Credit Suisse, Greensill and Archegos: how did it all go so wrong?
Spare a thought as the week begins for Christine Graeff, the group head of corporate communications for Credit Suisse. The Swiss finance giant has lost billions of dollars in recent weeks in what has been branded a “disaster pile-up”.
The basic cause is easy enough to diagnose: Credit Suisse provided financial backing for the the now-notorious Greensill Capital as it hit stormy seas, vulnerable especially because of its business model as well as the buccaneering style of its boss, Lex Greensill; that relationship now promises to cost Credit Suisse somewhere in the realm of $3 billion, the equivalent of a year’s profit. When credit insurance on Greensill’s fund assets was not renewed in March, Credit Suisse ended their support, and Greensill went into insolvency.
The Swiss have learnt the hard lesson that disaster seldom travels alone. On 29 March, Credit Suisse announced it was unwinding a “significant US-based” hedge fund client which had failed to meet its margin commitments. We now know this to be Archegos Capital Management. Archegos founder Bill Hwang does nothing by halves. He is reported to have lost $8 billion in 10 days, and Credit Suisse’s hit may be as big as that it suffered because of the Greensill imbroglio.
For Credit Suisse, whose CEO Thomas Gottstein was only weeks ago peddling a tale of a strong start to 2021, this is a car crash. Now, at least seven senior figures at the bank have been sacked, including Lara Warner, the group’s chief risk and compliance officer, and Brian Chin, head of the investment bank. The chairman, Urs Rohner, is stepping down after a decade at the helm (notwithstanding that in 2017 he was chastised by shareholders for what they felt was his poor performance). The new boss will be António Horta-Osório, currently CEO of Lloyds Banking Group, and his inbox will be full when he sits down at his desk for the first time.
Observers, let alone shareholders and investors, are entitled to ask: what the hell went wrong? How has Credit Suisse blundered into two separate, titanic losses within a matter of weeks, each of them enough to wipe out a year’s profit?
Credit Suisse has prized itself on the depth and sophistication of its risk management in the past. Brady Dougan, the firm’s CEO until 2015, has pointed out that the bank navigated the 2008 financial crisis without a government bailout and reaped the rewards of its informed caution: “there is a lot of good DNA around risk management there”, he concluded.
The Archegos and Greensill mayhem tells us this might no longer be the case. Even the basic no-smoke-without-fire principle suggests something is smouldering in the risk and compliance corners of Credit Suisse. While Archegos followed hard on the heels of Greensill, one need only leaf back through the bank’s pages to last year, when Credit Suisse advised SoftBank to create a $1 billion lifeline of convertible bonds to German payments company Wirecard. It did not work. Wirecard collapsed, and so too did the lifeline.
Christian Hunt, founder of Human Risk and a former COO of the Prudential Regulation Authority, underlines the gravity of this. “Banks are designed to take risk, but to lose billions on one client is frankly astonishing. It just shouldn’t happen. What’s particularly worrying is that this type of error has plenty of precedents that should’ve served as a warning.”
Still, we all have losing streaks, and everyone is advised, however sotto voce, that the value of their investments can go down as well as up. If there is no systematic problem within the risk management section of Credit Suisse, the problem may be a more ad hominem one. Arguably the most senior casualty of the extended series of losses has been Lara Warner, group chief risk and compliance officer. With those buzzwords in her job title, she was unlikely to escape this episode.
According to her LinkedIn profile, she claims she “provides a single point of accountability for risk management, while building a best-in-class Risk and Compliance capability”. She graduated in finance, worked in a number of roles at AT&T and then worked as a cable TV industry analyst for Lehman Brothers. Even when she joined Credit Suisse, she did many things but did not obviously work in the risk and compliance space until being appointed chief compliance and regulatory affairs officer in 2015.
This matters. You can have the most sophisticated and brilliant risk management systems and personnel in the world, but they are no good unless they have agency. If someone in Warner’s position feels empowered to ignore warnings and instead give free rein to asset managers, that’s a horribly perilous nexus of systemic and individual failure.
Credit Suisse must know it is in dangerous waters. In the prim academic words of a recent study of reputation management, “reputation is a decisive factor for ensuring long-lasting profitability”. In other words, it’s not enough to be good: you must be seen to be good. If Credit Suisse’s incoming chairman does not implement substantial change, he might see the effects in the starkest terms of all, on the balance sheet.