Credit Suisse Made Archegos Salesman Responsible For Risk Management After Gutting Compliance
Investors will likely learn more details about losses tied to Credit Suisse’s historically terrible first quarter when the bank reports results on Thursday. The bank has already announced plans to cut bonuses and its dividend after disclosing a $4.7 billion loss tied to the Archegos blowup. The bank is also bracing for billions in losses tied to the collapse of Greensill Capital (though, to be sure, most of the losses from that incident will likely be passed along to Credit Suisse’s clients).
In recent weeks, Credit Suisse has fired more than half a dozen senior executives, including Lara Warner, the bank’s head of risk and compliance. Meanwhile, CEO Thomas Gottstein has avoided the chopping block. And as the finger-pointing intensifies, Bloomberg on Wednesday published an anonymously sourced story laying the blame for the Archegos blowup at the feet of Parshu Shah, who had been head of risk at the bank’s prime-services business, a position he assumed after serving as the salesman in charge of – what else? – nurturing the bank’s relationship with Archegos.
For years, Shah – who was let go along with served as a front-office salesman raking in commissions and helping to “nurture” relationships for CS’s prime brokerage division, including with Archegos and other hedge funds. As Bloomberg pointed out, it’s rare that “revenue-producing” front-office employees are moved to a compliance/risk management role, since risk management is an unglamorous “back office” role.
While it’s not typical for revenue-generating finance employees to switch to risk-oversight roles, some banks make such shifts.
That’s because Shah wasn’t so much moved to a different role as he was given the additional responsibility of managing risk within the prime brokerage unit. Though the report says Shah’s sales role ended when he left the swaps desk, clearly, his new “hyrbid” role involved too much conflict for him to be effective.
When Shah left the swaps desk, his sales role ended and he took over the new oversight position within the prime-brokerage group. That job included overseeing the risk of several clients, including Archegos. An existing member of Shah’s team was assigned to Hwang’s firm for monitoring its activity on a daily basis, according to a Credit Suisse executive who asked not to be identified discussing internal matters.
The prime-brokerage risk group was one among several lines of defense set up to shield a firm of Credit Suisse’s size from confronting hefty losses in dealings with any one client. But the enormity of the bank’s exposure coupled with the rapid implosion of Hwang’s firm ripped through the safety net Credit Suisse had set up, leaving management befuddled, the lender’s workforce frustrated and investors furious.
Conveniently for the bank’s current CEO, Thomas Gottstein, Bloomberg laid the blame for these risk management changes at the feet of Gottstein’s predecessor, CEO Tidjane Thiam, who “revamped” the bank’s risk controls following a wave of departures from the bank’s compliance department. The attitude was hands-off, with Warner being mostly trusted to oversee compliance and risk across the bank. Around the same time, then-CEO Thiam shipped compliance from New York back to Zurich, a clear message to employees that risk management wasn’t a priority.
At Credit Suisse Group AG, executives had given the point salesman to Archegos Capital Management on its swaps desk the new responsibility of instead overseeing risk-taking in the broader prime-brokerage unit, according to people with knowledge of the matter. This year, Archegos’s swap bets spectacularly collapsed, saddling the bank with a $4.7 billion writedown, and setting it up as the biggest loser to emerge from the debacle at Bill Hwang’s family office.
Parshu Shah — the salesman who became head of prime-services risk — hasn’t been accused of any impropriety in previous trades with Archegos. But the bank has faced questions in the wake of the debacle over whether managers prioritized boosting revenue over managing against downside. Shah is among a roster of Credit Suisse executives who’ve been forced to step down following the blowup, according to an internal memo early this month.
The usually behind-the-scenes functions of risk controls have been thrust into the limelight after Credit Suisse was left holding the bag on two financial catastrophes in just a month — Hwang’s firm and the collapse of Greensill Capital. The Swiss lender’s losses have left investors puzzling over whether it has sufficient checks in place.
Looking ahead, expect the bank to share plans for revamping its risk management controls, an investment that won’t exactly help revive its lagging valuation, presently the lowest of all the bulge bracket banks.
Wed, 04/21/2021 – 19:10