What does Credit Suisse investigation into Archegos fiasco reveal?

An external investigation into the dealings of Credit Suisse with the collapsed US hedge fund manager Archegos Capital has revealed that the Swiss banking major had failed “to effectively manage risk.”

The investigation, which was led by Paul, Weiss, Rifkind, Wharton & Garrison LLP, involved 80 interviews conducted with current and ex-Credit Suisse staff. The probe also examined a collection of “more than 10 million documents and other data”.

“It also found a failure to control limit excesses across both lines of defense as a result of an insufficient discharge of supervisory responsibilities in the Investment Bank and in Risk, as well as a lack of prioritization of risk mitigation and enhancement measures,” the summary of the investigation report said.

The bank, however said that none of its employees were found to be involved in fraud or ill-intent . “However, the investigation also found that this was not a situation where the business and risk personnel engaged in fraudulent or illegal conduct or acted with ill intent,” it added.

The Archegos collapse had sent the global financial system into panic in April, as losses to banks – which included some big names – surpassed US$10 billion. Credit Suisse was the worst-hit bank in the fiasco, while other big names like Nomura, UBS, Morgan Stanley, Goldman Sachs and Wells Fargo also took massive hits.

At the end of the first quarter of 2021, Credit Suisse had reported a loss of CHF4.4 billion (US$5.4 billion) owing to the Archegos meltdown. However, in its second quarter update, earlier this week, the bank said that it incurred an additional pre-tax loss of CHF594 million related to the hedge fund collapse.

The collapse of Archegos happened after the hedge fund was forced to inject more cash into the stocks wherein it had massive stakes. Archegos had built huge holding in certain stocks through swaps – a derivative that investors trade over the counter or among themselves without reporting the holdings publicly and they are usually highly leveraged. This led to a forced liquidation of more than US$20 billion for Archegos.