Credit Suisse is in its current mess partly because of bankers acting without authorization, and three cases demonstrate the urgent need for a change in culture.

Credit Suisse needs to develop a culture of personal responsibility where every banker is a risk manager, its chairman, António Horta-Osório, said in July.

Horta-Osório’s comments come against the backdrop of the double debacles he inherited of the collapse of hedge fund Archegos Capital and the closure of Credit Suisse’s supply chain funds in the wake of the Greensill scandal.

Herculean Task

However, he will have his work cut out for him because recent events have brought cases to light or put them in a new light that show how far the bank still has to go on cultural change.

Three of these cases are well documented. Archegos Capital, a London employment tribunal on the dismissal by the bank of Ellina Volkova and the fraud scandal surrounding the late «Banker to the Russians» Patrice Lescaudron.

1. Archegos: Breaking Limits

The investment bankers in the prime brokerage division who financed Archegos' stock bets were reckless, Paul Weiss’ report on the affair published by the bank in July said.

The report rightly focuses on how warning signals about this client were ignored. The operational business (including risk management) had enough information and time to intervene before Credit Suisse suffered a catastrophic loss of over 5 billion francs ($5.5 billion) in March, the authors said.

The business relationship with Credit Suisse had lasted practically since Archegos was founded in 2012, and nothing put the bankers off: Not the fact that Archegos founder Bill Hwang was convicted of insider trading in 2012, nor that it regularly breached the credit limits the bank set it from 2017 on.

As of 2019, Credit Suisse was still requiring less margin than its competitors as collateral, prompting Archegos to place more volume with it. Even when this was questioned at the beginning of 2020, it was decided to rely on Archegos’ assurances that everything was in perfect order and that it was doing similar business with the competition.

In March, the bank agreed to fund around $ 13 billion in equity positions, mostly at existing margins, for another two years. It was to be its last deal with Archegos.

2. Wrong Way Around in London

The transcript of a London employment tribunal case over the dismissal of Ellina Volkova, which Credit Suisse lost, is highly illuminating about risk culture at the bank.
In 2018, Volkova sold an «unsuitable» financial product without first obtaining permission from the compliance team. The bank subsequently reversed the transaction, which led to a loss of 22,000 francs.

Unlike Archegos, the instructions from risk management and her supervisors were clear: The deal went against the super-rich Russian client's risk profile.

However, the tribunal documents show she went through with it anyway. She phoned the customer and had them confirm the transaction.

When her superiors realized this a few days later, their consternation was great. «Wow,» one manager wrote in an email, «This worries me even more. She didn’t mention this key fact at
any time and shows how badly she understands the S&A Framework; you assess suitability first, then trade. Not the other way round. Sigh....»

The tribunal said the dismissal was unfair because the investigation into the incident had dragged on for so long. However, the tribunal did find Volkova’s conduct had contributed to the dismissal.


3. Patrice Lescaudron: Fallen Star

The fraud committed by customer advisor Patrice Lescaudron still haunts Credit Suisse even though he was instantly dismissed in 2015.

From 2011 on, the Frenchman managed assets from Geneva for former Georgian prime minister Bidzina Ivanishvili and other oligarchs.

But this «banker to the Russians» diverted hundreds of millions from these assets, some of it into his own pocket and some into parallel structures he had set up.

Lescaudron was subsequently sentenced to imprisonment by a Geneva court in 2018 for commercial fraud, serious breach of trust, mismanagement and forgery of securities. Tragically, he committed suicide a year ago.

However, the scandal has outlived him. The victims' association «CS Victims» around Ivanishvili is claiming damages of up to $1 billion from Credit Suisse, accusing it of a lack of supervision.

The bank has always portrayed itself as another of Lescaudron’s victims and said that no one within the bank had abetted his criminal actions.

However, in autumn 2018, Swiss financial regulator Finma reprimanded Credit Suisse for its inadequate supervision of Lescaudron.

A report originally written in 2017 by the Swiss law firm Geissbühler Weber & Partner for Finma was leaked in February, which lists hundreds of warning signs that were not fully investigated between 2009 and 2015.

The report also stated that no one else had committed a criminal offense and that Credit Suisse subsequently successfully plugged the holes with two packages of measures.

This report too paints a picture of a banker who paid scant attention to the rules.

The bank had known since 2011 that Lescaudron was completing transactions on his own authority and not keeping customer documents safe enough. No serious measures were taken against him. Efforts such as ring fencing to keep Lescaudron in check were not properly implemented by his managers.

The report attributes this to the superstar status he enjoyed and the bank's desire to retain him. In seven years, Lescaudron earned 54 million francs for the bank and was one of its top three performers in 2011.

Focus on risk management

Credit Suisse is still chewing over the consequences of these cases. The «CS Victims» are circling the institute with lawsuits around the world as well as in Switzerland.
In response to Archegos and Greensill, the bank has been focusing for now on renewing risk management.

«On July 29, Credit Suisse made a public statement on the Paul Weiss report and outlined the specific measures to be taken to strengthen risk management. Implementation of the measures has already begun,» a spokesman told finews.com.

Cultural Change Slow

The bank said these measures include separating functions and creating new positions, with around 20 new jobs in credit risk.

In terms of risk culture, however, the bank has pleaded for time. A new risk committee has already been set up, and Credit Suisse says corporate culture is set at the top.

In light of the cases cited, the bank can only hope that change will be rapid all the way down the chain of command.