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Credit Suisse ignored ‘warning signs’ before losing billions in hedge fund collapse

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The Swiss bank published a report by law firm Paul, Weiss, Rifkind, Wharton & Garrison, which uncovered the continuing failures of senior executives to manage risks associated with transactions made by New York-based Archegos family office who managed the fortune of investor Bill Hwang.
Archegos used borrowed money to build massive positions in stocks, including media companies ViacomCBS (FOLLOWING) and Discovery (DISK), and was unable to repay its lenders when stock prices fell.
Its implosion cost global banks, including Morgan stanley (MRS) and from Japan Nomura (NMR), over $ 10 billion and has led to calls for tighter regulation of companies that invest on behalf of wealthy families and individuals who are subject to less scrutiny than financial institutions.
Swiss credit (CS) punished 23 of its employees following the hedge fund collapse, canceling or clawing back bonuses totaling $ 70 million and laying off nine staff, including top investment banker Brian Chin and chief risk officer Lara Warner.

The independent review found that the Archegos related losses were the result of a “fundamental failure of the management and controls” of Credit Suisse’s investment bank and in particular of its blue chip service business, which provides trading, financing and advisory services to hedge funds and institutional clients.

“The company was focused on maximizing short-term profits and failed to dampen, and even allowed Archegos to take voracious risks,” according to the report, which was based on more than 80 interviews with current and former Credit Suisse employees and over 10 million documents.

“There have been many warning signs, including large and persistent limit breaches indicating that Archegos’ concentrated, volatile and severely undersized swap positions pose a potentially catastrophic risk for Credit Suisse,” a- he added.

Although some people raised concerns, risk managers and senior executives, including the global head of equities, ignored the warnings. Although no fraudulent or illegal activity took place, there has been a “persistent failure” to manage “obvious risks,” according to the report.

He highlighted a “lax attitude to risk” in the blue-chip service sector and a “cultural reluctance to engage in difficult discussions”.

“The Archegos case directly calls into question the competence of the sales and risk management staff who had all the information necessary to assess the scale and urgency of Archegos risks, but repeatedly failed to take decisive and urgent measures to deal with it, ”he added. report added.

Why Archegos was allowed to operate in the shadows
In a statement, Credit Suisse chairman Antnio Horta-Osrio, who joined the bank in April after a decade as head of Lloyds (LLDTF), said the Swiss bank had already taken “a series of decisive steps” to strengthen risk oversight.

“We are committed to developing a culture of personal responsibility and accountability, where employees are risk managers at heart,” he added.

Credit Suisse said after the collapse of Archegos it had “significantly reduced” leverage exposure in the blue chip services industry, increased margin requirements and put processes in place. additional approval for “significant transactions”.

The most conservative approach to risk is is already weighing on its investment bank, which suffered a 41% drop in revenues in the second quarter compared to a year earlier. Credit Suisse on Thursday reported a 78% drop in profit for the period, following a first-quarter loss attributable to Archegos.

He said the findings of a separate investigation into his relationship with the bankrupt UK supply chain finance company Green capital would be published in the coming months.

CEO Thomas Gottstein said the bank took the Archegos and Greensill events “very seriously” and was “determined to learn all the right lessons”.

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2/ https://www.cnn.com/2021/07/29/investing/credit-suisse-archegos-report/index.html

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