(Bloomberg) – At the height of its meteoric rise, Hamza Lemssuger was a prize worth fighting for at Credit Suisse Group AG.
The firm has allowed its 30-year-old trading prodigy to take on a high level of risk in order to accumulate profits in illiquid corners of wild markets. When he turned this hot run into a job at hedge fund Citadel late last year, a Swiss bank promised him a fund of its own to lure him back.
But in the critically acclaimed Credit Suisse, which has moved from one crisis to the next this year, Lemsuger appears to have become too much of a risk. On Wednesday, the bank canceled plans for a young star fund, freeing it to pursue its ambitions without its money and support. The episode marks a dramatic shift in the bank’s attitude following embarrassing failures with Archegos Capital Management and Greensill Capital, which cost the firm billions of dollars in losses.
“These accidents showed more than anything that Credit Suisse has really been looking to make a profit over the past few years,” said Peter Hahn, a former banker and now professor emeritus at the London Institute of Banking and Finance. “And it looks like there will be fewer and more stretch marks.”
Lemsuger’s successful ascent was not without controversy. The London-based trader gained fame by buying large packages of debt, which allowed him to capture the opaque market for illiquid securities and provoke losses for competitors who switched sides of the deal. This account of his work at Credit Suisse is based on interviews with eight people who spoke on condition of anonymity.
In 2019, at least three competitors and trading clients filed a complaint against it with the UK financial authority, claiming to be insider trading and price manipulation, according to sources familiar with the matter. One of these complaints came from a hedge fund that lost money on a bet that paid off well for Credit Suisse, and the other came from a firm that actually made money on the deal, people say.
While Credit Suisse has not received any formal inquiries from the UK Financial Conduct Authority following the complaints, some clients have unofficially raised concerns about Lemsuger’s tactics with bank contacts, one of the people said. According to this person, these complaints were not raised by clients.
It is unclear whether the UK regulator has dealt with complaints against Lemsuger. The FCA will generally acknowledge any complaint to the parties who filed it, but is not always able to provide any information on how it handles the complaint. FCA declined to comment.
Lemsuger, who declined to comment for the story, referred all inquiries to Credit Suisse.
“We have clear procedures for handling complaints from customers and other counterparties,” a Credit Suisse spokesman said in an e-mail statement. “They are officially registered and checked to determine if there have been any wrongdoing. We have not received any official complaints on this matter ”.
The collapse of Archegos’ secret family office in March, just weeks after the collapse of financial services provider Greensill, shook Credit Suisse and set off a period of intense introspection at the bank. Switzerland’s second-largest lender is currently investigating what went wrong with its internal controls and has redefined its senior ranks – its asset management boss, chief risk officer, and investment bank head quickly stepped down.
Credit Suisse executives postponed the launch of the Lemssouguer Absolute Returns Loan Fund, which sought to place big bets on troubled businesses, in March as part of a broader review of its asset management division. After the bank was forced to cut $ 10 billion in supply chain funds associated with Greensill, the bank decided to approve only those funds it deemed relatively low-risk and uncomplicated, according to people familiar with the matter.
On Tuesday, during a phone call about the launch of new funds, some Credit Suisse executives expressed a pessimistic view of products that deviate from traditional strategies. By Wednesday, the bank announced that it was losing its former star downstream.
Just six months ago, Credit Suisse convinced Lemsuger to give up his role in Ken Griffin’s Citadel. Bloomberg reported at the time that a $ 39 billion Chicago hedge fund had hired him as a portfolio manager as part of a global credit expansion. It’s easy to see why Credit Suisse wanted this trader back: he was recognized as one of them. According to sources familiar with the matter, helping the bank’s European high-yield division generate about $ 220 million in 2020 by placing huge bets on risky junk bonds, distressed debt and illiquid securities. This is about 5.5% of the bank’s total revenue from fixed income operations.
In recent marketing materials, Credit Suisse described the young trader as a connoisseur of the junk bond market, making historic gains by betting on the fortunes of troubled European companies.
“His ability to understand the psychology and risk tolerance of market participants and to assess liquidity in this context has led to one of the most profitable years in the history of the trading service,” said a presentation that Bloomberg News saw advertising his new loan fund. “He has been instrumental in ensuring the group’s visibility and risk-taking ability, and has implemented rigorous investment and risk management processes.”
Lemsuger was born in Morocco and educated at the Ecole Polytechnique in France. Lemsuger joined Credit Suisse in 2014 only after a summer internship at Goldman Sachs Group Inc. His first job at a Swiss bank was as a London analyst. later made a highly profitable table as a trader.
Lemsuger’s early days at Credit Suisse coincided with an attempt to mitigate risk under the leadership of then-CEO Tijan Thiam. After losing about $ 1 billion in write-offs of distressed bonds and securitized products in 2016, Thiam pledged to move away from more risky activities.
But by 2019, Credit Suisse had re-discovered its appetite for aggressive lending. The name behind the higher debt trading volumes was Lemssouguer, which caused a stir by placing high bets on the debt of the travel firm Thomas Cook Group Plc and UK debt collection firm Lowell Group.
According to people familiar with the matter, his proprietary strategy was to buy up huge chunks of debt and sell paper at a higher price. Sometimes he controlled up to 90% of the debt flows of highly distressed companies, and Credit Suisse gave him the ability to buy bonds worth up to $ 100 million, some people say. This is unusually high by industry standards: in competing banks, transactions of less than one third of this amount must be approved by the credit managers’ committee.
And yet Lemsuger’s tactics worried some market participants. At least two investment funds and a rival bank have accused Lemssouguer of complaining to the regulator for distorting market prices and using inside information regarding the August 2019 buyback of Lowell’s 33.5 million pounds ($ 47 million) bonds, sources said.
The redemption of bonds is usually carried out privately between the issuer, the organizing bank and the investors who agreed to sell. One firm that filed the complaint cited information leaked by Lemssuger prior to the ransom, which indicated that he was aware of the pending transaction, according to people familiar with the matter. Lemsuger’s upbeat stance on Lowell’s unsecured bonds is long before the buyback, as his group has encouraged clients to invest in them since at least 2017, according to a Bloomberg note.
After the buyback was announced, Lowell’s bond prices surged while the cost of debt insurance plummeted, bringing Lemsuger a profit on his deal, people say.
Despite complaints, 2020 began as another important year for a trader who was able to find huge trading opportunities in the chaos caused by the global pandemic. In the first quarter of 2020, it traded at least $ 21 billion, which is more than some banks in a year.
He soon caught the attention of Citadel’s Pablo Salame, head of the company’s global lending business. Salame, who formed his team after joining Citadel from Goldman Sachs in 2019, joined Lemsuger in September.
By November, however, Credit Suisse had lured Lemsuger back by offering him the opportunity to oversee the launch of his own equity platform as part of his investment arm with seed capital from the bank to jumpstart his efforts. His purported foundation is called Arini, after the parrots he has bred since growing up in Morocco.
Lemsuger began meeting with potential investors in 2021 and was planning to raise up to $ 500 million for his debut fund when Credit Suisse was shaken by the double collapse of Greensill and Archegos.
Credit Suisse Asset Management is currently undergoing a major overhaul and new Credit Suisse Chairman Antonio Horta-Osario is considering a strategy restart as part of a broad overview of the bank’s operations. Shrinking or spinning off an asset management operation is one option he might consider.
Meanwhile, Lemsuger is encouraged to go it alone.
© 2021 Bloomberg LP