Business and Finance

How Credit Suisse rolled the dice on risk management — and lost

Five months earlier than Greensill Capital’s collapse, Credit Suisse invited a particular visitor to current to its high ranks in Asia. The customer was hailed as the form of daring entrepreneur the financial institution needed to do enterprise with: Lex Greensill.

“The tone was this is the exact kind of client the bank wants, tell the MDs to go out and find more guys like Lex,” mentioned one senior supervisor who watched the November video convention. It was hosted by Helman Sitohang, the financial institution’s head of Asia and one in every of Greensill’s largest advocates.

Yet simply two months earlier Greensill Capital had been put on a “watchlist” by the Swiss financial institution’s risk managers in Asia, in keeping with individuals acquainted with the matter.

That might need raised extra alarm at Credit Suisse, which had $10bn funds full of loans originated by Greensill. In its fundamental enterprise, Greensill paid suppliers to giant company prospects — early however at a small low cost — and obtained the full quantity later from the company consumer. The debt was packaged into the Swiss financial institution’s funds that had been offered to exterior buyers.

However, warnings had been repeatedly dismissed by the financial institution’s management in Zurich, London and Singapore. They continued to market the Greensill funds and even authorised a $160m mortgage to the firm, which was launched by its eponymous Australian founder in 2011.

In March Greensill collapsed into administration. Its fall from grace might price Credit Suisse’s purchasers as a lot as $3bn.

“Lex’s video appearance showed that the whole risk culture was just ‘thanks for the heads-up but we beg to differ’,” mentioned the supervisor who watched the November presentation. “When Lex came along, the bank couldn’t get enough of him.”

The Greensill blow-up is just one hyperlink in an extended chain of risk management failures at Credit Suisse. Just weeks later, Archegos Capital, the household workplace of disgraced former hedge fund supervisor Bill Hwang, defaulted on a margin name, sparking chaos at banks that had lent him billions to enlarge his positions. Credit Suisse is nursing the largest losses of at the very least $4.7bn.

Credit Suisse’s performance and key risk issues since 2010

Credit Suisse shareholder payouts have been cancelled and bankers face big bonus cuts. The succession of crises have left buyers and employees livid and demanding solutions. How did executives develop into so enthusiastic a couple of small group of doubtful purchasers? And why had been these elevating purple flags ignored or marginalised?

“Accumulating giant exposures to single entities, especially low-grade ones, goes completely contrary to every principle of how to manage risk,” mentioned Benedict Roth, a former risk supervisor at the Bank of England.

‘Swimming with the sharks’

In interviews with the Financial Times, six present and former Credit Suisse managers mentioned the financial institution hollowed out risk experience and buying and selling acumen in favour of selling salesmen and technocrats. Dissenting voices had been suppressed, they mentioned.

“There was a dulling of the senses,” mentioned a former government. “Credit Suisse was in the deep end swimming with the sharks, but doing it with a private banking mindset. They were always going to get destroyed.”

At the centre of the controversies was Lara Warner, the chief risk and compliance officer till she was ousted on April 6. A former Lehman Brothers fairness analyst, she joined Credit Suisse in 2002 to cowl the cable tv and telecoms industries.

The Australian-US twin citizen rose to finance director of the funding financial institution, earlier than ex-CEO Tidjane Thiam named her chief compliance and regulatory affairs officer in 2015.

Credit Suisse chair Urs Rohner and Thiam “came in with a mindset that you can appoint anyone clever into a job and they will be a success, even if they had no experience . . . [but] that was inappropriate for risk and compliance,” one other government mentioned.

When Thiam stepped down over a spying scandal, his successor Thomas Gottstein added world risk oversight to Warner’s duties. He did this to attempt to save on duplicated know-how and working prices in the two divisions, on which the financial institution spends about half a billion {dollars} a 12 months, an individual near the CEO mentioned.

Warner was eager that the financial institution’s world risk perform shouldn’t be seen as an “academic ivory tower” that might “dismiss business out of hand”, in keeping with an individual near the financial institution. She additionally needed her division to be seen as a profession vacation spot fairly than an administrative backwater.

During her five-year tenure, Warner and different executives pushed for risk and compliance to be “more commercial” and “aligned” with the entrance workplace merchants and dealmakers, a number of present and former employees advised the FT.

She led by instance. In October, Warner personally overruled risk managers who cautioned towards giving Greensill a $160m bridge mortgage forward of a non-public fundraising. The mortgage is now in default.

