Credit Suisse just couldn’t say no to Archegos

The widespread and enduring failings in Credit Suisse Group AG’s risk management exposed by the Archegos scandal were laid out in all their gory detail. The Swiss bank has started addressing each weakness one by one. What’s needed is for these measures to coalesce into a total cultural overhaul.

The implosion of Archegos Capital Management came fast in March. Credit Suisse’s reckless support of the family office’s leveraged stock positions has cost it over $US5.5 billion ($7.5 billion) directly after it was forced to liquidate its exposure. Yet the risks of such a blow-up had been mounting for years, according to an independent report into the crisis. Credit Suisse staff were aware but just let it happen.

Despite past controversies, Credit Suisse decided against imposing a heightened compliance framework on Archegos. And Archegos repeatedly got the better of the firm. This favoured client persuaded the bank’s prime services business, which looks after hedge funds, to assess the riskiness of its portfolio differently. That meant it faced less onerous demands to post margin backing its levered positions. The risk managers in the prime business would impose some conditions for this special treatment, but still let Archegos operate outside this more lax framework.

This pattern would repeat itself for years before Archegos eventually imploded. In 2020, as the exposure was swelling, the prime unit merely wanted the family office to be stress-tested for a “bad week” rather than a complete market meltdown. And so it went on.

In September, one risk manager outside the prime services business raised concerns that no one in the unit had the backbone to stand up to their client. Yet this concern went nowhere, even though Credit Suisse was at the time trying to learn the lessons of another hedge-fund default. Only in late March when rival firms were already scrambling to cut exposure did the head of the investment bank get told what was going on.

As the report says, the firm had the information to understand the magnitude of these “conspicuous” risks, but didn’t act. There are many aspects to the failing: Dual-headed management structures meant it wasn’t clear who was really in charge; leadership that was stretched; a hollowed out risk-management function short on experience due to cost-cutting; a silo-based organisational structure.

As is so often the case, the more junior staff sounded the alarm. And yet they were overruled by their seniors. The fundamental problem here is the lack of escalation of these concerns higher up in the organisation. That is a deep issue of culture and governance. So many people were aware for so long that Archegos posed risks – yet the situation was allowed to get worse. The board found out only when it was too late.

Credit Suisse’s response has been to terminate the employment of nine people, while culling $US70 million of bonuses across 23 people. It’s cutting back on co-heads, reviewing large exposures and leverage limits, adding headcount in risk and has a new chief risk officer coming from Goldman Sachs. When a business has to take this much remedial action, it’s worth asking whether it’s worth being in prime services at all. But this is a difficult business line to exit given the value of hedge fund relationships to other parts of the firm.