12 ms·

Credit Suisse Takes $4.7B Hit on Archegos Meltdown

142 points by cwwc 6y ago

sorokod 6y ago
Also ( no paywall ) Guardian article https://www.theguardian.com/business/2021/apr/06/credit-suisse-archegos-greensill-losses-bonuses https://www.theguardian.com/business/2021/apr/06/credit-suis...
tumetab1 6y ago
Insert MEME: Here we go again :D On a serious note, this is funny to read after the initial reports that this had a small and contained impact. Let's hope no further cascading bankruptcies happen.
- itsoktocry 6y ago
  >Here we go again :D Maybe so. There was a year between Bear Stearns Asset Management funds blowing up in 2007, and Lehman failing...
flerchin 6y ago
In 2019 they reported ~$20B profit. So this is like one quarter's profit. You win some, you lose some. https://www.credit-suisse.com/media/assets/corporate/docs/about-us/investor-relations/financial-disclosures/financial-reports/csg-ar-2019-en.pdf https://www.credit-suisse.com/media/assets/corporate/docs/ab...
- ckastner 6y ago
  You mean they reported ~$20B in revenue. Profit was $3.4bn.
  - flerchin 6y ago
    Correct! I don't spend a lot of time reading annual reports.
    - thehappypm 6y ago
      If this is true, why post a comment about one?
herodoturtle 6y ago
"Archegos was a fund run by and managing the personal fortune of Bill Hwang, an investor who had built up large positions in companies worth billions of pounds, despite a previous insider trading conviction." "Credit Suisse’s investment bank under Chin acted as prime broker to Archegos funds, lending it large sums of money to allow it to build up bigger positions in the shareholdings of quoted companies. Hwang had placed big bets that certain stocks, including Chinese technology company Baidu and US media group ViacomCBS, would see their share prices rise. When the stocks fell, both Hwang and his lending banks suffered heavy losses." This reads as if Credit Suisse was bankrolling a maverick fund manager's speculative investments. Strikes me as a rather unhealthy disregard for risk, and completely goes against the spirit of capital preservation. That's four thousand seven hundred million dollars down the drain - by one of the world's most prestigious banks. Leaves a bitter taste in my working class mouth.
- jerf 6y ago
  A casual reading of that may make it sound like Credit Suisse made some sort of conscious decision to lend money, but from what I see in the financial industry, lending is handed out like candy on Halloween, almost right down to the bowl left out on the street that says "Take Two" and uses the honor system. It's just "leverage". It came with the account and they used it, and it's likely very minimal oversight was ever exerted beyond basic automated checks asserting that sufficient assets were in place to be margin called if necessary. I see a lot of people calling this the "everything bubble", but to my mind, history may record this as the "leverage bubble". With such low interest rates and free money being shoveled out of the helicopter as fast as it can with more than a whiff of desperation about the whole exercise, there's leverage everywhere, and leverage stacked on that leverage, and leveraged assets being held up as collateral for levered leverage. It seems, at least for today, that this was not The Great Deleveraging, but at some point in the not-too-distant future one seems inevitable to me. (Subject to the usual "the market can remain irrational longer than you can remain solvent" timing issues, in that I wouldn't dream of trying to call a date on this, but I can't help but think The Great Deleveraging is inevitably coming, when something somewhere pops like this, and the act of margin calling to make up for it pushes down other assets in value, which causes more margin calling and assets getting automatically sold, which pushes down other assets in value, which causes more margin calling and asset selloffs, and it just doesn't stop until there's hardly a speck of leverage left in the market and valuations are a smoking crater, along with every account that was based on leverage. A basic understanding of differential equations would suggest that it's likely the market will at some point experience a phase transition, where we don't gradually go from this being impossible, to kinda happening more and more as leverage increases, but instead we can go in very short time from this being essentially impossible to completely inevitable, and nobody actually knows when this threshold will be crossed.)
osrec 6y ago
As someone who has worked in the Investment Banking industry for a while, I'm always amazed that risk professionals get paid significantly less than the front office guys. This in turn attracts less talented people in risk, who can then be outsmarted by the whipper snappers in the front office teams. If IBs don't want to lose bucket loads of money every so often, pay your risk guys a bit more so you hire the same calibre of individual that would otherwise end up on the trading/structuring/quant desks.
- itsoktocry 6y ago
  >pay your risk guys a bit more so you hire the same calibre of individual that would otherwise end up on the trading/structuring/quant desks. Reverse the causation here: they don't pay risk guys enough because they don't really care about the risks they are taking. Because, you're right, if they cared they could solve issues like this tomorrow.
  - ethbr0 6y ago
    I think it can be chalked up to cost center vs profit center. Staffing trading makes money. Staffing risk costs money. It's inevitable the latter is going to get the short end of the stick, probably the bare minimum requires to satisfy regulation, when salaries are allocated.
  - SkyMarshal 6y ago
