risky trades that it couldn’t easily exit.

The Credit Suisse building at London’s Canary Wharf business district. Picture: Picture: Getty Images

Credit Suisse Group’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 $US10 billion 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 $US4.7 billion 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 $US1.5 billion, according to a person familiar with the bank.

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, according to people familiar with the bank’s operations.

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. A former client is suing the bank for around $US800 million for ignoring alerts that a Credit Suisse banker stole from him for years. And the bank faces lawsuits and regulatory fines over $US2 billion 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.

Australian Lex Greensill, of Greensill Capital. Picture: Annabel Moeller

More risks may lurk inside Credit Suisse. Last year it was Wall Street’s biggest underwriter in blank-check 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.

The bank landed a hit in 2017 when a Credit Suisse fund that invested in Greensill’s supply-chain finance loans took off. Eric Varvel, the bank’s asset-management chief, told prospective investors they could invest on a short-term basis, “similar to the money market,” for attractive returns, according to a Credit Suisse client magazine.

Yet red flags were raised even before the funds launched. Members of Credit Suisse’s credit-structuring team, who knew Lex Greensill’s business, lobbied against working with Greensill on the funds, according to a person familiar with the funds.

Another group in the bank working on commodity trade finance had stopped doing business with one of Greensill’s biggest clients, UK steel magnate Sanjeev Gupta, according to people familiar with the relationship. They had identified suspicious shipments during a compliance check, one of the people said.

More warnings came in 2018, when Swiss investment manager GAM Holding AG suspended, and later fired, an employee over investments he made with Greensill and some of Mr. Gupta’s companies. GAM said at the time that money in the fund in question was returned to investors.

A spokesman for Mr Gupta declined to comment.

Sanjeev Gupta.

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 credit-structuring team escalated its alerts about Greensill to the bank’s reputational-risk committee, the person familiar with the funds said. They had become concerned Greensill might be taking operational shortcuts.

But by December 2019, the funds had tripled in the year to $US9 billion. 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 AG spotted someone following him and went to the police. Mr Gottstein, at the bank since 1999, became chief executive.

Former Credit Suisse CEO Tidjane Thiam. Picture: AFP

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 Corp.’s Vision Fund, came to the rescue. It struck a deal with Credit Suisse and Greensill to inject $US1.5 billion into the funds, The Wall Street Journal previously reported, citing people familiar with the matter.

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, according to a person familiar with the loan.

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 $US140 million 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, according to the people familiar with the bank’s operations.

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, the people said.

She and other executives approved it, confident that Credit Suisse was well protected from loss by a pledge on $US50 million cash in a Greensill bank account and around $US1 billion in Greensill receivables, the people 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 March 1.

Credit Suisse is facing a double-barrelled financial crisis. Picture: AFP

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. The fund pleaded guilty to wire-fraud charges related to insider trading of Chinese stocks in 2012, and 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, according to a person familiar with the review. It decided Archegos would receive extra scrutiny, the person said.

Mr Hwang wasn’t putting outside clients’ money at risk, a factor that gave Credit Suisse comfort in keeping him on as a client, the person said.

Credit Suisse took on more risk with Archegos relative to its size, according to people familiar with the Archegos trade, than did players such as Goldman Sachs Group Inc. and Morgan Stanley.

In the weeks leading up to the meltdown, Credit Suisse investment-banking executives discussed ways to bring down its exposure to Archegos. One option was to raise margin requirements on Archegos, said people familiar with the discussions.

The bank opted not to act.

When Archegos’s big positions began to sour, the hedge fund asked its lenders to meet. Credit Suisse argued for a take-it-slow approach, partly to protect Mr Hwang, according to the people familiar with the bank’s operations.

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, according to the people familiar with the bank’s operations. Credit Suisse’s board then broadened a review of Greensill to include the bank’s entire risk culture.

The bank’s top shareholder, David Herro of Harris Associates, said he argued for keeping Mr. Gottstein in place but said the bank had to get risk under control.

With Juliet Chung and Duncan Mavin

Wall Street Journal