In his maiden speech at the group’s annual general meeting last month, Credit Suisse chair Axel Lehmann gave a brutal assessment of what lay at the heart of the bank’s recent spate of high-profile scandals.
“It has become clear that the challenges of the past were not solely attributable to isolated poor decisions or to individual decision makers,” he told the Swiss lender’s shareholders. “Within the organisation as a whole, we have failed too often to anticipate material risks in good time in order to counter them proactively and to prevent them.”
Lehmann was speaking just a few days after a Rhode Island state pension fund filed a lawsuit against 20 current and former Credit Suisse executives — including Urs Rohner, a predecessor of Lehmann’s — over a $5.5bn trading loss the bank suffered on the collapse of family office Archegos Capital last spring, the biggest in its history.
“The fundamental problem was that CS’s board did not provide the resources, people, technology, systems and controls needed to comprehend the overall risk the bank was taking on, much less manage that risk,” the Employees Retirement System for the City of Providence said in the lawsuit filed to the New York Supreme Court.
The Archegos loss came just weeks after Credit Suisse was forced to close a group of funds linked to the specialist finance firm Greensill Capital, trapping $10bn of client money. The bank has said efforts to recoup the money could take at least five more years.
The twin crises have been the most prominent in a string of scandals that have plagued the bank going back to the global financial crisis of 2008. In the past year alone, the bank’s share price has halved, it has cleared out nearly all of its executive ranks and several prized clients and shareholders have started lawsuits against it.
A common thread running through the bank’s failings has been a risk department that was all too often overruled by commercially minded executives who were chasing higher returns from riskier deals, according to several current and former employees.
“We had historically weak compliance combined with high risk-taking businesses,” says a former executive who worked in the bank’s risk department. “The structure also made it very difficult to see total global risk — it was like playing hide and seek.”
Four months after the Archegos loss, Credit Suisse published a report into its own failings, which it had commissioned from law firm Paul, Weiss. Over 172 pages, the report described in excoriating detail a catalogue of individual and organisational errors.
Paul, Weiss said the losses were the result of a “fundamental failure of management and controls” in Credit Suisse’s investment bank and a “lackadaisical attitude towards risk”. Credit Suisse was the worst hit of several investment banks that collectively lost more than $10bn when Archegos collapsed. Archegos was a client of the bank’s prime brokerage division that helps hedge fund clients by lending them money and stock to execute trades.
The report also highlighted a process of “juniorisation” among the bank’s risk staff, with experienced managers being replaced by less competent people who lacked knowledge of how to deal with complex risks. Among the report’s findings was that in summer 2020, Credit Suisse’s potential exposure to Archegos was more than 25 times greater than the bank’s risk limits.
Yet staff in the prime brokerage division successfully argued that Archegos should be evaluated under the bank’s “bad week” scenario rather than the more draconian “severe equity crash” scenario. At the time, a Credit Suisse risk analyst raised concerns to his supervisor about the prime broking staff, saying “the team is run by a salesperson learning the role from people” he did not “trust to have a backbone”.
Paul, Weiss did, however, state that Archegos had also probably “deceived” Credit Suisse. Last month US authorities arrested Bill Hwang, the founder of Archegos, along with his former chief financial officer Patrick Halligan and charged them with racketeering, fraud and market manipulation.
In the year following the twin crises of Greensill and Archegos, Credit Suisse carried out a comprehensive review of risk throughout the organisation and closed the prime brokerage division where the Archegos losses originated.
It also drafted in Goldman Sachs veteran David Wildermuth as its new chief risk officer. He will provide shareholders with an update on his plans for the group next month. Credit Suisse commissioned a similar report into its failings over the Greensill affair, which was conducted by Deloitte and Swiss law firm Walder Wyss. But while the report has been completed and shared with the bank’s board and Finma, the Swiss regulator, it has not been made public.
However, a person who has seen the report says its findings are broadly similar to those uncovered by the Archegos report: commercially minded executives overriding concerns raised by weak risk managers. “We made mistakes, but without the front office caring about managing risk and compliance, something was bound to happen,” the former risk manager says.
Credit Suisse’s recent troubles
Credit Suisse is forced to close $10bn of investment funds linked to the specialist finance firm Greensill Capital. The debacle prompts several of the bank’s wealthiest clients to start legal action to recover losses.
The bank suffers a $5.5bn trading loss from the collapse of family office Archegos Capital.
Swiss regulator Finma sanctions Credit Suisse over the “spygate” saga, which uncovered seven instances of improper corporate surveillance of staff, including a former senior executive who was pursued through the streets of Zurich with his family by private investigators.
Credit Suisse pays $475mn in fines to regulators in the UK, US and Switzerland to settle investigations into its role in the Mozambique “tuna bonds” scandal, which pushed more than 2mn people into poverty.
Chair António Horta-Osório is forced out after breaching Covid-19 quarantine rules to attend sporting events and coming under scrutiny for his use of corporate jets.
Credit Suisse becomes the first Swiss bank to face criminal charges over its dealings with a group of cocaine-smuggling Bulgarian mafiosi.
A consortium of international media organisations publish “Swiss Leaks”, where details of the accounts of 30,000 Credit Suisse clients are released showing links to high-risk individuals involved in crimes such as money laundering, fraud and human trafficking.
Credit Suisse is forced to pay $600mn to the former prime minister of Georgia by a Bermuda court over a long-running case involving a private banker who stole from the group’s richest eastern European customers.