Culture, Incentives and Risk

In 2020 Credit Suisse's prime services desk earned about $16–17 million from one client, the family office of Bill Hwang (Paul, Weiss review, reported, verify). Hwang's earlier hedge fund, Tiger Asia, had settled SEC insider-trading charges and pleaded guilty to wire fraud in 2012. His new firm, Archegos Capital Management, managed only his own money, so it did not have to register with the SEC or disclose its positions. It held almost everything through total return swaps with a group of banks that included Credit Suisse, Nomura, Morgan Stanley, Goldman Sachs and UBS, so the banks, not Archegos, owned the shares, and each saw only its own slice. Between March 2020 and March 2021 Archegos's net capital grew from about $1.5 billion to more than $35 billion and its gross exposure from about $10 billion to more than $160 billion (US indictment, reported), concentrated in a handful of stocks such as ViacomCBS, Discovery, Baidu and Tencent Music.

On 22 March 2021 ViacomCBS announced a share sale of about $3 billion and its stock fell. On 25 March Archegos told its prime brokers that it could not meet their margin calls. The banks discussed an orderly wind-down; no agreement held, and on Friday 26 March Morgan Stanley and Goldman Sachs began selling large blocks. Credit Suisse and Nomura were slower. Bank losses passed $10 billion: about $5.5 billion at Credit Suisse and about $2.9 billion at Nomura. Selling early was not a full defence: Morgan Stanley still lost about $911 million, more than UBS's roughly $861 million. The independent report Credit Suisse commissioned from the law firm Paul, Weiss found "a fundamental failure of management and controls" and a "lackadaisical attitude towards risk", but no fraud by the bank's staff. Hwang was convicted of fraud and racketeering in July 2024 and sentenced to 18 years.

Nine years earlier, Knight Capital had lost about $440 million in 45 minutes (the SEC later said more than $460 million). Credit Suisse had lost money slowly, through a long run of small decisions; Knight lost its money in under an hour because of one deployment. Both firms had controls on paper. This chapter is about why such controls fail, and what makes people inside a financial firm obey them.