Credit Suisse Claws Back Pay as It Faults Staff for Archegos

(Bloomberg) -- Credit Suisse Group AG’s $5.5 billion of losses tied to Archegos Capital Management stemmed from years of mistakes and misjudgments that continued right up until the days before the family office’s implosion -- when the bank handed the firm back $2.4 billion in collateral.

A report prepared by the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP concluded while the bank’s systems identified the risks, they were “systematically ignored” by a prime services unit with a “lackadaisical attitude toward risk.”

The Swiss firm said it ousted nine executives and recouped about $70 million in pay, including bonus claw-backs, as it punished 23 people in all for their role in the scandal, which cost Credit Suisse far more than its Wall Street counterparts.

“There were numerous warning signals -- including large, persistent limit breaches -- indicating that Archegos’s concentrated, volatile, and severely under-margined swap positions posed potentially catastrophic risk to CS,” the report stated. “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.”

Credit Suisse’s $5.5 billion loss from the March collapse of Archegos far surpassed those of any other bank and forced it to cut its dividend, pause share buybacks and raise capital.

Dynamic Margins

No criminality was involved, the report said. The bank said it is responding by creating 20 new credit-risk roles and appointing a chief business risk officer for its investment bank, as well as moving all hedge-fund clients to dynamic margining that will better reflect the potential exposure they present to the bank.

The report underscored the needs. From March 11 through March 19, for instance, Credit Suisse accepted Archegos requests to return $2.4 billion in collateral. Only a week later, March 26, Credit Suisse was told by Archegos that Goldman Sachs Group Inc. was organizing a block sale of some of its holdings; the next day, Archegos asked its prime brokers to give it the space to liquidate positions in an orderly way.

Archegos’s March requests for the return of its margin came as it was ignoring Credit Suisse’s repeated efforts to get it to agree to a change that would increase the amount of collateral the bank held. Still, the bank’s risk managers felt they had no legal right to refuse the requests under their agreements with the family office, the report stated.

Executive Exits

The Archegos debacle followed just weeks after the implosion of Greensill Capital, another multibillion-dollar client. The twin shocks prompted the exit of senior executives including investment banking head Brian Chin, risk and compliance head Lara Warner and both co-heads of the prime brokerage business. While Chief Executive Officer Thomas Gottstein was spared, he’s since struggled to retain many of the firm’s top investment bankers, who have left over concerns that the scandals will dent their business and pay.

The collapse of Bill Hwang’s family office, and the pullback in risk it prompted at Credit Suisse, continued to weigh on results in the second quarter. The firm’s profit fell short of estimates, driven by a slump in trading revenue. The trading drop was exacerbated by a $653 million loss related to the implosion of the U.S. family office, while in Asia the bank turned away billions of dollars in assets as it cut exposure to risky clients.

“We are committed to developing a culture of personal responsibility and accountability, where employees are, at heart, risk managers,” said António Horta-Osório, the bank’s chairman, in a statement.

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