Unraveling Archegos fund shows investment banking risks


Credit Suisse is still digesting the collapse of Greensill, a British financial company which declared bankruptcy shortly after the Swiss bank froze the funds that provided it with liquidity.


Arnd Wiegmann/Reuters

Last year, investment banks made exceptional profits. This year, unexpected bills arrive.

Monday, Credit Suisse CS -2.58%

and Nomura said they would both suffer substantial losses due to the collapse of an unnamed US client believed to be former Tiger Asia manager Bill Hwang’s Archegos Capital Management hedge fund. Nomura estimated its exposure at around $2 billion, while Credit Suisse said it was “premature to quantify” the hit. Shares of both banks fell more than 10%.

The sale of large blocks of shares at the end of last week by many banks, including Morgan Stanley,

Goldman Sachs and Deutsche Bank — hinted at a collapse of hedge funds. Investors should be prepared for a wider fallout as it is unclear whether all of Archegos’ positions have yet been unwound. Shares of a handful of other lenders with potential ties to the fund fell slightly in morning trading.

The losses come just weeks after many global banks announced annual results boosted by billions of dollars in revenue from investment banks capitalizing on last year’s market volatility. The news reminds us that there is a lingering risk associated with these outsized gains. As the 2008 financial crisis made clear, banking costs can arise long after profits have been counted and celebrated.

Credit Suisse is still digesting the collapse earlier this month of Greensill, a British supply chain finance company that declared bankruptcy shortly after the Swiss bank froze funds that provided it with liquidity. The double hit could be an extraordinary streak of bad luck; there were other banks caught in both failures. Alternatively, it could indicate endemic risk management issues at Credit Suisse. The Swiss company continued to work with Greensill despite internal concerns.

Shareholders understand that investment banking is a high-risk, high-reward business. The irony is that Credit Suisse did not have as rewarding a 2020 as many of its peers due to the cost of previous lapses. The last quarter’s exceptional trading profit was overwhelmed by two one-time charges: $850 million in legal fees related to the sale of toxic securities before the 2008 crisis and a $450 million write-down of its stake in hedge fund York. Capital Management, purchased in 2010.

The first year has been difficult for new CEO Thomas Gottstein. The Credit Suisse veteran was appointed last February to steady the ship after Tidjane Thiam was ousted following a spy scandal. It has nothing to do with the good start the lender was hoping for.

Regulators have forced banks to hold much more capital over the past decade, which has been one of the reasons for their low return on equity. In the lingo, Credit Suisse has a 12.9% Tier 1 common equity ratio of high-quality equities to risk-weighted assets, which should be more than enough to absorb the latest losses. The Archegos drama is a reminder, if it were needed, of why these anti-reverse buffers are needed.

Write to Rochelle Toplensky at [email protected]

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Appeared in the March 30, 2021 print edition.


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