Credit Suisse Group CEO Thomas Gottstein sought to assure investors that the bank will "learn all the right lessons" from the debacle at Archegos Capital Management that cost the bank billions of dollars.
But a year before the blowup, the bank's leadership missed an opportunity to plug the holes in its risk-management operation, leaving the Zurich-based bank vulnerable to a repeat.
In March 2020, Credit Suisse was blindsided by a $214 million loss from the collapse of a hedge fund client, Malachite Capital Management. A subsequent internal probe revealed a litany of shortcomings and spurred top officials to try to prevent such a hit from recurring.
"While the Malachite incident was distinct from Archegos in many ways, certain of the issues and deficiencies ultimately identified there appear to have recurred with Archegos," according to the internal report on the implosion of the family office, which was published Thursday, along with second-quarter earnings.
The investigation into Credit Suisse's $5.5 billion loss from Archegos, prepared by the New York-based law firm Paul, Weiss, Rifkind, Wharton & Garrison and released today, concluded that while the bank's systems identified the dangers, they were "systematically ignored" by a prime services unit with a "lackadaisical attitude toward risk." That episode came just weeks after exposure to the collapse of Greensill Capital had already left the bank reeling.
Malachite, based in New York, was founded by former Goldman Sachs Group traders Jacob Weinig and Joe Aiken and managed about $600 million. The firm had wagered on volatility in stock markets, but their bets came undone in March 2020 as the coronavirus upended the global economy. The fund shut after receiving margin calls from banks including BNP Paribas, Bloomberg reported at the time.
While Malachite was a client of Credit Suisse's equity-derivatives unit rather than the prime-brokerage division that catered to hedge funds and family offices, its implosion exposed the same kinds of shortcomings that led to the Archegos loss, according to the Paul Weiss autopsy. The mishaps included shoddy risk assessment, missing red flags and tail risks, allowing the potential exposure to rise too high and, notably, a flawed margin strategy that left the bank exposed.
The debacle was buried amid positive results elsewhere. Credit Suisse posted a 21% surge in equities-trading revenue for the first quarter of 2020 on the back of "elevated volatility" and made no reference to Malachite in its earnings report.
But, internally, the losses had rattled top executives. The bank's models had predicted a maximum possible exposure to Malachite of just $7 million and a "scenario limit" of $129 million. The hedge fund had generated less than $7 million in total fees for Credit Suisse.
After Malachite shut, the board demanded an investigation and steps to design a "sustainable solution" that would prevent similar losses from happening again.
The effort, known as "Project Copper," led to the establishment of a senior-level group, the Counterparty Oversight Committee, which considered the Archegos matter twice, once in September and again March 8.
Two weeks before the implosion that led to a $5.5 billion loss, the committee concluded: "Move client to dynamic margining with add-ons for concentration and liquidity within the next couple of weeks. If no traction perceived by the middle of week of March 15, request an additional $250 million margin from the counterparty."