Credit Suisse Group (CS) - Get Report unveiled a $4.7 billion writedown Tuesday, and cautioned investors it would book a near $1 billion first quarter loss, as the bank took stock of its role in the implosion of the Archegos Capital hedge fund.
Credit Suisse said it will likely report a pre-tax loss of 900 million Swiss francs ($960 million) , a figure that includes a charge of 4.4 billion Swiss francs tied to what it called "the failure by a US-based hedge fund to meet its margin commitments.
The Zurich-based investment bank also said it will launch a review of its risk management processes -- and announced the removal of several senior executives -- in the wake of the Archegos Capital failure, which was linked to the hedge fund's use of complicated derivatives known as total return swaps (TRS) that allow a 'buyer' to receive running payments on a basket of reference shares without actually owning them.
Leverage provided by several U.S and European investment banks was used to increase that exposure, which was based on U.S. and China-based media stocks including ViacomCBS (VIA) - Get Report, Discovery (DISCA) - Get Report, Baidu (BIDU) - Get Report and Tencent Music (TME) - Get Report, while the shares themselves were held by the banks, which acted as prime brokers New York-based Archegos.
"The significant loss in our Prime Services business relating to the failure of a US-based hedge fund is unacceptable," said CEO Thomas Gottstein in a statement. "In combination with the recent issues around the supply chain finance funds, I recognize that these cases have caused significant concern amongst all our stakeholders."
"Together with the Board of Directors, we are fully committed to addressing these situations. Serious lessons will be learned," he added. "Credit Suisse remains a formidable institution with a rich history."
Credit Suisse's U.S.-listed shares were marked 0.6% lower in early trading Tuesday to change hands at $10.80 each. The stock is down around 16%, however, since details of the Archegos implosion were first made public late last month.
With investment banks tapping near-zero interest rate liquidity from central banks around the world, many of their prime brokerage operations have been able to provide significant leverage to hedge fund clients, allowing them to boost exposure to stocks and other assets while ramping-up potential returns in the process.
This may have allowed Archegos Capital and its founder, Bill Hawang, to build massive exposure to certain stocks without drawing the notice of market regulators, as the structure of a TRS doesn't require disclosure of ownership in the underlying stocks.
The losses triggered a margin call from various prime brokerage operations, including Credit Suisse, that may have resulted in a massive 'block sale' of shares late last month that was ultimately traced back to Archegos.
Japan-based Nomura (NMR) - Get Report said last week that it was "evaluating the extent of the possible loss and the impact it could have on its consolidated financial results," adding its current estimate is "approximately $2 billion" but is "subject to change depending on unwinding of the transactions and fluctuations in market prices."