So how exactly do you explain what is now estimated to be 5 billion francs ($5.5 billion) in charges from letting a client build up a massively leveraged position that ultimately couldn’t be repaid?
That was the challenge on Thursday facing Credit Suisse
Chief Executive Thomas Gottstein and Chief Financial Officer David Mathers, having surprised investors with some $1.9 billion in new fundraising, and the announcement the second quarter will also see a charge relating to Archegos Capital Management, the fund that collapsed after betting on U.S. media and Chinese internet companies.
Gottstein wasted no time addressing the inevitable. “The significant loss in our prime services business relating to the failure of a U.S.-based hedge fund is unacceptable,” he said, continuing the bank’s odd insistence at mislabeling Archegos Capital Management, which was a family office.
There is also the matter of the Greensill supply-chain funds, which had $10 billion at the time of suspension. Credit Suisse says it has already given back $4.8 billion to investors, and according to Gottstein has “good visibility” on about three-quarters of the book, and has “very strong legal positions” with respect to the remaining 23%. “We have noted that it is reasonably possible that Credit Suisse will incur a loss in respect of these matters, though it is not yet possible to estimate the size of such a reasonably possible loss,” said Gottstein.
But the bank fielded far more queries from analysts about Archegos than Greensill.
Amit Goel of Barclays went for the jugular with the very first question, noting Gottstein and Mathers have each spent more than two decades at the bank. “I’m just trying to understand essentially how, in your view, how the group has got to a position where, in 2021, we’re having a debate where the group is looking to cut back on risk within the prime business and there are questions about the future of the asset management business. So, just trying to understand, from your perspective, how we’ve arrived at this point,” he asked.
Gottstein made it sound like it was just two very unfortunate incidents. “Look, generally, the prime services business in the past didn’t have any losses. Clearly, this loss came as a big surprise to us and we are taking measures that this will not reoccur,” he said. He took a similar stance on Greensill. “Asset management, we had, again, this situation around Greensill but the overall asset management business, as we saw also today, is actually doing very well from operational perspective.”
Mathers said the investment bank is reducing leverage by at least $35 billion — mostly in the prime services business. He said that reduction accounts for roughly a third of the total leverage employed at the prime business.
Mathers also took umbrage at the idea Credit Suisse did a worse job exiting the Archegos positions than its Wall Street peers such as Goldman Sachs
and Morgan Stanley
“I think I would just refute the suggestion that we were slow to sell down. We produced reduced position in a lawful and orderly manner I think, in respect to the challenge we actually faced. And I think as far as I can tell in terms of looking at the prices we achieved compared to the other prime brokers, the exit prices were broadly similar over the period of time,” he said.
Gottstein commented on what Credit Suisse has already learned, though an internal investigation is continuing. Disclosure, he said, needs to be improved, particularly around family offices. The bank also needs to look at the limits, both in absolute terms and in terms of margin, that it allows, and the correlation between short and long positions and concentration risk management.
“This is an isolated case. Look, I definitely hope it is and I think it is, but we are obviously reviewing the entire bank now just to make sure that our risk processes and systems are where they should be,” he said.
Credit Suisse shares dropped 5% on Thursday, and have dropped 29% since the bank first announced losses tied to its lending to Archegos.