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The backstory: There was a major financial disaster that shook Wall Street in 2021 when Archegos Capital Management, a former client of Credit Suisse, got into some serious trouble. The hedge fund borrowed a ton of money to invest in big media companies like ViacomCBS and Discovery and some other tech giants using complicated strategies that involved making big bets. But then, when some of those bets backfired and it came time for the fund to pay up on its margin calls, it couldn’t. So, not only did some of those stocks it was heavily invested in start to crash in a massive liquidation, but some of the fund’s creditors, like Credit Suisse, also saw big losses. The bank lost US$5.5 billion and had a departure of top execs.
The thing is, Credit Suisse had also made some risky moves. It repeatedly overlooked red flags about Archego, increasing the bank’s exposure to the fund’s leveraged bets. Then, the bank actually lowered Archegos's credit rating, but at the same time, it increased its potential exposure limit from US$20 million to US$50 million, which was an unusual move. A report from a law firm called Paul, Weiss, Rifkind, Wharton & Garrison LLP dug deep into what went wrong at Credit Suisse during this whole crisis.
Over the past several years, Credit Suisse has faced several scandals and headwinds in the banking sector that eventually led to its collapse in March this year. So, Swiss bank UBS pulled off an emergency takeover of Credit Suisse, sealing the deal at a 3 billion Swiss francs (around US$3.25 billion) in June. Swiss authorities orchestrated this rescue mission to avoid a full-blown global banking crisis. As part of the agreement, UBS also took on shared losses linked to Credit Suisse.
More recently: Credit Suisse has been facing a lot of legal challenges. The bank tried to avoid a trial over a boat-financing scandal in Mozambique, but the trial is still on. On top of that, it’s getting sued in Japan over bonds linked to a fund it operated with a company called Greensill, which also collapsed around the time of the Archegos disaster. Also, US lawmakers are accusing Credit Suisse of not cooperating in an investigation about accounts tied to Nazis after World War II. Since UBS has taken over, it has inherited all of these ongoing legal issues.
The development: UBS just agreed to pay a fine of about US$387 million because of Credit Suisse's links with Archegos. The US Fed slapped it with a US$268.5 million fine for what it deemed "unsafe and unsound counterparty credit-risk management practices." The Bank of England also hit it with an £87 million fine (around US$112 million), the biggest fine it’s ever given out. The UK regulator said the bank didn’t learn from its past mistakes and didn’t properly address concerns that had already been raised over its practices.
"Credit Suisse repeatedly failed to address identified risks associated with Archegos' portfolio despite repeated escalation of red flags by staff to multiple levels of management," said the US Federal Reserve Board.
"Credit Suisse’s failures to manage risks effectively were extremely serious, and created a major threat to the safety and soundness of the firm. The seriousness and widespread nature of those failures has led to today’s fine, which is the largest ever imposed by the PRA,” said Deputy Governor for Prudential Regulation and CEO of the UK Prudential Regulation Authority Sam Woods.
UBS “has already begun implementing its risk framework, including actions addressing these regulatory findings, across Credit Suisse,” said a statement from UBS on Monday.