Credit Suisse Group AG yesterday said that it had taken a US$4.7 billion hit from its links to troubled hedge fund Archegos Capital Management LLC, cut dividends and announced the departure of two senior executives.
The Swiss bank and Japan’s Nomura Holdings Inc last month warned that they could face significant losses due to their exposure to a US hedge fund forced to liquidate its holdings.
“The significant loss in our Prime Services business relating to the failure of a US-based hedge fund is unacceptable,” Credit Suisse chief executive officer Thomas Gottstein said in a statement.
Bloomberg News has reported that the fund was little-known Archegos Capital Management, which sold more than US$20 billion in stocks from US media and Chinese companies as it sought to cover its obligations to its lenders.
Credit Suisse said that its pretax loss of 900 million Swiss francs (US$960 million) in the first three months of the year included SF4.4 billion related to “the failure by a US-based hedge fund to meet its margin commitments as we announced on March 29.”
Trading on margin is the practice of using borrowed funds to invest in financial assets such as stocks. It can be profitable for borrowers, as they are often only required to put down a small percentage in cash while the stocks serve as collateral for the lender.
However, large shifts in share prices can force borrowers to put up more money, that is to meet their margin commitments, or sell the shares and potentially lose more than their investment.
Credit Suisse also announced the departure of the head of its investment bank, and chief risk and compliance officer, while it pulled bonuses for senior executives and chopped its dividend.
The bank’s board of directors announced an investigation into the matter.
Credit Suisse also announced a separate probe into its supply chain finance funds, a reference to its exposure to the collapse of British finance firm Greensill Capital Ltd, which specialized in providing short-term financing to companies.
“The Archegos fallout ... has become a significant nightmare for Credit Suisse, and the bank has to take the right steps for its survival, as losses are just too big to digest,” AvaTrade analyst Naeem Aslam said.
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