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  • Frank Tian

🤯 Risk Replay: Credit Suisse’s $5.5B Archegoes Mishap

This week, Credit Suisse grabs the financial market’s attention again.

The bank is still standing. However, it is clearly haunted by previous mishaps, including the $5.5B Archegoes loss.

The Archegoes loss serves as a classic case study. Here is a recap of how a series of internal and external factors leading to the largest loss.

🟧 The People

In Feb 2020, the previous CEO was ousted by the board due to a spying scandal. He was brought in to tame the risk of the investment bank 5 years ago. With the staff turnover, many positions were filled with less experienced people.

On the same day the CEO left the bank, the risk manager of the prime brokerage unit died from a ski-lift accident. The replacement was someone who spent two decades in sales.

🟧 The System

In March 2020, the pandemic spooked the market. The bank lost $200 million from the failure of a hedge fund. The review called for a better system to monitor risk real time.

The 2-year project was still in progress when the Archegoes loss happened. In a market with high volatility, the bank significantly underestimated the risk with lagged data.

In prime brokerage, there is no aggregate reporting at the industry level regarding how much an entity has borrowed. Each investment bank wants to guard its financial dealing with the client.

🟧 The Process

The new risk manager of prime brokerage did flag the rising exposure of Archegoes to the counterparty credit risk team.

However, no action seemed to be taken. The issue did not get escalated, either.

Instead of asking the client to put in more cash to secure its bets, the bank returned some cash per Archegoes’ request - given the increased stock prices in early 2021.

🟧 The Result

The exposure of Archegoes grew to $20 billion, with only 10% cash received at one time.

The reward for such massive risk was relatively small: in tens of millions over several years.

🟧 The Final Days

In March 2021, Archegoes held a meeting with its lenders to discuss a survival plan. True exposure and leverage came to light.

No deal was reached at the end of the meeting. Some banks quickly offloaded their holdings after the meeting.

Credit Suisse seemed to be the last to act, thus experienced the biggest loss.

Sources: WSJ, Bloomberg, NY Times

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