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Credit Suisse overhauls management as it takes $4.7 billion hit on Archegos

Stock MarketsApr 06, 2021 03:30AM ET
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© Reuters. FILE PHOTO: Logo of Swiss bank Credit Suisse is seen in Zurich

By Brenna Hughes Neghaiwi and Matt Scuffham

ZURICH (Reuters) -Credit Suisse said on Tuesday it will take a 4.4 billion Swiss franc ($4.7 billion) hit from dealings with Archegos Capital Management, prompting it to overhaul the leadership of its investment bank and risk division.

The scandal-hit bank now expects to post a loss for the first quarter of around 900 million Swiss francs. It is also suspending its share buyback plans and cutting its dividend by two thirds.

Switzerland's No. 2 bank, which has dumped over $2 billion worth of stock to end exposure to Archegos, said Chief Risk Officer Lara Warner and Brian Chin, the bank's investment banking head, were stepping down following the losses.

"The significant loss in our Prime Services business relating to the failure of a US-based hedge fund is unacceptable," Credit Suisse (SIX:CSGN) Chief Executive Thomas Gottstein said in a statement. "Serious lessons will be learned. Credit Suisse remains a formidable institution with a rich history."

The Archegos fallout is the second major scandal for Credit Suisse in just over a month after the collapse of Greensill Capital, with the bank's shares down by a quarter since March 1. Credit Suisse had marketed funds that had financed the operations of the British supply chain finance firm.

The bank's board has launched an investigation into the Archegos losses. It also has begun a probe into its $10 billion supply chain funds which invested in bonds issued by Greensill. Bonuses for executive board members have been scrapped and outgoing chairman Urs Rohner is to forgo his 1.5 million Swiss franc fee.

Credit Suisse shares were down 1.5% in early trade.

The bank said Christian Meissner would be appointed chief of the investment bank as of May 1, while Joachim Oechslin, who was the bank's chief risk officer until February 2019, would take on the risk head role again on an interim basis. Thomas Grotzer is to be interim global head of compliance.

"At least - in our opinion - personnel consequences have now been taken. The main damage, however, has been inflicted on shareholders, who have to make do with a lower dividend and a suspended share buyback," said Michael Kunz, an analyst at Zuercher Kantonalbank.

"In view of the bank's vulnerability to risk....it does not seem appropriate to us to recommend bets on the securities of CS Group."

Warner and Chin are paying the price for a year in which Credit Suisse's risk management protocols have come under harsh scrutiny. JPMorgan Chase & Co (NYSE:JPM) analysts estimate that combined losses from the Archegos and Greensill scandals could add up to $7.5 billion.

Archegos, a private investment vehicle of former hedge fund manager Sung Kook "Bill" Hwang, fell apart late last month when its debt-laden bets on stocks of certain media companies unravelled. Credit Suisse and other banks, which acted as Archegos' brokers, had to scramble to sell the shares they held as collateral and unwind the trades.

Last month Credit Suisse said it was separating its asset management business from its wealth unit and bringing former UBS executive Ulrich Koerner to lead the funds business.

"Obviously heads are rolling. After any sort of blow up there's always tighter control," said Jason Teh, chief investment officer at Vertium Asset Management in Sydney.

Credit Suisse had lost a lot of money and its share price will struggle to rally, Teh said.

"In the short term, even if all that is declared, (the stock) is not going to go up because you still have to grow earnings. Basically they've lost earnings and they won't get it back until they find another way to get it."

The episodes have also put pressure on Chief Executive Thomas Gottstein who has been trying to move Credit Suisse on from another string of bad headlines, spanning a spy scandal that ousted predecessor Tidjane Thiam to a $450 million write-down on a hedge fund investment.

UNWINDING THE TRADES

Hwang, a former Tiger Asia manager, ran into trouble following a March 24 stock sale by media company ViacomCBS (NASDAQ:VIAC) Inc. Archegos was heavily exposed to ViacomCBS, sources said, and the slide in stock set off alarm bells at its banks, which called on the fund for more collateral.

When the firm could not meet the demand, the banks started selling the collateral, which included shares of Baidu Inc (NASDAQ:BIDU) and Tencent Music Entertainment Group (NYSE:TME), among others.

While some banks were able to offload their collateral earlier, Credit Suisse still had shares left. On Monday, it offered 34 million shares of ViacomCBS priced between $41 to 42.75; 14 million American depository receipts of Vipshop (NYSE:VIPS) Holdings Ltd between $28.50 and $29.50; and 11 million shares of Farfetch (NYSE:FTCH) Ltd, priced between $47.50 and $49.25 in secondary offerings, a source familiar with the situation said.

The shares were the remaining holdings tied to Archegos that Credit Suisse needed to sell before tallying up losses, the source said.

ViacomCBS shares, which traded at a record of $101.97 in March, closed down 3.9% at $42.90 in regular trading. Vipshop was down 1.19% at $29.78, while Farfetch shares fell nearly 6.1% to $49.69.

Credit Suisse overhauls management as it takes $4.7 billion hit on Archegos
 

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Comments (4)
TL Chan
TL Chan Apr 05, 2021 11:53PM ET
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Before they leave, please check if they have received bribery money!
Zach Lohman
Zach Lohman Apr 05, 2021 10:15PM ET
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I’m under the impression a bank can in a sense manufactor as much profit as it wants since loans just blossom and expand out the balance sheet (they dont have to raise funds in the convential way of most businesses). Were these officers under pressure to allow rising risk levels for the sake of shaky profit? I just get the feeling at most banks a conflict between the risk officer and the sales office has the sales office win. On the part of the family fund manager, if he wanted to use that much leverage why not lock it in place with long term loans that couldnt be called on a dime? This whole episode seems like bizzaro land stuff.
Gold Fever
Gold Fever Apr 05, 2021 9:28PM ET
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They will cash out with millions, rinse and repeat somewhere else, game of rich pawns
Tim Ki
Tim Ki Apr 05, 2021 9:26PM ET
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If the CEO didn't know what was going on then he should probably go on a course in being a good manager, or depart himself, bad (pass the buck) culture at Credit Suisse? Turn a blind eye as you know you can scapegoat someone lower than you? I've worked in similar places.
nemo me impune lacessit
nemo me impune lacessit Apr 05, 2021 9:26PM ET
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Yes, to say the least, leadership begins at the top.
 
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