    They do care about the risks they’re taking and invest a lot of money into risk management. But the real risk management is in buying politicians with campaign donations, lobbying, and revolving door jobs after they leave office. Favorable regulations, weak punishments, and bailouts are much more effective. Bank risk departments are just risk theater.
  - vmception 6y ago
    Exactly, I always like to remind myself of the New York State court cases that reaffirmed Compliance Officers are at-will employees, and can be fired for any reason, like raising compliance issues. Some people are regulatory hires.
jgalt212 6y ago
Reg T is very loosely applied, and there are all sorts of work-arounds (TRR swaps, etc) and the regulators just don't seem to care that Reg T is being violated in spirit if not in letter. https://www.investopedia.com/terms/r/regulationt.asp https://www.investopedia.com/terms/r/regulationt.asp I interviewed for am equity swaps trading position many years ago, in full disclosure to me the prospective employer let me know that applying Reg T to derivatives transactions would be very bad for their business.
- Spinnaker_ 6y ago
  Reg T only covers initial equity leverage for retail investors. It probably doesn't apply to anyone you hear about in the wsj. There are basically no all-encompassing, market-wide regulations for institutions.
lordnacho 6y ago
As a former fund manager, I have some things to explain and some things to ask. First, the thing to explain: Basically CS was one of several Prime Brokers. This basically means the guy who lends money to the speculators. Same as buying a house, you have a down payment that's your money, and then a bank lends you between 115% (boom times) and 30% (safe as houses) of the value of the house. If the house falls in value and you can't pay the mortgage, the bank can sell your house, and hopefully that will mean they recover their entire loan. Note that they only lose once the value has declined by your down payment amount. I actually knew the boss of a PB who got fired because a rich guy came in and wanted a lot of leverage, the risk managers said no, and he overruled them. And then the customer proceeded to lose hundreds of millions speculating, and it ate the bank's capital. So it's not the first time that risk gets overruled. So somehow, CS has lost $4.7B on this Archegos financing, after Archegos lost whatver they put up. From what I gather, Archegos had $10B of equity in total? Typically (sensibly) you don't put all your eggs in one basket as a fund, even a quite concentrated fund. How big was the position?
- duxup 6y ago
  I read elsewhere (can't read this article) that some other banks had made similar deals with Archegos, but they saw the trouble coming and were able to offload their exposure / shares (sell the house using the analogy) before other banks and thus were able to get out with limited or no losses. Does that sound right? It seems strange to me that using the house analogy ... there's potentially WAY more than say a 15 percent loss (using the 115% number) if other lenders decide to nope out.
  - lordnacho 6y ago
    Disregard the 115%, that's from the pre-GFC times when banks used to give you more money than you needed to buy the house, plus some more to buy a car. You're right there were several deals, but again, you're allowed to ask questions as a PB. Clearly if you're lending money to a guy who is borrowing from a bunch of other people to do the same thing, you should have a think about it.
    - 6y ago
BlasDeLezo 6y ago
I lost 50 Euros once. I was very upset all day.
tibbydudeza 6y ago
@ArchegosFO Martian Institute of Technology (MIT) - Online class of 1945 I give bad financial advice Already a twitter parody account :).
andys627 6y ago
Who took the other side of this bet? Ie who made 4.7b?
- yellowstuff 6y ago
  This wasn't really a two sided bet, Archegos bought a lot of stock and essentially borrowed a massive amount of money to buy even more stock, then the stock lost value. If Company X is worth $60B on Monday and $40B on Tuesday then some people who were short could make a lot of money, but in general $20B of value has been destroyed and the world is poorer on Tuesday.
- alex504 6y ago
  Whoever sold the jesus guy stock
myth_buster 6y ago
History doesn't repeat but it surely rhymes. Long Term Capital Management 94-98. https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management
99_00 6y ago
Highly leveraged firms blowing up often happen at major market tops.
OliverJones 6y ago
Was this a black swan event [1] (in Taleb's jargon)? If so, this high-leverage approach to investing is a swan hatchery downwind of a coal plant. [1] https://fs.blog/2011/10/what-is-a-black-swan/ https://fs.blog/2011/10/what-is-a-black-swan/
ArtWomb 6y ago
The "Total Return Swaps" are very interesting instruments. I'm unclear how the banks can justify the paltry premiums compared to massive risks involved, other than the implicit guarantees that a Fed inspired bull market may achieve: https://www.investopedia.com/terms/t/totalreturnswap.asp https://www.investopedia.com/terms/t/totalreturnswap.asp How did Goldman survive unscathed? Their exposure was less than JPMC, but they seem to have liquidated before the impact of the block trades hit the market price. Curious! https://www.cnbc.com/2021/04/06/goldmans-risk-controls-worked-well-during-archegos-fire-sale-ceo-solomon-says.html https://www.cnbc.com/2021/04/06/goldmans-risk-controls-worke...
cromka 6y ago
As a (soon to be former) employee, I was already pitched in the AM today by a headhunter referring to this loss.
orloffm 6y ago
Is it possible to read the article without getting into their subscription trap? I'd gladly pay some one-time fee, maybe 1-2$ for the whole issue.

