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

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 present Asia at its highest levels. The visitor was a kind of brave entrepreneur who wanted to do business with the bank: Lex Greensill.

“The tone was that the exact type of customer the bank wants is to tell doctors to go outside and find more guys like Lex,” said a senior executive who watched the November video conference. Helman Sitohang was the Asian head of the bank and one of Greensill’s biggest advocates.

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

This could have raised more alarm at Credit Suisse, which had $ 10 billion in loans filled by Greensill. In its core business, Greensill paid suppliers to large corporate customers – early but with a small discount – and received the full amount later from the corporate customer. The debt was put into the funds of a Swiss bank that was 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 also approved a $ 160 million loan from the company, which was launched in 2011 by the Australian founder of the same name.

In March he fell to the Greensill administration. Falling from grace could cost Credit Suisse customers $ 3 billion.

“Lex’s video appearance showed a whole culture of risk,” we thanked him, “but we demand to be different,” said the director, who saw the November presentation. “When Lex came, the bank couldn’t get enough.”

The Greensill explosion is the only long-term link in risk management failures at Credit Suisse. A few weeks later, Archegos Capital, the family office of former hedge fund manager Bill Hwang, called for no margin, creating chaos in the banks that gave it billions to increase its position. Credit Suisse handles the largest losses of at least $ 4.7 billion.

Credit Suisse shareholder payments have been suspended and bankers have to deal with them large bonus cuts. The aftermath of the crisis has left angry and sharp responses from investors and employees. How did the directors turn out to be such a fan with a small group of questionable clients? And why did they reject or reject those who raised red flags?

“The accumulation of huge exposures to a single entity, especially low-level ones, goes against all principles of risk management,” said Benedict Roth, a former head of risk at the Bank of England.

‘Shark swimming’

In interviews with the Financial Times, the current six former directors of Credit Suisse said the bank had failed to specialize in risk and commercial skills in favor of promoting vendors and technocrats. Voices of disagreement were said to have been suppressed.

“The senses were weakened,” a former executive said. “Credit Suisse was swimming with sharks, but thinking with a private bank. They would always destroy them.”

At the center of the controversy was Lara Warner, who was removed from office on April 6 as the main person responsible for the risks and compliance. A former Lehman Brothers equity analyst, he joined Credit Suisse in 2002 to cover the cable television and telecommunications industries.

The Australian-US dual citizen became chief financial officer of the investment bank before being appointed chief executive officer of Tidjane Thiam in 2015 for its compliance and regulatory affairs.

Urs Rohner and Thiam, president of Credit Suisse, “came up with the idea that you can nominate any skilled person for the job and they will be successful, even if they have no experience. . .[but]that the risk and compliance was inadequate, ”said another executive.

When Thiam left an espionage scandal, his successor, Thomas Gottstein, added global risk oversight to Warner’s responsibilities. He did this in an attempt to save on the duplicate technology and operating costs of the two departments, which the bank spends about half a billion dollars a year, said a person close to the CEO.

According to a person close to the bank, Warner wanted the bank’s global risk function to be seen as an “ivory academic tower” to “get the business out of hand”. He wanted to see his department as a career destination, rather than a back administration.

During his five-year tenure, Warner and other executives pushed for risk and compliance to be “more commercial” and “aligned” with first-office merchants and vendors, current and former employees told FT.

He led by example. In October, Warner personally overwhelmed risk managers warned Greensill to grant a $ 160 million bridge loan ahead of a private fundraiser. The loan is defaulted.

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

His predecessor – Joachim Oechslin, a Swiss national and career risk manager – was set aside to become chief executive officer of Gottstein. They have now re-installed it as a temporary official risk.

Thomas Gottstein and Joachim Oechslin

Thomas Gottstein, on the left, the new CEO of Credit Suisse and Joachim Oechslin, now the bank’s main temporary risk

“When you intimidate an organization by removing so many people, the culture of risk is not to say‘ no ’to the business,” said one person who was involved at the time.

Last year Warner threw more pens at him by changing the lines of complaint. The risk functions of some markets, which were previously part of an independent central risk group, were changed to inform the head of the technology office.

While some other banks use this model, “from a control perspective that was a disaster” on Credit Suisse, according to a person who lobbied against the changes. “Risk has lost independence.”

Prevent bureaucracy

Helman Sitohang, Asia Suia’s head of credit, is another key figure in the Greensill relationship. It has been out of focus so far.

Sitohang was an investment banker, and brought in some of the region’s most lucrative bank customers, including an Indonesian tycoon chain such as Rajawali’s Peter Sondakh. He also runs the lender with SoftBank, a Japanese group behind the $ 100,000 million Vision Fund, which has strong backing from Greensill.

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

Sitohang spoke in favor of Greensill in a FT review in the summer of 2020 that SoftBank was using Credit Suisse’s supply chain financing funds linked to Greensill, allocating hundreds of millions of dollars to its owned companies.

“Helman was personally very supportive of Lex, saying we couldn’t damage the relationship with him,” one colleague said.

Credit Suisse missed a lot of opportunities to avoid 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 secondary problems that could be vindicated in the bank.

The so-called “Risk 360” was launched when the tool found lenders with strong ties to a Hong Kong business group, linked to an individual, disguised as an intricate network of corporate organizations, with the aim of manipulating stock prices. he said.

The system received excellent reviews from the Swiss regulator Finma and a worldwide expansion was planned. But “behind dozens of other technology projects” he was “trapped in a huge machinery of bureaucracy and went nowhere,” they added.

Had it been taken more broadly, it would have been “absolutely” perceived as an increase in risks to the main mediation divisions of Greensill and the U.S. mediation divisions, one of them said. Another person about Credit Suisse disagreed, noting that these events were largely outside the capabilities of the tool because it was based on publicly available information.

Credit Suisse, Warner and Sitohang wanted to give their opinion on this article.

‘Lack of discipline’

The problems were under the skin, as Credit Suisse was expensive for Greensill and Archegos before they created the wrong steps.

“There were a lot of tremors that indicated that any person based on the risk was growing the potential to play big,” the former top executive said.

In 2018, Credit Suisse lost about $ 60 million after leaving a block of shares in the clothing company Canada Goose when the share price fell. A year later, the bank lost about $ 200 million to Malachite Capital, a New York hedging fund and one of its main brokerage clients, when it exploded.

“These losses were caused by a lack of discipline,” the former executive said. As was the case with Archegos, Credit Suisse’s senior management stopped at large positions in price negotiations, while their peers were aggressively exhausted.

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

A former CEO recalls Libor’s 2019 conference call on interest rate benchmark reform. When a senior trader called him on the phone, an automatic message was played to remind him that the meeting was now being recorded, a regulatory requirement.

When Warner heard this, he asked the shopkeeper to call from an unrecorded line. Some in attendance found the intervention of an official danger sad. A person close to Warner, noticing that the call had nothing to do with the trade, said it was just a normal way to do business.

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