Credit Suisse wins $ 4.7 billion in Archegos Meltdown
Credit Suisse CS 0.19%
Group AG reported a $ 4.7 billion blow from the collapse of Archegos Capital Management, cut its dividend and said its investment bank and risk officers would leave the bank.
The Swiss lender was hit hardest by the collapse at the end of last month of Archegos, a US family-owned investment firm, which suffered a significant loss in its hedge fund services unit. The Archegos crisis came just weeks after Greensill Capital, a UK finance company deeply entangled with Credit Suisse,
filed for insolvency and left the bank on the hook for losses.
Managing director Thomas Gottstein will remain in his post, but chief risk officer Lara Warner will leave the bank on Tuesday and investment banking director Brian Chin will leave at the end of April.
Archegos and Greensill’s double hit represents the bank’s biggest test in years and comes at a time of leadership transition. Mr Gottstein took over a year ago after his predecessor, Tidjane Thiam, was kicked out after the bank was caught spying on a recently resigned executive.
Long-time bank chairman Urs Rohner is expected to retire later this month. He will be replaced by a foreigner, the Managing Director of Lloyds Banking Group PLC, António Horta-Osório.
Credit Suisse has experienced a series of mishaps in recent years, causing unexpected one-off charges that have dented its profits and undermined its reputation as a safe place for the rich around the world to store their wealth. Mr Gottstein has vowed to steer a tighter ship and avoid surprises.
“Greensill and Archegos’ double shatters any illusion that his ongoing reputation crises are excusable anomalies,” said Nir Kossovsky, managing director of Steel City Re, which helps companies manage reputation risk with advisory and insurance services.
“The problem almost always comes down to siled knowledge, authority and accountability, and the lack of inter-organizational intelligence gathering and analysis around reputational risk,” Kossovsky said.
To consolidate capital, Credit Suisse announced it would suspend a share buyback program and pay a reduced dividend through a combination of capital and retained earnings. Mr Gottstein and the rest of the board will not receive any 2020 bonuses. Mr Rohner forfeits part of his salary.
Credit Suisse shares have fallen almost a quarter since March, but only declined slightly until Tuesday.
While the hole created by the Archegos crisis is substantial, an otherwise strong first quarter performance by the bank offset some of the damage. The bank said it expects a pre-tax loss in the quarter ended March of 900 million Swiss francs, the equivalent of about $ 960 million.
Credit Suisse said its relationship with Archegos and Greensill needed “further scrutiny and examination.” He said his board formed a crisis team and hired outside help to investigate.
The crises sparked a fundamental reassessment among board members and Mr Gottstein on how the bank should operate. The results of the investigations could encourage the bank to change its mix between its more reliable wealth management franchise and its still volatile investment bank.
The investigations will also examine how the bank, having invested huge sums in risk control and oversight in recent years, allowed itself to become deeply involved in both situations. In Greensill’s case, the bank has reviewed the relationship several times over the past few years, but has continued to expand its business with the company.
Credit Suisse suspended its Greensill funds on March 1, after the credit insurance that Greensill was responsible for arranging ran out. Insurance made funds more secure and allowed Credit Suisse to market them as an alternative to money market funds, although many of the underlying investments were of lower quality.
He demoted Eric Varvel, head of the asset management unit that managed the funds, in March and appointed a new head of the division.
Part of the recent drop in Credit Suisse’s share price has been linked to fears that the bank will have to at least partially compensate investors in Greensill funds. It could take years for the funds to recover money from Greensill’s underlying insurers and borrowers. Preliminary estimates inside the bank put the fund’s losses at $ 1.5 billion, according to a person familiar with the matter.
Three weeks after the Greensill crisis, more bad news emerged for the Swiss lender. Credit Suisse was one of at least six banks that had to offload large stock market positions when Archegos imploded. The New York-based family office had accumulated stakes in individual stocks with heavy loans from banks. Archegos could not maintain the positions when one of the stocks fell sharply.
Credit Suisse was one of the last banks to exit, the Wall Street Journal reported. Some analysts had estimated that he would lose between 3 and 4 billion dollars following the sale of the fire.
Christian Meissner, a veteran of Bank of America Corp. and Goldman Sachs Group Inc., will become chief investment officer, Credit Suisse said on Tuesday. The bank hired Mr. Meissner last year to head a new unit connecting its wealthier clients to its investment bank. He temporarily returned his former chief risk officer, Joachim Oechslin, to this post and appointed a temporary compliance manager.
The bank’s head of equities sales, Paul Galietto, a key contact for the Archegos account, will also be leaving the bank this month, according to a note reviewed by the Journal.
Thomas Hallett, analyst at Keefe, Bruyette & Woods Europe, said long-term implications for Credit Suisse could include a much shorter leash from regulators, which could prevent the bank from entering new lines of business or restrict its dividends and share buybacks. There is also the risk, he said, that clients “potentially take business elsewhere.”
Last week, S&P Global Ratings, Moody’s Investors Service and Fitch Ratings all moved to a negative outlook on the bank’s ratings.
“Although the size of hedge fund losses has been clarified, the debate around Credit Suisse’s concentrated and high-risk strategy has only just begun,” said Hallett.
Write to Margot Patrick at [email protected]
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