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

Five months before the collapse of Greensill Capital, Credit Suisse invited a special guest to come to its highest ranks in Asia. The visitor was hailed as the kind of daring entrepreneur the bank wanted to do business with: Lex Greensill.

“The tone was this was the exact type of customer the bank wants, tell the doctors to come out and find more guys like Lex,” said a senior executive who watched the November video conference. It was moderated by Helman Sitohang, director of the bank for Asia and one of Greensill’s biggest advocates.

Yet just two months earlier, Greensill Capital had been put on a “watch list” by risk managers at the Swiss bank in Asia, according to people familiar with the matter.

Perhaps that would have alarmed Credit Suisse more, which had $ 10 billion in funds filled with loans issued by Greensill. In its core business, Greensill paid suppliers to large corporate clients – early but with a small discount – and received the full amount later from the corporate client. The debt was packed into Swiss bank funds which were sold to outside investors.

However, the warnings have been repeatedly dismissed by the bank’s executives in Zurich, London and Singapore. They continued to market the Greensill funds and even approved a $ 160 million loan to the company, which was started by its eponymous Australian founder in 2011.

In March, Greensill collapsed into administration. Its fall could cost Credit Suisse clients up to $ 3 billion.

“The appearance of Lex’s video showed that the whole risk culture was just ‘thanks for the caveat, but we don’t agree’,” said the director who watched the presentation from November. “When Lex arrived, the bank couldn’t get enough of him.

The Greensill explosion is just one link in a long chain of failed risk management at Credit Suisse. Weeks later, Archegos Capital, the family office of disgraced former hedge fund manager Bill Hwang, defaulted on a margin call, causing chaos at banks that had loaned it billions to magnify its positions. Credit Suisse suffers the largest losses of at least $ 4.7 billion.

Payments to Credit Suisse shareholders have been canceled and bankers face big bonus cuts. The succession of crises has left investors and staff furious and demanding. How did executives get so excited about a small group of questionable clients? And why have those who throw red flags been ignored or marginalized?

“Accumulating giant exposures to single entities, especially low quality ones, goes completely against all risk management principles,” said Benedict Roth, former risk supervisor at the Bank of England.

‘Swimming with sharks’

In interviews with the Financial Times, six current and former Credit Suisse executives said the bank has deepened its risk expertise and trading acumen in favor of promoting salespeople and technocrats. Dissenting voices have been suppressed, they said.

“There was numbness of the senses,” said a former executive. “Credit Suisse swam in the bottom with sharks, but did so with a private banking mentality. They were always going to be destroyed.

At the center of the controversy was Lara Warner, who was responsible for risk and compliance until her ouster on April 6. A former equity analyst at Lehman Brothers, she joined Credit Suisse in 2002 to cover the cable television and telecommunications sectors.

The dual Australian-American citizen became director of finance for the investment bank, before ex-CEO Tidjane Thiam appointed her head of compliance and regulatory affairs in 2015.

Credit Suisse chairman Urs Rohner and Thiam, “came up with the idea that you can appoint any smart person to a position and they will be successful, even if they had no experience. . .[but]it was inappropriate for risk and compliance, ”said another executive.

When Thiam resigned over a spy scandal, his successor Thomas Gottstein added global risk oversight to Warner’s responsibilities. It did so to try and save on duplicate technology and operating costs across the two divisions, on which the bank spends around half a billion dollars a year, a person close to the CEO said.

Warner was keen that the bank’s overall risk function was not seen as an “academic ivory tower” that could “rule out business in an uncontrollable manner,” according to a person close to the bank. She also wanted her department to be seen as a career destination rather than an administrative backwater.

During his five-year tenure, Warner and other executives lobbied for risk and compliance to be “more business” and “aligned” with traders and front office negotiators, multiple staff said. current and former FT.

She led by example. In October, Warner personally canceled risk managers who warned against granting Greensill a $ 160 million bridging loan before a private fundraiser. The loan is now in default.

