Credit Suisse, which also reported a big quarterly drop in profit on Thursday, said it would use the Archegos debacle “as a turning point for its overall approach to risk management.” The bank said that 23 employees would forfeit or be required to pay back $70 million in bonuses, and that nine in the group would be fired.
“We are determined to learn all the right lessons and further enhance our control functions to ensure that we emerge stronger,” António Horta-Osório, who took over as chairman of Credit Suisse in April, said in a statement.
The blame went beyond individual cases of negligence, according to the Paul, Weiss report. The bank’s zeal to cut costs and increase profit was also a factor, the report said.
Starting in 2015, rounds of staff cuts left senior managers at Credit Suisse “wearing so many hats, receiving so many reports and being inundated with so much data that it was difficult for them to digest all of the information and discharge their responsibilities effectively.”
Seasoned managers were replaced by junior employees. The team responsible for overseeing Archegos and other clients “struggled to handle more work with less resources and less experience,” the report said.
Archegos’s collapse came as a shock to outsiders, but the risk of doing business with the fund had been apparent for years, according to the report. In 2012, Mr. Hwang, the founder, pleaded guilty to a U.S. charge of wire fraud while running another fund, and settled insider trading allegations with the Securities and Exchange Commission. He had also been banned in 2014 from trading in Hong Kong.
In 2015, Credit Suisse employees “shrugged off” Mr. Hwang’s history after reviewing the risk of doing business with him, the Paul, Weiss report said. In subsequent years, the bank allowed Archegos to make big bets using mostly borrowed money — moves that generated interest income and fees for Credit Suisse. In 2020, though, Archegos began chronically exceeding limits on the amount of risk it was allowed to assume.
Credit Suisse executives ignored or downplayed the breaches and other red flags because they were aware that Archegos was working with other banks. They were afraid of alienating an important client.
When the bank’s risk managers suggested in February that Archegos be required to post an additional $1 billion in cash to reduce its leverage, people responsible for working with the fund said that would be “pretty much asking them to move their business,” according to the report.
“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 to address them,” the report from Paul, Weiss said.
The scale of Archegos’s problems did not become evident to the top echelon of Credit Suisse managers until March 24, a day before the fund collapsed, according to the report. By then, it was too late.
“No one at C.S. — not the traders, not the in-business risk managers, not the senior business executives, not the credit risk analysts and not the senior risk officers — appeared to fully appreciate the serious risks that Archegos’s portfolio posed to C.S.,” the report said. “These risks were not hidden. They were in plain sight.”
This week, Credit Suisse appointed David Wildermuth, a veteran Goldman Sachs executive, as its chief risk officer, the latest in a series of high-level management changes. Lara Warner, who served as the bank’s chief risk officer and chief compliance officer, stepped down in April.
Archegos remains a burden on Credit Suisse earnings. The bank said Thursday that net profit in the second quarter fell nearly 80 percent, to 253 million Swiss francs, or $278 million. It booked an additional loss from Archegos of $653 million in the quarter, and also absorbed an 18 percent decline in sales, to 5.1 billion francs.