Warner additionally eliminated greater than 20 senior managers from Credit Suisse’s risk division. Most swiftly discovered high-ranking jobs, together with at UBS, Jefferies, Standard Chartered and the Hong Kong Stock Exchange.

Her predecessor — Joachim Oechslin, a Swiss nationwide and profession risk supervisor — was moved apart to develop into chief of employees for CEO Gottstein. He has now been reinstalled as interim chief risk officer.

Thomas Gottstein and Joachim Oechslin
Thomas Gottstein, left, Credit Suisse’s new chief government, and Joachim Oechslin, now the financial institution’s interim chief risk officer

“When you bring in a sense of fear into an organisation by removing so many people, the culture of the risk is not to say ‘no’ to the business any more,” mentioned an individual concerned at the time.

Last 12 months Warner ruffled extra feathers by altering reporting traces. Some markets risk features, which beforehand sat inside an impartial central risk crew, had been shifted to report back to the head of entrance workplace know-how.

While another banks use this mannequin, “from a control point of view this was a disaster” at Credit Suisse, in keeping with one one that lobbied towards the modifications. “Risk lost its independence.”

Hampered by forms

Helman Sitohang, Credit Suisse’s head of Asia, is one other key determine in the Greensill relationship. He has remained out of the highlight thus far.

An funding banker by background, Sitohang introduced in a few of the financial institution’s most profitable purchasers in the area, together with a string of Indonesian tycoons similar to Rajawali’s Peter Sondakh. He additionally leads the lender’s relationship with DelicateBank, the Japanese group behind the $100bn Vision Fund, a major backer of Greensill.

“He is a salesman. He has a risk-agnostic approach to clients,” mentioned an individual who labored carefully with him.

Sitohang spoke up for Greensill throughout a summer time 2020 evaluation ordered after the FT revealed DelicateBank was utilizing Credit Suisse’s Greensill-linked supply-chain finance funds to route tons of of tens of millions of {dollars} to struggling firms it owned.

“Helman was personally very supportive of Lex, telling us we couldn’t damage the relationship with him,” a colleague mentioned.

Credit Suisse missed quite a few alternatives to avert catastrophe. According to 2 individuals near the undertaking, in 2016 the Asia enterprise began to construct a device to map a consumer’s exposures in seek for second-order issues that might rebound on the financial institution.

Called “Risk 360”, the device was commissioned after the lender found outsized publicity to a gaggle of companies in Hong Kong that had hyperlinks again to at least one particular person, disguised by a convoluted net of company entities with the purpose of manipulating inventory costs, the individuals mentioned.

The system obtained glowing evaluations from the Swiss regulator, Finma, and a worldwide rollout was deliberate. But it turned trapped in a “huge machinery of bureaucracy” behind dozens of different know-how initiatives, and went nowhere, they added.

Had it been adopted extra extensively, mounting dangers similar to Greensill and the US prime brokerage division’s publicity to Archegos would have “absolutely” been noticed, one in every of them mentioned. Another particular person near Credit Suisse disagreed, stating that these incidents had been largely exterior the device’s capabilities as a result of it relied on publicly-available information.

Credit Suisse, Warner and Sitohang declined to remark for this text.

‘Lack of discipline’

Problems had been effervescent beneath the floor earlier than Credit Suisse’s pricey missteps at Greensill and Archegos emerged.

“There were numerous tremors that signalled to any risk-literate person that the potential for a big one to hit is growing,” mentioned a former senior government.

In 2018, Credit Suisse lost about $60m after it was left holding a block of shares in clothes firm Canada Goose when its inventory value plummeted. About a 12 months later, the financial institution lost about $200m when Malachite Capital, a New York hedge fund and one in every of its prime brokerage purchasers, imploded.

“Those losses arose from lack of discipline,” the former government mentioned. Just as with Archegos, senior managers at Credit Suisse acquired caught in giant positions negotiating on value whereas their friends aggressively offered out.

“There was systematic insensitivity at all levels,” mentioned a second particular person. “If you’re the head of risk and you let a $60m loss go by, then a $200m loss, and you don’t ask what the hell is happening here, what are you doing?”

One former managing director remembers a 2019 convention name about the reform of the Libor rate of interest benchmark. When a senior dealer dialled in, an automated message was performed reminding everybody that the assembly was now being recorded, a regulatory requirement.

When Warner heard this, she requested the dealer to name again from a non-recorded line. Some of these current discovered it a jarring intervention from a risk officer. An individual near Warner, noting that the name had nothing to do with buying and selling, mentioned it was only a regular approach of doing enterprise.

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