142 points by cwwc 6y ago

Also ( no paywall ) Guardian article https://www.theguardian.com/business/2021/apr/06/credit-suisse-archegos-greensill-losses-bonuses https://www.theguardian.com/business/2021/apr/06/credit-suis...

tumetab1 6y ago

Insert MEME: Here we go again :D On a serious note, this is funny to read after the initial reports that this had a small and contained impact. Let's hope no further cascading bankruptcies happen.

itsoktocry 6y ago
>Here we go again :D Maybe so. There was a year between Bear Stearns Asset Management funds blowing up in 2007, and Lehman failing...

flerchin 6y ago

In 2019 they reported ~$20B profit. So this is like one quarter's profit. You win some, you lose some. https://www.credit-suisse.com/media/assets/corporate/docs/about-us/investor-relations/financial-disclosures/financial-reports/csg-ar-2019-en.pdf https://www.credit-suisse.com/media/assets/corporate/docs/ab...

ckastner 6y ago
You mean they reported ~$20B in revenue. Profit was $3.4bn.
- flerchin 6y ago
  Correct! I don't spend a lot of time reading annual reports.
  - thehappypm 6y ago
    If this is true, why post a comment about one?

herodoturtle 6y ago

"Archegos was a fund run by and managing the personal fortune of Bill Hwang, an investor who had built up large positions in companies worth billions of pounds, despite a previous insider trading conviction." "Credit Suisse’s investment bank under Chin acted as prime broker to Archegos funds, lending it large sums of money to allow it to build up bigger positions in the shareholdings of quoted companies. Hwang had placed big bets that certain stocks, including Chinese technology company Baidu and US media group ViacomCBS, would see their share prices rise. When the stocks fell, both Hwang and his lending banks suffered heavy losses." This reads as if Credit Suisse was bankrolling a maverick fund manager's speculative investments. Strikes me as a rather unhealthy disregard for risk, and completely goes against the spirit of capital preservation. That's four thousand seven hundred million dollars down the drain - by one of the world's most prestigious banks. Leaves a bitter taste in my working class mouth.

