How Credit Suisse rolled the dice in risk management and lost

Five months before the collapse of Greensill Capital, Credit Suisse invited a special guest to perform in its top spots in Asia. The visitor was hailed as the kind of bold businessman the bank wanted to do business with: Lex Greensill.

“The tone was that this was the exact kind of customer the bank wants, tell the doctors to go out and find more guys like Lex,” said a senior executive who watched the November video conference. It was hosted by Helman Sitohang, the Asian head of the bank and one of Greensill’s top advocates.

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

This could have caused more alarm at Credit Suisse, which had a $ 10 billion fund filled with loans originated by Greensill. In its core business, Greensill paid suppliers to large corporate firms (in advance but with a small discount) and later received the full amount from the corporate customer. The debt was packaged in Swiss bank funds that were sold to foreign investors.

However, the warnings were repeatedly dismissed by the bank’s management in Zurich, London and Singapore. They continued to market Greensill funds and even approved a $ 160 million loan to the company, which was launched by its Australian founder of the same name in 2011.

In March, Greensill fell to the administration. His fall from grace could cost Credit Suisse customers up to $ 3 billion.

“The appearance of Lex’s video showed that the whole risk culture was just‘ thank you for the advance, but we ask for differences, ’” said the manager who saw the November presentation. “When Lex appeared, the bank I couldn’t have had enough. “

The Greensill explosion is just a nexus of a long chain of failures in risk management at Credit Suisse. A few weeks later, Archegos Capital, the family office of former dishonored hedge fund manager Bill Hwang, incurred a margin call, wreaking havoc on banks that had lent him billions to magnify their positions. . Credit Suisse is suffering the biggest losses of at least $ 4.7 billion.

Credit Suisse shareholder payments have been canceled and bankers are facing off big bonus cuts. The succession of crises has left investors and staff furious and demanding. How did executives get excited about a small group of dubious customers? And why were those who raised red flags ignored or marginalized?

“The accumulation of giant exposures to individual entities, especially low-level ones, is completely contrary to all the principles of how to manage risk,” said Benedict Roth, a former risk supervisor at the Bank of England.

“Swimming with Sharks”

In interviews with the Financial Times, six current and former executives of Credit Suisse said the bank removed the risky experience and business acumen in favor of promoting vendors and technocrats. They said they suppressed dissenting voices.

“There was a mess of the senses,” a former executive said. “Credit Suisse was swimming with sharks, but it was with a private banking mentality. They were always going to be destroyed. ”

At the center of the controversy was Lara Warner, the main person responsible for risks and compliance until she was fired on April 6. A former Lehman Brothers equity analyst, he joined Credit Suisse in 2002 to cover the cable television and telecommunications industry.

The Australian-American dual citizen became director of finance for the investment bank, before former CEO Tidjane Thiam appointed his chief compliance and regulatory officer in 2015.

Credit Suisse President Urs Rohner and Thiam, “came up with the mentality that you can appoint any smart person in a job and you will succeed, even if they have no experience. . .[but]that was inappropriate for risk and compliance, ”another executive said.

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

Warner wanted the bank’s global risk function not to be seen as an “academic ivory tower” that “could rule out business out of hand,” according to a person close to the bank. He also wanted his department to be seen as a professional destination rather than an administrative remedy.

During his five-year tenure, Warner and other executives pushed for risk and compliance to be “more commercial” and “aligned” with front office dealers and distributors, several current and former officials told FT.

She led by example. In October, Warner personally canceled risk managers who warned not to give Greensill a $ 160 million bridge loan before a private fundraiser. Now the loan is defaulted.

Warner also retired more than 20 senior executives from Credit Suisse’s risk department. The fastest found high-ranking jobs, including at UBS, Jefferies, Standard Chartered and the Hong Kong Stock Exchange.

His predecessor, Joachim Oechslin, a Swiss national and professional risk manager, was removed to become chief of staff to CEO Gottstein. He has now been reinstated as interim director of risk.

“When you incorporate a sense of fear into an organization eliminating so many people, the culture of risk is not to say‘ no ’to the company,” said one person involved at the time.

Last year Warner erased more pens by changing the lines of information. The risk functions of some markets, which were previously part of an independent central risk team, were changed to inform the head of front office technology.

While some other banks use this model, “from a control standpoint, this was a disaster” at Credit Suisse, according to one person who put pressure on the changes. “Risk lost its independence.”

Obstructed by bureaucracy

Helman Sitohang, Asia head of Credit Suisse, is another key figure in the Greensill relationship. So far it has stayed out of focus.

A background investment banker, Sitohang attracted some of the bank’s most lucrative clients in the region, including a number of Indonesian tycoons such as Peter Sondakh of Rajawali. He also leads the lender’s relationship with SoftBank, the Japanese group behind the $ 100 billion vision fund, a major sponsor of Greensill.

“He is a salesman. He has an agnostic approach to risk for clients, ”said one person who worked closely with him.

Sitohang spoke for Greensill during an orderly summer 2020 review after FT revealed that SoftBank was using Credit Suisse’s Greensill-linked supply chain financing funds to channel hundreds of millions of dollars to troubled companies.

“Helman gave personal support to Lex, telling us we couldn’t damage the relationship with him,” one colleague said.

Credit Suisse missed numerous opportunities to avert disaster. According to two people close to the project, in 2016 the Asian business began building a tool to map a customer’s exposures to look for second-order problems that could backfire on the bank.

Called “Risk 360”, the tool was commissioned after the lender discovered excessive exposure to a group of Hong Kong companies that had links with an individual, disguised as a convoluted corporate entity with the aim of manipulating prices. of actions, people said.

The system received brilliant reviews from Swiss regulator Finma, and a global launch was planned. But he got stuck in a “huge bureaucratic machinery” behind dozens of other technology projects and went nowhere, they added.

Had it been adopted more broadly, it would have detected “absolutely” growing risks such as Greensill and the exposure of the U.S. brokerage division to the Archegos, one of them said. Another person close to Credit Suisse disagreed, noting that these incidents were largely outside the capabilities of the tool because it was based on publicly available information.

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

“Lack of discipline”

Problems were bubbling beneath the surface before Credit Suisse’s costly missteps appeared in Greensill and Archegos.

“There were numerous tremors that indicated to anyone with risk knowledge that the potential of a big one is what grows,” a former executive said.

In 2018, Credit Suisse lost about $ 60 million after being left with a block of shares of clothing company Canada Goose when the stock price fell. About a year later, the bank lost about $ 200 million when it imploded Malachite Capital, a New York hedge fund and one of its main brokerage clients.

“These losses arose from a lack of discipline,” the former executive said. As with Archegos, senior Credit Suisse executives were stuck in great positions negotiating the price while their colleagues aggressively exhausted themselves.

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

A former CEO recalls a 2019 conference call on Libor interest rate benchmark reform. When a senior trader dialed, an automatic message was played reminding everyone that the meeting was now being recorded, a regulatory requirement.

When Warner heard this, he asked the merchant to call back from an unrecorded line. Some of those present found it to be a discordant intervention by a risk agent. A person close to Warner, who noted that the call had nothing to do with the trade, said it was just a normal way of doing business.