Credit Suisse’s disclosure Tuesday that he will lose nearly $ 5 billion and fire two top executives after his involvement in collapsed investment fund Archegos Capital Management sounds familiar to anyone who lived through the last major financial crisis there. over ten years ago.
Once again, the hidden risks of opaque financial transactions devastated a blue chip bank, punished shareholders and ruined careers, raising questions as to whether financial regulatory reforms went far enough.
Swiss credit said he had enough capital to satisfy regulators and there was no indication that his problems risked causing a wider financial crisis.
But his problems with Archegos, the latest in a series of debacles that have damaged the reputation of the Swiss lender, serve as a warning about the risks that may lurk in the financial system as bankers and investors try to earn returns when rates interest rates are at an all-time low and the value of the shares is already sparkling.
And the dramatic losses have shown that increased scrutiny of lenders over the past decade has not stopped some of the same types of behavior that caused Lehman Brothers to collapse in 2008, triggering a financial crisis and severe downturns. economic in the United States and Europe.
“It’s déjà vu,” said Thomas Minder, a member of the Swiss Ständerat, which is similar to the US Senate. Reforms after the last financial crisis failed to address some of the underlying causes, Minder said, such as outsized premiums that encourage excessive risk-taking by bank executives.
“I’m not at all surprised,” said Mr. Minder, a vocal critic of Credit Suisse. “It happens every few years.”
In a way, Credit Suisse has endorsed the guarantees that regulators around the world put in place after 2008. Defying intense lobbying from the banking industry, central banks and banking supervisors have forced lenders to use more of their own. money in transactions by raising capital. conditions.
These capital buffers are one of the reasons the turmoil at Credit Suisse did not trigger wider panic. But Nicolas Véron, a senior fellow at the Peterson Institute for International Economics, said the crisis at Credit Suisse demonstrated that regulators need to be vigilant as investors seek returns in a world where bond interest rates are sometimes negatives and stock prices already stratospheric.
Credit Suisse, said Véron, could be “a straw in the wind which suggests there is a relaxation of risk management within banks because it is so difficult to make money on the bank. interest margins.
Credit Suisse unwittingly competed with Deutsche Bank for the title of Europe’s most accident-prone lender. Credit Suisse did not demand a direct bailout from the Swiss government in 2008 after the Lehman collapse, but it was deeply involved in the subprime mortgage crisis. In 2017, the bank agreed to pay $ 5.3 billion in penalties and compensation to the United States after admitting to selling investors. securities backed by mortgages that he knew would fail.
More recently, the bank was involved in a spy scandal; wrote off $ 458 million in losses on its stake in York Capital Management, a hedge fund; and warned of losing a $ 90 million loan to Greensill Capital, which collapsed last month.
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Credit Suisse’s asset management unit oversaw $ 10 billion in funds that Greensill pooled based on the funding he provided to companies, many of which had low credit ratings or were not on credit. all noted. Credit Suisse said in its annual report for 2020 that it expected some of the companies to fail to meet their payments and that Swiss regulators had ordered it to set aside more capital to cover. the loss.
Credit Suisse detailed the financial impact of its relationship with Archegos on Tuesday. The bank said it would report a loss for the first quarter of 900 million Swiss francs after recording a charge of 4.4 billion francs, or $ 4.7 billion, related to the fund. Archegos is a private investment company that has managed Bill Hwang’s Wealth, a seasoned investor who had previously been fined for insider trading.
Credit Suisse is not alone. Japanese bank Nomura lost $ 2 billion as a result of its involvement with Archegos.
There could be more bad news for Credit Suisse if it faces lawsuits from aggrieved investors or loses business due to its tarnished reputation. Analysts at JPMorgan Cazenove have estimated that Credit Suisse should set aside $ 2 billion just to cover litigation resulting from the Greensill fiasco.
Credit Suisse’s involvement with Archegos and Greensill echoed the 2008 financial crisis in that they used hard-to-understand strategies that minimized regulatory oversight. Credit Suisse has used opaque derivatives to help Archegos make big bets on companies like ViacomCBS without having to report the investments to regulators.
Securities packaged by Greensill and marketed by Credit Suisse allowed companies that already had low credit ratings to hide additional borrowing. The accounting rules did not require disclosure.
Credit Suisse holds more than half a dozen senior disaster managers, including Brian Chin, the managing director of the investment bank of Credit Suisse, who will leave on April 30. Lara Warner, chief risk and compliance officer, will resign immediately, the bank said on Tuesday.
Thomas Gottstein, Managing Director of Credit Suisse since last year, will retain his post. He said in a statement that the bank would hire outside experts to investigate what led to the “unacceptable” loss of Archegos as well as the bank’s involvement with Greensill Capital. Credit Suisse has promised to release the findings of the investigations once they are completed.
Credit Suisse board members will forgo their bonuses for 2020 and 2021, the bank said. Credit Suisse will also cancel its intention to buy back its own shares, a way of driving up the share price.
Ethos, a Swiss foundation that represents many pension funds, has complained for years that Credit Suisse overcompensated its executives despite the bank’s poor performance. Credit Suisse’s top 1,000 executives received bonuses totaling $ 1 billion, Ethos complained in 2018.
Tuesday, Ethos said he hoped for “a new corporate culture with a more focused approach to risk management” when António Horta-Osório, Managing Director of Lloyds Banking Group, takes over the chairmanship of Credit Suisse at the annual meeting on 30 April. In December, Mr. Horta-Osório was appointed to replace Urs Rohner as chairman.
Shareholders can bear most of the pain of recent losses. Credit Suisse shares have lost almost a quarter of their value since the start of March. The bank announced on Tuesday that it would pay a dividend of 0.10 francs per share for 2020, instead of the 0.29 francs initially proposed.
Credit Suisse chief executive Mr Gottstein promised on Tuesday that this time the bank would change for the better. “Serious lessons will be learned,” he said.
Mr. Minder, the Swiss senator, does not believe so. “The bank has been mismanaged for years,” he said. “There are always new losses, always new scandals.”
Kate kelly, Matthew goldstein and Matt phillips contribution to reports.