jerf 6y ago
A casual reading of that may make it sound like Credit Suisse made some sort of conscious decision to lend money, but from what I see in the financial industry, lending is handed out like candy on Halloween, almost right down to the bowl left out on the street that says "Take Two" and uses the honor system. It's just "leverage". It came with the account and they used it, and it's likely very minimal oversight was ever exerted beyond basic automated checks asserting that sufficient assets were in place to be margin called if necessary. I see a lot of people calling this the "everything bubble", but to my mind, history may record this as the "leverage bubble". With such low interest rates and free money being shoveled out of the helicopter as fast as it can with more than a whiff of desperation about the whole exercise, there's leverage everywhere, and leverage stacked on that leverage, and leveraged assets being held up as collateral for levered leverage. It seems, at least for today, that this was not The Great Deleveraging, but at some point in the not-too-distant future one seems inevitable to me. (Subject to the usual "the market can remain irrational longer than you can remain solvent" timing issues, in that I wouldn't dream of trying to call a date on this, but I can't help but think The Great Deleveraging is inevitably coming, when something somewhere pops like this, and the act of margin calling to make up for it pushes down other assets in value, which causes more margin calling and assets getting automatically sold, which pushes down other assets in value, which causes more margin calling and asset selloffs, and it just doesn't stop until there's hardly a speck of leverage left in the market and valuations are a smoking crater, along with every account that was based on leverage. A basic understanding of differential equations would suggest that it's likely the market will at some point experience a phase transition, where we don't gradually go from this being impossible, to kinda happening more and more as leverage increases, but instead we can go in very short time from this being essentially impossible to completely inevitable, and nobody actually knows when this threshold will be crossed.)

osrec 6y ago

As someone who has worked in the Investment Banking industry for a while, I'm always amazed that risk professionals get paid significantly less than the front office guys. This in turn attracts less talented people in risk, who can then be outsmarted by the whipper snappers in the front office teams. If IBs don't want to lose bucket loads of money every so often, pay your risk guys a bit more so you hire the same calibre of individual that would otherwise end up on the trading/structuring/quant desks.

itsoktocry 6y ago
>pay your risk guys a bit more so you hire the same calibre of individual that would otherwise end up on the trading/structuring/quant desks. Reverse the causation here: they don't pay risk guys enough because they don't really care about the risks they are taking. Because, you're right, if they cared they could solve issues like this tomorrow.
- ethbr0 6y ago
  I think it can be chalked up to cost center vs profit center. Staffing trading makes money. Staffing risk costs money. It's inevitable the latter is going to get the short end of the stick, probably the bare minimum requires to satisfy regulation, when salaries are allocated.
- SkyMarshal 6y ago
  They do care about the risks they’re taking and invest a lot of money into risk management. But the real risk management is in buying politicians with campaign donations, lobbying, and revolving door jobs after they leave office. Favorable regulations, weak punishments, and bailouts are much more effective. Bank risk departments are just risk theater.
- vmception 6y ago
  Exactly, I always like to remind myself of the New York State court cases that reaffirmed Compliance Officers are at-will employees, and can be fired for any reason, like raising compliance issues. Some people are regulatory hires.

jgalt212 6y ago

Reg T is very loosely applied, and there are all sorts of work-arounds (TRR swaps, etc) and the regulators just don't seem to care that Reg T is being violated in spirit if not in letter. https://www.investopedia.com/terms/r/regulationt.asp https://www.investopedia.com/terms/r/regulationt.asp I interviewed for am equity swaps trading position many years ago, in full disclosure to me the prospective employer let me know that applying Reg T to derivatives transactions would be very bad for their business.

