Credit Suisse / Archegos: music stops for prime broking

Members of Credit Suisse’s executive committee will themselves get no short-term bonuses for 2020 or long-term awards for 2021 Keystone / Peter Klaunzer

In musical chairs, players whose seats are filched sometimes sit on the floor with a bump. This was the undignified position of Credit Suisse announcing a stiff CHF4.4 billion ($4.7 billion) impairment.

The implosion of US family office client Archegos has obliterated 18 months of average net profits and cost two senior executives their jobs. Agile Wall Street banks, such as Goldman Sachs and Morgan Stanley, appear to have escaped unscathed. But the stability of systemically important banks should not rely on a talent for party games.

Regulators led by the US Securities and Exchange Commission should investigate the prime broking industry. This is the low-profile business of helping funds such as Archegos to structure and finance bets.

The risk to capital buffers is clear when six or more institutions are lending separately to a little-known investor in volatile stocks while apparently knowing little about the others. Without strong retained profits, Credit Suisse’s core equity tier one capital would have dropped uncomfortably below 12% of risk-weighted assets.

The peril to fair markets is signalled by the discussions that prime brokers reportedly held on whether to co-ordinate sales of Archegos collateral. Transparency is sparse in prime broking. Derivatives allowed Archegos to avoid disclosing hefty equity positions. Derivatives can fulfil the same function for hedge funds betting on controversial takeovers while generating questionable tax savings.

Thinning out

In theory, prime brokers hedge all exposures, making only a modest margin on their activities. In practice, hedges are rarely perfect. Bonus-hungry bankers can find ways to exploit that.

Members of Credit Suisse’s executive committee will themselves get no short-term bonuses for 2020 or long-term awards for 2021. As expected, investment bank boss Brian Chin and chief risk officer Lara Warner are out. The latter oversaw a series of disasters. They included letting Credit Suisse back defunct supply chain finance house Greensill, which is expected to cost the bank $1 billion to $2 billion.

Thomas Gottstein has been chief executive for just over a year after decades running domestic businesses. He should be able to hang on – provided he tightens and centralises risk controls. A thinning out of underlings associated with Archegos and Greensill has already begun and must continue. Target CET1 should rise to a safer 13%. Credit Suisse will need a spotless record for years to lose its share price discount.

Copyright The Financial Times Limited 2021