Credit Suisse Group AG today published the report based on the independent external investigation into Archegos Capital Management (Archegos), which was commissioned by the Board of Directors (Board) and supervised by a special committee of the Board.
Over the past months, at the direction of the Board of Directors, Paul, Weiss, Rifkind, Wharton & Garrison LLP and its expert advisors conducted a comprehensive review of Credit Suisse’s relationship with Archegos following the US hedge fund’s default on March 25, 2021. The review consisted of more than 80 interviews with current and former Credit Suisse employees as well as the collection of more than 10 million documents and other data.
Among some of the key conclusions, the investigation found a failure to effectively manage risk in the Investment Bank’s Prime Services business by both the first and second lines of defense as well as a lack of risk escalation. In the same business, it also found a failure to control limit excesses across both lines of defense as a result of an insufficient discharge of supervisory responsibilities in the Investment Bank and in Risk, as well as a lack of prioritization of risk mitigation and enhancement measures (such as dynamic margining).
However, the investigation also found that this was not a situation where the business and risk personnel engaged in fraudulent or illegal conduct or acted with ill intent. Nor was it one where the architecture of risk controls and processes was lacking, or the existing risk systems failed to operate sufficiently to identify critical risks and related concerns.
António Horta-Osório, Chairman of Credit Suisse, said: “While the bank has already taken a series of decisive actions to strengthen the risk framework, we are determined to learn all the right lessons and further enhance our control functions to ensure that we emerge stronger. We are committed to developing a culture of personal responsibility and accountability, where employees are, at heart, risk managers; know exactly what they must do; escalate any concerns; and are responsible for their actions. Such a culture is of critical importance and, by working relentlessly on this goal, we can create lasting change and value for both clients and shareholders.”
Under the leadership of the Tactical Crisis Committee of the Board – which consists of the Chairman of the Board, the Chair of the Audit Committee, the Chair of the Risk Committee, and the Chair of the Conduct and Financial Crime Control Committee – and in close collaboration with the Group Chief Executive Officer and selected members of senior management, including the ad interim Chief Risk Officer (CRO), the Chief Financial Officer, the General Counsel, the ad interim Chief Compliance Officer, the new CEO of the Investment Bank Division, and the Head Internal Audit, the bank has already implemented a series of key recommendations (see separate summary of actions taken).
These implementation steps have included several changes in senior leadership at the Investment Bank, including in the Prime Services business, and initiating the recruitment of additional resources for the Risk function. Furthermore, over the past months, a review of all large group-wide exposures and a revision of limit excess controls and escalation requirements has been conducted. A number of risk-governance bodies have been reviewed and upgraded, and a reduced risk appetite across the organization has been implemented together with additional approval requirements for all material transactions. Through this exercise, the bank has significantly reduced the risk-weighted assets and leverage exposure in the Prime Services business while increasing margin requirements, and all hedge fund clients have been moved to dynamic margining. In addition, the bank has commissioned a review of double-hatted roles.
A key aspect of the overall review considered individual accountability, with subsequent actions taken on 23 individuals. These actions include termination of employment (nine individuals) and severe monetary penalties totaling approximately USD 70 mn in the aggregate via compensation adjustment tools encompassing up to 100% malus (the cancellation of outstanding deferred awards) and some clawback (the recovery of previously paid amounts). The bank will provide a full accounting of the implicit and explicit compensation consequences for the Archegos incident in the Compensation Report after the close of the year.
Finally, earlier this week, the bank announced the appointment of David Wildermuth as the new CRO, joining from Goldman Sachs and bringing a wealth of relevant risk management experience with him. He will commence his new role in early 2022. Until then, and as originally planned and announced in early April 2021, Joachim Oechslin, will continue as ad interim CRO. Joachim Oechslin and Richard Meddings, the ad interim Chair of the Risk Committee, have both been instrumental in leading and implementing the above described risk management improvement steps.
Credit Suisse is committed to working relentlessly toward establishing a culture of clear accountability and responsibility, while continuing our in-depth read-across to ensure this never happens again, and to creating sustainable value for both clients and shareholders.
In order to access the full Paul, Weiss report and the Credit Suisse summary of actions taken, click on www.credit-suisse.com/archegos