Spinnaker_ 6y ago
Reg T only covers initial equity leverage for retail investors. It probably doesn't apply to anyone you hear about in the wsj. There are basically no all-encompassing, market-wide regulations for institutions.

lordnacho 6y ago

As a former fund manager, I have some things to explain and some things to ask. First, the thing to explain: Basically CS was one of several Prime Brokers. This basically means the guy who lends money to the speculators. Same as buying a house, you have a down payment that's your money, and then a bank lends you between 115% (boom times) and 30% (safe as houses) of the value of the house. If the house falls in value and you can't pay the mortgage, the bank can sell your house, and hopefully that will mean they recover their entire loan. Note that they only lose once the value has declined by your down payment amount. I actually knew the boss of a PB who got fired because a rich guy came in and wanted a lot of leverage, the risk managers said no, and he overruled them. And then the customer proceeded to lose hundreds of millions speculating, and it ate the bank's capital. So it's not the first time that risk gets overruled. So somehow, CS has lost $4.7B on this Archegos financing, after Archegos lost whatver they put up. From what I gather, Archegos had $10B of equity in total? Typically (sensibly) you don't put all your eggs in one basket as a fund, even a quite concentrated fund. How big was the position?

duxup 6y ago
I read elsewhere (can't read this article) that some other banks had made similar deals with Archegos, but they saw the trouble coming and were able to offload their exposure / shares (sell the house using the analogy) before other banks and thus were able to get out with limited or no losses. Does that sound right? It seems strange to me that using the house analogy ... there's potentially WAY more than say a 15 percent loss (using the 115% number) if other lenders decide to nope out.
- lordnacho 6y ago
  Disregard the 115%, that's from the pre-GFC times when banks used to give you more money than you needed to buy the house, plus some more to buy a car. You're right there were several deals, but again, you're allowed to ask questions as a PB. Clearly if you're lending money to a guy who is borrowing from a bunch of other people to do the same thing, you should have a think about it.
  - 6y ago

BlasDeLezo 6y ago

I lost 50 Euros once. I was very upset all day.

tibbydudeza 6y ago

@ArchegosFO Martian Institute of Technology (MIT) - Online class of 1945 I give bad financial advice Already a twitter parody account :).

andys627 6y ago

Who took the other side of this bet? Ie who made 4.7b?

yellowstuff 6y ago
This wasn't really a two sided bet, Archegos bought a lot of stock and essentially borrowed a massive amount of money to buy even more stock, then the stock lost value. If Company X is worth $60B on Monday and $40B on Tuesday then some people who were short could make a lot of money, but in general $20B of value has been destroyed and the world is poorer on Tuesday.
alex504 6y ago
Whoever sold the jesus guy stock

myth_buster 6y ago

History doesn't repeat but it surely rhymes. Long Term Capital Management 94-98. https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management

99_00 6y ago

Highly leveraged firms blowing up often happen at major market tops.

OliverJones 6y ago

Was this a black swan event [1] (in Taleb's jargon)? If so, this high-leverage approach to investing is a swan hatchery downwind of a coal plant. [1] https://fs.blog/2011/10/what-is-a-black-swan/ https://fs.blog/2011/10/what-is-a-black-swan/

ArtWomb 6y ago

The "Total Return Swaps" are very interesting instruments. I'm unclear how the banks can justify the paltry premiums compared to massive risks involved, other than the implicit guarantees that a Fed inspired bull market may achieve: https://www.investopedia.com/terms/t/totalreturnswap.asp https://www.investopedia.com/terms/t/totalreturnswap.asp How did Goldman survive unscathed? Their exposure was less than JPMC, but they seem to have liquidated before the impact of the block trades hit the market price. Curious! https://www.cnbc.com/2021/04/06/goldmans-risk-controls-worked-well-during-archegos-fire-sale-ceo-solomon-says.html https://www.cnbc.com/2021/04/06/goldmans-risk-controls-worke...

cromka 6y ago

As a (soon to be former) employee, I was already pitched in the AM today by a headhunter referring to this loss.

orloffm 6y ago

Is it possible to read the article without getting into their subscription trap? I'd gladly pay some one-time fee, maybe 1-2$ for the whole issue.