5/12/22, 11:12 PM Credit Suisse Report Details Failings in Archegos Debacle - The New York Times

https://www.nytimes.com/2021/07/29/business/credit-suisse-archegos.html

Daily Business Briefing

Credit Suisse finds incompetence but no criminal conduct in Archegos

debacle.
The Swiss bank, which lost $5.5 billion in the hedge fund’s collapse, will fire nine employees and order that some bonuses
be paid back.

By Jack Ewing

Published July 29, 2021 Updated Oct. 8, 2021

Credit Suisse suffered humiliation and shareholder wrath this year when it lost $5.5 billion from the collapse of the
Archegos Capital Management investment fund. On Thursday, the bank admitted that its own failings were to blame,
releasing a report that chronicled the “fundamental failure of management and controls” behind the debacle.

Perhaps the only bright spot for Credit Suisse in a report full of painful details was that the New York law firm hired by
the bank to conduct the autopsy attributed the losses to incompetence and fear of alienating a big client. The investigators
concluded that none of the bank employees “engaged in fraudulent or illegal conduct or acted with ill intent.”

The 165-page report, by the law firm Paul, Weiss, Rifkind, Wharton & Garrison, amounted to a case study in everything
that can go awry inside an investment bank and lead to financial disaster. At Credit Suisse, the problems included an
overworked and underqualified staff, miscommunication between departments, inattentive senior managers and a
system geared to increase sales rather than monitor risk.

Credit Suisse, based in Zurich, was hardly the only bank to do business with Archegos, which managed the wealth of Bill
Hwang, a onetime star money manager. But after Archegos collapsed in March, done in by a $20 billion wager on shares
of ViacomCBS that went sour, Credit Suisse was slower than Goldman Sachs and other creditors to liquidate the fund’s
positions, and it had the biggest losses.

Credit Suisse probably also suffered the biggest hit to its reputation, in part because it was caught up in another disaster
at almost the same time. Greensill Capital, which organized funds that Credit Suisse marketed to investors, filed for
bankruptcy in London only weeks before Archegos’s meltdown. Credit Suisse said Thursday that it expected to return at
least $5.9 billion to investors in the Greensill funds, which had been valued at $10 billion.

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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.

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5/12/22, 11:12 PM Credit Suisse Report Details Failings in Archegos Debacle - The New York Times

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
barred 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 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.
Jack Ewing writes about business, banking, economics and monetary policy from Frankfurt, and contributes to breaking news coverage. Previously he
worked for a decade at BusinessWeek magazine in Frankfurt, where he was European regional editor. @JackEwingNYT • Facebook

A version of this article appears in print on , Section B, Page 4 of the New York edition with the headline: In Archegos Report, Credit Suisse Finds Incompetence, Not Fraud

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5/12/22, 11:12 PM Credit Suisse Report Details Failings in Archegos Debacle - The New York Times

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