Warner has also removed more than 20 senior executives from Credit Suisse’s risk department. Most quickly found high-level jobs, including at UBS, Jefferies, Standard Chartered, and the Hong Kong Stock Exchange.

His predecessor – Joachim Oechslin, Swiss national and head of career risks – was sidelined to become chief of staff of CEO Gottstein. He has now been reinstalled as acting chief risk officer.

Thomas Gottstein and Joachim Oechslin

Thomas Gottstein, left, new chief executive of Credit Suisse, and Joachim Oechslin, now interim chief risk officer of the bank

“When you bring a sense of fear into an organization by removing so many people, the culture of risk is no longer to say ‘no’ to the business,” said one person involved at the time.

Last year, Warner ruffled more feathers by changing the reporting lines. Some market risk functions, which previously sat in a central independent risk team, have been transferred to report to the front office technology manager.

While some other banks use this model, “from a supervisory perspective, it was a disaster” at Credit Suisse, according to a person who lobbied against the changes. “The risk has lost its independence.”

Hindered by bureaucracy

Another key figure in the Greensill relationship is Helman Sitohang, Asia Manager at Credit Suisse. He has stayed out of the spotlight until now.

An investment banker by training, Sitohang has attracted some of the bank’s most lucrative clients in the region, including a series of Indonesian tycoons such as Peter Sondakh from Rajawali. He also heads up the lender’s relationship with SoftBank, the Japanese group behind the $ 100 billion Vision Fund, a major backer to Greensill.

“He’s a salesperson. He has a risk-independent approach to clients, ”said one person who worked closely with him.

Sitohang defended Greensill in a summer 2020 review ordered after the FT revealed that SoftBank was using Credit Suisse’s Greensill-linked supply chain finance funds to funnel hundreds of millions of dollars to distressed businesses that it owned.

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

Credit Suisse missed many opportunities to avert disaster. According to two people familiar with the project, in 2016, the Asia business began building an exposure mapping tool for a client looking for second-order issues that could bounce back on the bank.

Called “Risk 360”, the tool was put into operation after the lender discovered disproportionate exposure to a group of companies in Hong Kong that had connections to an individual, disguised as a convoluted network of corporate entities in the purpose of manipulating stock prices, people mentioned.

The system received rave reviews from the Swiss regulator, Finma, and a worldwide deployment was planned. But it found itself trapped in a “huge bureaucratic machine” behind dozens of other tech projects, and came to nothing, they added.

Had it been adopted more widely, growing risks such as Greensill and the US senior brokerage division’s exposure to Archegos would have been “absolutely” spotted, one said. Another person close to Credit Suisse disagreed, pointing out that these incidents were largely beyond the tool’s capabilities as it relied on publicly available information.

Credit Suisse, Warner and Sitohang declined to comment for this article.

‘Lack of discipline’

Problems boiled beneath the surface before Credit Suisse’s costly missteps in Greensill and Archegos manifested themselves.

“There were a lot of tremors that signaled to anyone sensitized to the risk of the potential for a big hitting increasing,” said a former senior executive.

In 2018, Credit Suisse lost around $ 60 million after it was allowed to hold a block of shares in clothing company Canada Goose when its share price fell. About a year later, the bank lost around $ 200 million when Malachite Capital, a New York hedge fund and one of its main brokerage clients, imploded.

“These losses are due to a lack of discipline,” said the former leader. Much like with Archegos, senior executives at Credit Suisse found themselves stuck in important positions to negotiate prices as their peers aggressively sold.

“There was systematic callousness at all levels,” said a second person. “If you’re at the head of the risk and you pass up a $ 60 million loss, then a $ 200 million loss, and you don’t ask what’s going on here, what do you do?”

A former chief executive recalls a 2019 conference call about reforming the benchmark Libor interest rate. When a senior trader called, an automated message was played reminding everyone that the meeting was now recorded, a regulatory requirement.

When Warner heard this, she asked the trader to call back from an unregistered line. Some of those in attendance thought it was a shocking intervention by a risk management officer. A person close to Warner, noting that the call had nothing to do with trading, said it was just a normal way of doing business.

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