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The Brokerage System that Just, Broke

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On November 4th 2021, Credit Suisse announced the shutdown of its prime brokerage services as the new chairman Antonio Horta-Osorio revealed his plans to restructure the firm. 

This comes a few months following the Archegos episode that delivered a major blow to the firm in the form of multibillion-dollar losses, much like a number of its major bulge bracket peers.

The Collapse of Archegos 

Credit Suisse’s Prime Services unit offers ‘financing, custody, clearing and advisory services to hedge funds and institutional clients’. The prime brokerage division in particular offers liquidity in the form of cash and securities to these clients in order to engage in netting to achieve returns.

In correlation with the growth of hedge fund activity in recent years, prime brokerage has evolved into a very lucrative division for many large investment banks. Despite this growth, the pandemic has contributed to the challenges faced by this sub-sector and a very significant obstacle came earlier this year in the form of the collapse of Archegos Capital Management.

Archegos Capital Management was a family office that, prior to its collapse, managed the personal assets of American New York-based billionaire investor Bill Hwang. He was formerly of Tiger Asia Management, a firm that has previously pleaded guilty to insider trading of Chinese bank equities in 2012 and was penalised with a US $44m fine. 

Bill Hwang / Vizemen

Following this, Hwang was banned from trading in the Asian financial hub of Hong Kong for four years. Archegos Capital defaulted on margin calls held with a number of global investment banks, including Credit Suisse, Deutsche and Nomura Holdings. 

Archegos had concentrated positions in total return swaps with a number of banks and, due to their nature as derivatives rather than the actual stock itself, Archegos’ significant exposure to these did not have to disclose its large holdings in these securities. 

When Archegos defaulted on these derivatives, the involved banks began to liquidate stocks with values into the billions of US dollars from firms such as ViacomCBS and Discovery Inc, causing these share prices to plummet by up to 27%.

How Did Wall Street Take the Hit? 

The titans of Wall Street, Goldman Sachs and Morgan Stanley, were relatively successful in damage limitation due to their quick reactions in selling the concerned stocks. Other banks, including Deutsche Bank, were also able to reduce their substantial exposure quickly to avoid any losses. 

However, not all banks were so fortunate. Of the banks involved in this fiasco, Credit Suisse was hardest hit with absolute losses approaching a catastrophic US$5.5bn, and Japanese bank Nomura registering losses approximately half of that of Credit Suisse.

In the immediate aftermath, Credit Suisse and Nomura Holding shares were down by 14% and 16% respectively. Such was the extent of the damage dealt by the Archegos scandal that Credit Suisse decided to report its 2021 Q3 earnings with a footnote clarifying that it had excluded any Archegos-related financial activity from its statements. 

Credit Suisse has since laid out plans to refer many of its prime services clients to its French competitor, BNP Paribas, two years after the French investment bank arranged a similar agreement with Deutsche Bank representing a gain of assets worth US$200bn.

Whilst many may come to the conclusion that Credit Suisse has brought the axe down on its Prime Services as a result of its misfortune with Archegos, its CEO Thomas Gottstein, newly appointed as of February 2020, had already announced bold plans to reform Credit Suisse’s structure. 

This is after a 10 year period following the financial crisis where the company’s share price tumbled by nearly 70% up until May 2021 when the previous chairman, Swiss lawyer Urs Rohner, was succeeded by Antonio Horta-Osorio. 

Source: Statista

This was caused by a number of scandals and incidents including the infamous Greensill incident and Archegos collapse mentioned earlier.

Many have questioned the decision of Urs Rohner to appoint Lara Werner, with no prior risk management experience, to the role of Chief Risk Officer for the sake of improving diversity within Credit Suisse’s management; it was not long after this that the Greensill incident gripped national headlines. 

What’s Next for Credit Suisse?

Looking into the future, it is evident that Credit Suisse wishes to leave the events of the past behind and push forward with fresh management and a new board in a bid to consolidate its position alongside its other global investment banking peers. 

Particularly during the pandemic, when M&A activity surged to record levels, there are plenty of opportunities for investment banks such as Credit Suisse to generate significant profits and move forward into a period of financial volatility. The twin evils of both the pandemic and high inflation pose a far greater threat to the health of the financial services industry and the wider global economy. 

Nevertheless, many financial experts have hope in the ability of Credit Suisse to rebound from its past failures given its global presence and long-standing reputation as one of the world’s leading bulge brackets. 

Much like its history based in railway financing, parts of its overall structure system may have buckled in the heat of events but its new management has been doing its utmost to repair the damage and reroute the firm’s progress towards more productive channels. 

Whilst there may be sharp turns and obstacles on its journey ahead, Credit Suisse remains steadfast on its track towards serving its clients and stakeholders with everything in its capacity.

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