'It's déjà vu': Credit Suisse faces a big loss from familiar troubles

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Credit Suisse’s disclosure Tuesday that it will lose almost $5 billion and remove two top executives after its involvement with Archegos Capital Management, the collapsed investment fund, has a familiar ring to anyone who lived through the last big financial crisis more than a decade ago.

Once again, hidden risks from opaque financial transactions have devastated a blue-chip bank, punished shareholders and ruined careers, raising questions about whether reforms to financial regulation went far enough.

Credit Suisse said it had enough capital to satisfy regulators, and there was no sign its problems were in danger of causing a broader financial crisis.

But its troubles with Archegos, the latest in a series of debacles that have battered the Swiss lender’s reputation, serve as a warning of the risks that may lurk in the financial system as bankers and investors try to earn returns when interest rates are at rock bottom and stock values are already frothy.

And the eye-popping losses showed that increased scrutiny of lenders during the last decade has not stopped some of the same kinds of behavior that caused the collapse of Lehman Bros. in 2008, setting off a financial crisis and severe economic downturns in the United States and Europe.

“It’s déjà vu,” said Thomas Minder, a member of the Swiss Ständerat, which is similar to the U.S. Senate. Reforms after the last financial crisis did not address some of the underlying causes, Minder said, such as outsize bonuses that encourage excess risk-taking by bank executives.

“I’m not surprised at all,” said Minder, a vocal critic of Credit Suisse. “It happens every few years.”

In a way, Credit Suisse has provided a backhanded endorsement of the safeguards that regulators worldwide put in place after 2008. Defying intense lobbying by the banking industry, central banks and bank supervisors forced lenders to use more of their own money in transactions by raising capital requirements.

Those capital buffers are one reason that the turmoil at Credit Suisse has not caused a broader panic. But Nicolas Véron, a senior fellow at the Peterson Institute for International Economics, said the crisis at Credit Suisse demonstrated that regulators needed to be vigilant as investors chased returns in a world where interest rates on bonds were sometimes negative and stock prices were already stratospheric.

Credit Suisse, Véron said, could be “a straw in the wind that suggests there is a relaxation of risk management within banks because it is so difficult to make money on interest margins.”

Credit Suisse has unintentionally rivaled Deutsche Bank for the title of Europe’s most accident-prone lender. Credit Suisse did not require a direct bailout from the Swiss government in 2008 after Lehman’s collapse, but it was deeply involved in the subprime mortgage crisis. In 2017, the bank agreed to pay $5.3 billion in penalties and compensation in the United States after admitting that it sold investors mortgage-backed securities that it knew would fail.

More recently, the bank has been involved in a spying scandal; written off $458 million in losses from its stake in York Capital Management, a hedge fund; and warned of losses from a $90 million loan to Greensill Capital, which collapsed last month.

Credit Suisse’s asset management unit oversaw $10 billion in funds that Greensill packaged based on financing it provided to companies, many of which had low credit ratings or were not rated at all. Credit Suisse said in its annual report for 2020 that it expected some of the companies to default on their payments and that Swiss regulators had ordered it to set aside more capital to cover the losses.

Credit Suisse detailed the financial impact of its dealings with Archegos for the first time Tuesday. The bank said it would report a loss for the first quarter of 900 million Swiss francs after booking a charge of 4.4 billion francs ($4.7 billion) related to the fund. Archegos is a private investment firm that managed the wealth of Bill Hwang, a veteran investor who had previously been fined for insider trading.

Credit Suisse is not alone. Japanese bank Nomura lost $2 billion from its involvement with Archegos.

There could be more bad news for Credit Suisse if it faces lawsuits from aggrieved investors or loses business because of its tarnished reputation. Analysts at JPMorgan Cazenove estimated that Credit Suisse would have to set aside $2 billion just to cover litigation stemming from the Greensill fiasco.

Credit Suisse’s involvement with Archegos and Greensill had echoes of the 2008 financial crisis in that they used hard-to-understand strategies that minimized regulatory scrutiny. Credit Suisse used opaque derivatives to help Archegos make big bets on companies like ViacomCBS without being required to report the investments to regulators.

The securities packaged by Greensill, and marketed by Credit Suisse, allowed companies that already had low credit ratings to hide additional borrowing. Accounting rules did not require disclosure.

Credit Suisse is holding more than half a dozen executives responsible for the disasters, including Brian Chin, the chief executive of Credit Suisse’s investment bank, who will leave April 30. Lara Warner, the chief risk and compliance officer, will step down immediately, the bank said Tuesday.

Thomas Gottstein, the chief executive of Credit Suisse since last year, will keep his job. He said in a statement that the bank would hire outside experts to investigate what had led to the “unacceptable” loss from Archegos as well as the bank’s involvement with Greensill Capital. Credit Suisse promised to disclose the conclusions of the investigations once they were complete.

Members of Credit Suisse’s executive board will forgo their bonuses for 2020 and 2021, the bank said. Credit Suisse will also cancel plans to buy back its own shares, a way of pushing up the stock price.

Ethos, a Swiss foundation that represents numerous pension funds, has complained for years that Credit Suisse overcompensated its top executives despite the bank’s poor performance. The top 1,000 executives at Credit Suisse received bonuses totaling $1 billion, Ethos complained in 2018.

On Tuesday, Ethos said it hoped for “a new corporate culture with a more focused approach on risk management” when António Horta-Osório, the chief executive of Lloyds Banking Group, takes over as chairman of Credit Suisse at the annual meeting April 30. In December, Horta-Osório was nominated to replace Urs Rohner as chairman.

Shareholders may bear the brunt of the pain for the recent losses. Credit Suisse shares have lost almost one-quarter of their value since the beginning of March. The bank said Tuesday that it would pay a dividend of 0.10 francs per share for 2020, instead of 0.29 francs as originally proposed.

Gottstein promised Tuesday that this time the bank would change for the better. “Serious lessons will be learned,” he said.

Minder, the Swiss senator, does not believe him. “The bank has been miserably managed for years,” he said. “There are always new losses, always new scandals.”

©2019 New York Times News Service