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Credit Suisse Takes $5.5 Bln Archegos Hit; Swiss Regulator Probes Role

CEO Thomas Gottstein vows to shake-up bank lending unit after 'unacceptable' loss linked to Archegos Capital collapse.

Credit Suisse Group  (CS) - Get Credit Suisse Group AG Sponsored ADR Report said Thursday that it expects to book a total hit of around $5.5 billion linked to Archegos Capital as Swiss regulators probe the bank's role in the hedge fund's collapse.

Credit Suisse said its current quarter earnings would be reduced by around $655 million from the Archegos failure, adding to the $4.7 billion in booked for the three months ending in March. The bank's first quarter loss was pegged at Sfr757 million. 

The Zurich-based bank also said it will raise around $2 billion in fresh capital to support its balance sheet with the sale of convertible notes while paring backs the prime brokerage division that deals with hedge fund financing. 

Swiss market regulator FINMA, meanwhile, said Thursday that it has opened enforcement proceedings against Credit Suisse linked to both Archegos Capital and the collapse of Greensill Capital, a specialized lender with links to former U.K. Prime Minister David Cameron. 

“Our results for the first quarter of 2021 have been significantly impacted by a SFr4.4 billion charge related to a US-based hedge fund. The loss we report this quarter, because of this matter, is unacceptable," said CEO Thomas Gottstein. "Together with the Board of Directors, we have taken significant steps to address this situation as well as the supply chain finance funds matter."

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"Among other decisive actions, we have made changes in our senior business and control functions; we have enhanced our risk review across the bank; we have launched independent investigations into these matters by external advisors, supervised by a special committee of the Board; and we have taken several capital-related actions," Gottstein said. "We will work to ensure Credit Suisse emerges stronger."

Credit Suisse's U.S.-listed shares were marked 6.36% lower in pre-market trading Thursday to indicate an opening bell price of $9.72 each. 

Archegos Capital, a so-called family office managed by billionaire investor Bill Hwang, collapsed last month amid volatility linked to its 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  (VIACA) - Get ViacomCBS Inc. Class A Report, Discovery  (DISCA) - Get Discovery, Inc. Class A Report, Baidu  (BIDU) - Get Baidu, Inc. Sponsored ADR Class A Report and Tencent Music  (TME) - Get Tencent Music Entertainment Group Sponsored ADR Class A Report, while the shares themselves were held by the banks, which acted as prime brokers New York-based hedge fund.

JPMorgan analysts estimated last week that bank losses could reach $10 billion, twice its original estimate, as lenders such as Morgan Stanley  (MS) - Get Morgan Stanley (MS) Report, Nomura  (NMR) - Get Nomura Holdings, Inc. Sponsored ADR Reportand Wells Fargo  (WFC) - Get Wells Fargo & Company Report scrambled to identify their risk to the embarrassing implosion.