By Geoffrey Smith
Investing.com -- Credit Suisse has spent a decade trying to reinvent itself as a more transparent, less cavalier player in global financial markets, but the events of the last month suggest that it may all have been a sham.
Already last week, the Swiss bank was reportedly facing losses of anything between $1 billion and $3 billion from its exposure to Greensill Capital, the collapsed supply chain finance lender. It’s now facing another multi-billion loss on loans made to Archegos Capital Management, the prop trading vehicle of a man already convicted of securities fraud.
One unconfirmed wire report, citing unnamed sources, said the bank could lose up to $7 billion unwinding its Archegos trades, although JPMJPMorgan Chase analysts pegged the loss somewhere between $2.5 billion and $5 billion. The bank itself said on Monday it’s too early to know how big the hit will be but said it “could be highly significant and material to our first quarter results.”
As such, a conservative estimate suggests that losses from the two episodes will total at least $3.5 billion, while the worst-case scenario would see $10 billion of equity gone. For context, the bank has made total profits of just under $3 billion last year and a little less than $8 billion over the last four years combined.
Either incident would be enough to raise serious questions about the bank’s internal risk management, but the two together – originating in completely different areas of the group – suggest that the responsibility for the lack of control lies at the very top.
This is in no way surprising, given the extraordinary level of dysfunction evident in the exit of Tidjane Thiam as CEO in 2020 after a spying scandal that showed how far above the normal rules of ethics top management considered itself to be. The bank’s asset management arm doubled down on its exposure to Greensill even after the supply chain finance group blew up GAM, a rival Swiss-based asset manager, in 2018. Assumptions of superior in-house risk management now look complacent in the utmost. The arrival in five weeks’ time of new chairman Antonio Horta-Osario to replace the discredited Urs Rohner cannot come soon enough.
Credit Suisse (SIX:CSGN)shares were down another 2.2% in Zurich on Tuesday and are now down 22% on the month.
Were the risks unmanageable, or just unmanaged? The latter is certainly what Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) will be arguing before the Securities and Exchanges Commission, which is now looking into the affair. However, Wall Street’s blue bloods are unlikely to have heard the last of this. How prime brokers colluded to let Hwang – a convicted securities fraudster – use complex, leveraged structures to take massive directional bets on single stocks without disclosing his beneficial interest is a story that goes way beyond shortcomings in Zurich.