So how do you explain exactly what is currently estimated to be 5 billion francs ($ 5.5 billion) for the fees due to letting a client build a highly leveraged position that ultimately cannot to return?
That was the challenge on Thursday that Credit Suisse faced
Chief Executive Thomas Gottstein and Chief Financial Officer David Mathers, surprised investors with a new $ 1.9 billion fundraising and announced in the second quarter that there would also be an associated fee. Regarding Archegos Capital Management, the fund collapsed after placing bets on US and Chinese media internet companies.
Gottstein didn’t waste time tackling the inevitable problem. “The significant loss in our basic services business related to the failure of a US-based hedge fund is unacceptable,” he said, continuing to assert. the bank’s oddity of mislabeling Archegos Capital Management, which is originally a family office.
There’s also the issue of Greensill supply chain funds, which had $ 10 billion at the time of the suspension. Credit Suisse said it has returned $ 4.8 billion to investors, and according to Gottstein has “good visibility” on about three-quarters of the book and has a “very solid legal position” to investors. with the remaining 23%. “We have noted that there is a possibility that Credit Suisse will incur a loss related to these matters, although it is not yet possible to estimate the size of such a reasonable loss,” Gottstein said. .
But the bank received more queries from Archegos analysts than Greensill.
Barclays’ Amit Goel started with the first question, noting that Gottstein and Mathers spent more than two decades at the bank. “I’m just trying to understand basically, from your point of view, how the team got the position where by 2021 we’re having a debate where the team is looking to cut down on risk in the field. Key businesses and there are questions about the future of the wealth management business. So just try to understand, from your point of view, how did we come to this point, ”he asked.
Gottstein said that these are just two very unfortunate incidents. “In general, the leading services business in the past has not been at a loss. Obviously, this loss was a big surprise for us and we are taking measures so that it won’t happen again, ”he said. He also holds a similar view towards Greensill. “Asset management, again, we ran into this situation around Greensill but the overall wealth management business, as we have seen today, is actually doing really well from the angle. activity level. ”
Mathers said the investment bank is reducing leverage by at least $ 35 billion – mainly in the core services business. He says the reduction accounts for about a third of the total leverage used in the primary firm.
Mathers was also puzzled by the idea that Credit Suisse did a worse job leaving Archegos positions than its Wall Street peers. “I think I will just reject the idea that we have been slow to sell. I think we have legitimately and orderly downplayed the challenge we actually faced. And I think that as far as I can tell when looking at the prices we get relative to the other top brokers, exit prices are generally similar over the time period, ”he said.
Gottstein commented on what Credit Suisse had learned, though an internal investigation is continuing. Disclosure of information needs improvement, he said, especially around home offices. A bank should also consider the limits, both in terms of the absolute limit and the margin it allows, and the correlation between short and long positions and centralized risk management.
“This is an exceptional case. Listen, I certainly hope so and I think so, but obviously we are looking at the entire bank now just to make sure that our risk processes and systems are in place. their position, ”he said.
Shares of Credit Suisse fell 5% on Thursday and have fallen 29% since the first announcement of the loss related to a loan to Archegos.