Credit Suisse finds incompetence but no criminal conduct in Archegos debacle.
Credit Suisse issued a report on Thursday that dissected in painful detail the “fundamental failure of management and controls” that led the bank to lose $5.5 billion from its business with the investment fund Archegos Capital Management earlier this year.
But investigators from the New York law firm hired to conduct the autopsy attributed the losses to incompetence and fear of alienating a big client, and said that none of the bank employees “engaged in fraudulent or illegal conduct or acted with ill intent.”
Credit Suisse, which also reported a big drop in profit on Thursday, said it would use the Archegos debacle “as a turning point for its overall approach to risk management.” The bank said that 23 employees would forfeit or be required to pay back $70 million in bonuses, and that nine in the group would be fired.
Archegos collapsed in March after its stock market bets, financed with money borrowed from Credit Suisse and other banks, turned sour. Credit Suisse was slower than Goldman Sachs and other creditors to liquidate Archegos’s positions and suffered the biggest losses.
But the risk of doing business with Archegos had been apparent for years, according to the 165-page report published Thursday. In 2012 its founder, Bill Hwang, while running another fund, pleaded guilty to a United States charge of wire fraud and settled insider trading allegations with the Securities and Exchange Commission, according to the report by the law firm Paul, Weiss, Rifkind, Wharton & Garrison. He had also been banned in 2014 from trading in Hong Kong.
In 2015, Credit Suisse employees “shrugged off” Mr. Hwang’s history after reviewing the risk of doing business with him, the Paul, Weiss report said. In subsequent years the bank allowed Archegos to make big bets using mostly borrowed money, and failed to take action as the fund chronically exceeded limits on the amount of risk it was allowed to assume.
Credit Suisse executives ignored numerous red flags because they were aware that Archegos was working with other banks and were afraid of alienating an important client. When Credit Suisse risk managers suggested in February that Archegos be required to post an additional $1 billion in cash to reduce its leverage, people responsible for working with the fund said that would be “pretty much asking them to move their business,” according to the report.
“The Archegos matter directly calls into question the competence of the business and risk personnel who had all the information necessary to appreciate the magnitude and urgency of the Archegos risks, but failed at multiple junctures to take decisive and urgent action to address them,” the report from Paul, Weiss said.
This week Credit Suisse appointed David Wildermuth, a veteran Goldman Sachs executive, as its chief risk officer, the latest in a series of high-level management changes. Lara Warner, who served as the bank’s chief risk officer and chief compliance officer, stepped down in April.
Archegos remains a burden on Credit Suisse earnings. The bank said Thursday that net profit in the second quarter fell nearly 80 percent, to 253 million Swiss francs, or $278 million. The bank booked an additional loss from Archegos of $653 million in the quarter, and also absorbed an 18 percent decline in sales, to 5.1 billion francs.
Credit Suisse also updated its progress in salvaging $10 billion that investors had put into funds organized by the bankrupt firm Greensill Capital. Credit Suisse, which marketed the so-called supply chain finance funds, said it would return at least $5.9 billion to investors, including a payment scheduled for August.
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