Credit Suisse keeps getting smacked. Let’s review a few of their recent scandals:
- $4.7 billion charge for losses in trades with Archegos Capital Management, the imploding hedge fund
- $1.5 billion loss likely in dealings with collapsed supply chain finance company Greensill Capital, just three weeks prior
- Bonus scandal: Former CEO Tidjane Thiam spied on employees and was forced out in February 2020
So they’ve been busy! Why is this one company stumbling from cliff to quagmire?
A major factor appears to be its bifurcated business, which focuses on both asset management and investment banking, but is too small to be a big player in either market. So, in order to win business from its bigger competitors, it has to offer better terms and do worse deals.
In reality, the asset-management unit, which brought in Greensill, and the investment bank, which handled Archegos, were too small to square off with Wall Street giants. The bank tried to make more money from fewer clients than rivals with larger balance sheets and ended up overlooking risks, the executives said.
There were clear warning signs on both Archegos and Greensill.Tweet
There were clear warning signs on both Archegos and Greensill. Archegos founder Bill Hwang had been sanctioned by the SEC for insider trading and banned from handling client money, which is the entire reason he started Archegos in the first place. It was a family office, managing just his own family’s money, due to that SEC ruling. Credit Suisse thought the risk was limited because he wasn’t managing client money, but failed to consider what would happen to its own funds!
Greensill too had come under scrutiny early enough to avert problems, but nothing was done:
In 2019, members of the credit-structuring team escalated its alerts about Greensill to the bank’s reputational-risk committee, the person familiar with the funds said. They had become concerned Greensill might be taking operational shortcuts.
Interestingly, the dynamic of Credit Suisse agreeing to anything in order to win business from larger competitors was played out by its client Greensill as well:
Mr. Greensill signed up some big, credit-rated companies. To wrest those customers from big banks, Greensill had to offer competitive terms that didn’t make it much money, according to people familiar with Greensill’s business.
Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoidTweet
Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid it. We can also gain a broader lesson from this fiasco. If you’re a smaller company trying to get into a market, don’t do disadvantageous deals just to get some market share. You expose yourself to too many problems that will blow you up before you ever get a chance to compete with the big boys.
For more on Archegos, check out these posts:
- How to Lose $8 Billion in 10 Days
- Inside the Archegos Implosion: “We Don’t Know How Far the Tentacles Go”
- A Giant Hedge Fund Is Imploding, Taking Stocks with It
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Photo: “Punch to the Face” by Ninja M. is licensed under CC BY-NC-SA 2.0