What Credit Suisse and Three Arrows Capital Have in Common

One of the world’s most embarrassingly bad banks is tanking – and some of its biggest missteps will look all too familiar to crypto financiers.

AccessTimeIconOct 12, 2022 at 4:05 p.m. UTCUpdated Oct 12, 2022 at 4:52 p.m. UTCLayer 2
AccessTimeIconOct 12, 2022 at 4:05 p.m. UTCUpdated Oct 12, 2022 at 4:52 p.m. UTCLayer 2

David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.

Credit Suisse could be $8 billion short of its required capital ratio by 2024, according to a recent analysis by JPMorgan. The math here is beyond the ken of mere mortals, but as summarized by Seeking Alpha, the projected shortfall is thanks to a mix of weak projected earnings, rising inflation, a risk-heavy balance sheet , lawyer fees as well as costs if Suisse is forced to restructure.

A Jefferies analyst speaking to Bloomberg agreed, saying Suisse needed to raise around 9 billion Swiss francs (about US$9 billion) in the next two to three years. So Suisse must either sell assets or issue new stock, at a moment in the business cycle when you definitely, really don’t want to be doing either of those things. Especially if you’re Credit Suisse.

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The litany of failures that led Suisse to this pass is … well, it’s a litany. A litany that is, nearly from start to finish, utterly hilarious. But if ranked for both sheer destruction and unalloyed comedy gold, top of the list has to be Suisse’s role in the meltdown of the hedge fund Archegos.

Archegos was a “hedge” fund in name only, in that it seemingly neglected to hedge, or for that matter to perform basic risk management. The fund’s strategy was essentially a pump-and-dump on a basket of blue chip stocks, which Archegos itself drove up by buying at huge scale using immense amounts of leverage, aka debt.

If that sounds familiar, you may be thinking of a humble little trading shop called Three Arrows Capital (or 3AC), which ran basically the same strategy with bitcoin and other crypto assets.

Leveraging up a small set of assets to pump your balance sheet is a strategy that works right up until the point you actually have to sell the assets you’ve inflated, and realize nobody is willing to pay the prices you did. Whoopsie!

Archegos ultimately nuked roughly $20 billion into the dirt, with Suisse alone on the hook for a stunning $5.5 billion of that. That’s believed to be the highest loss among the several banks whose big loans let Archegos run its boneheaded strategy . Other lenders, including Goldman Sachs, simply managed to get out faster.

Three Arrows Capital, for its part, used leverage to turn about $10 billion into dust. Archegos is beating Three Arrows on another metric – Archegos management already faces charges of fraud, with the U.S. Department of Justice alleging the firm engaged in market manipulation. Similar charges could be coming for Three Arrows. But because tradfi still has its boring aspects, Archegos founder Bill Hwang has not escaped to international waters.

3AC was considered the most important fund in crypto, while Archegos was just one of many in TradFi. However, there are a few parallels between the firms worth noting. First, the numbers are shockingly similar, if not exactly comparable. The second parallel is more important: In the 2010s, fancy investment bankers made the same utterly brain-dead sort of bets as the wild-eyed psychos who (presumably) run money in crypto.

Most humiliating of all, a post-mortem found that at every step of the way Suisse’s missteps were the result of mere incompetence rather than “fraudulent or illegal conduct.” By the standards of polite society, of course, that could be considered a plus. But remember that we’re talking about bankers here – regardless of what’s said in the light of day, it’s obviously preferable to be a crook than a sucker.

Other global investment banks are bad in different ways – Deutsche Bank and HSBC are money laundering factories, Goldman Sachs is a heartless vampire squid, etc. But if you’re a global bank, you want to be bad the way Goldman and Deutsche are bad (evil and mercenary), NOT in the way Credit Suisse is bad (incompetent and disarrayed).

Suisse’s history of bumbling is too varied and manifold to detail here, but at the same time it was losing money on Archegos it was also entangled in another alleged fraud called Greensill Capital, a U.K.-based finance firm generating an estimated $1.72 billion loss. Credit Suisse is also currently under investigation for tax fraud. Then there’s the Suisse private banker who allegedly defrauded the former prime minister of Georgia to the tune of $800 million.

Suisse has also been accused of spying on its own employees, which led to the resignation of a CEO in 2020. The chief executive brought in to clean house resigned after two years as further scandals and screwups rolled in.

All that makes it hard to imagine who would want to own more of Suisse, or pay actual money to shoulder responsibility for units whose balance sheets could be as full of holes as Swiss cheese. In an absolute worst-case scenario, all this could mean Suisse becomes insolvent sometime in the next few years.

The good news is that, at least for now, analysts don’t see Suisse as a systemic risk in the way that Lehman Brothers was in 2008. Still, there are ways to view Suisse’s ineptitude as systemic to modern banking. Some point to the moral hazard of bailouts to explain banks’ risk exposure. Or perhaps big banks consistently make huge mistakes because the concentration of power reduces diversity of thought. That could mean a less concentrated financial system would provide better outcomes.

But for now, let’s enjoy the comforting idea that sometimes stupidity is just stupidity.

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David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.

David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.