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"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,

"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.)
- herodoturtle 6y ago
  I just wanted to quickly say thanks for taking the time to reply to my comment with so much insight. I don't have anything valuable to add, but hell, your response was very interesting to read! It also sent me down some fun rabbit holes on credit cycles. Cheers from South Africa.
- xhkkffbf 6y ago
  Which differential equations? The heat equation/option valuation doesn't seem to have such a possibility built into, right?
  - jerf 6y ago
    I don't have a specific one in mind, just the intuition that recursive processes can have a lot sharper of a cutoff than a less differentially-minded intuition might suggest. You can also look at it probabilistically, rather than differentially. Consider even just "If the probability of a margin call causing a margin call is X, and a margin call occurs, how many margin calls will occur in a chain?" The number sharply goes up as your raise the probability close to one, it doesn't just smoothly increase. It's even worse once you add in to the model that the probability is not independent, but as more occur the probability of the next one also would increase. Especially if you add that non-independence in, what you'll see is a phase change, where you get a surprisingly sharp transition between "a margin call doesn't usually cause another one" to "a never-ending cascade of margin calls occurs", rather than a smooth one. (I may post a model of this. Someone may beat me to it, too. It's not that hard.)
    - jerf 6y ago
      I'm not saying this is an accurate model of the financial system, just the sort of thing I was going for: import random import itertools def withProb(p): return random.random() < p def avg100(f): return sum(f() for i in range(100))/100 # Independent probabilities; look what happens as you get close to 1. def marginCallChain(prob): total = 0.0 while withProb(prob) and total < 100000: total += 1 return total # Dependent probabilities: def marginCallDependent(prob): total = 0.0 while withProb(prob) and total < 100000: total += 1 prob = 1 - 1 /((1 / (1 - prob)) * 1.01) return total If you play with that with something like "avg100(lambda: marginCallChain(.95))", you can find that the chain starts extending a lot as you get close to 1. It's not a terribly sharp phase change, though. "avg100(lambda: marginCallDependent(.95))" shows more interesting behavior. That only slightly raises the probability of the next margin call based on the fact that one occurred, and what you can see is that around .93-.95, you start seeing that every once in a while, the probability manages to occasionally work itself up to effectively 1 and the chain hits the upper limit I set. As you raise up towards one, you start to see it more and more often; .96 still sometimes manages to have a run of 100 without a crash, but even .965 the odds that one will occur in that run of 100 start to approach 1. There's a phase change between where 100 runs of the model have almost no probability of having a runaway to where the probability of at least 1 runaway is quite probable, and it's more sudden than a linear understanding of the process would suggest. Again, this is not a model of the financial system; this is a simple model of the point I was making.
tootie 6y ago
I don't work in hedge funds and have only a superficial understanding, but it seems the operative word of "hedge" was completely ignore here. He plowed a huge chunk of his positions into two companies and didn't offset with any swaps or other risk absorbers. This seems like downright malpractice and not just a bad luck.
- bidirectional 6y ago
  Eh, all is fair in love and war. The bank are charging a risk premium on any transactions with him, it's their fault if they underestimate it. It's a family office, not a hedge fund taking outsider capital, so he's entering into transactions with willing counterparties using his own money.
- dcolkitt 6y ago
  Archegos was hedged. All of its long positions were matched with short index futures, and the fund was running at or near market neutral. Hedging doesn't mean zero risk. It just means removing the risk of whatever it is being hedged. In this case it wasn't a general market decline that took out Archegos. It was a decline in the specific basket of stocks they were holding relative to the broader market.
QuestionC 6y ago
> This reads as if Credit Suisse was bankrolling a maverick fund manager's speculative investments. Archegos had secured identical positions with a number of investment banks, including Morgan Stanley, Goldman Sachs, and Nomura. Credit Suisse was just stuck holding the bag while other banks quickly unwound their positions.
- ashconnor 6y ago
  Layman here. Why was Credit Suisse left holding the bag instead of the losses being distributed between the banks? Was it because they were the broker?
  - kristjansson 6y ago
    The other firms were better at listening to the music, and knew that it had stopped?
    - herodoturtle 6y ago
      This comment reminded me of that awesome scene by Jeremy Irons in Margin Call :-)
      - arthurcolle 6y ago
        Be first, be smarter or cheat
        lotsofpulp 6y ago
        https://www.youtube.com/watch?v=ag14Ao_xO4c https://www.youtube.com/watch?v=ag14Ao_xO4c
  - tedunangst 6y ago
    Because they were last to sell.
  - QuestionC 6y ago
robk 6y ago
the money went somewhere. unless you hold CS shares it may well have gone into your retirement fund's allocation indirectly. who knows, but you're probably no worse off.

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.)

herodoturtle 6y ago
I just wanted to quickly say thanks for taking the time to reply to my comment with so much insight. I don't have anything valuable to add, but hell, your response was very interesting to read! It also sent me down some fun rabbit holes on credit cycles. Cheers from South Africa.
xhkkffbf 6y ago
Which differential equations? The heat equation/option valuation doesn't seem to have such a possibility built into, right?
- jerf 6y ago
  I don't have a specific one in mind, just the intuition that recursive processes can have a lot sharper of a cutoff than a less differentially-minded intuition might suggest. You can also look at it probabilistically, rather than differentially. Consider even just "If the probability of a margin call causing a margin call is X, and a margin call occurs, how many margin calls will occur in a chain?" The number sharply goes up as your raise the probability close to one, it doesn't just smoothly increase. It's even worse once you add in to the model that the probability is not independent, but as more occur the probability of the next one also would increase. Especially if you add that non-independence in, what you'll see is a phase change, where you get a surprisingly sharp transition between "a margin call doesn't usually cause another one" to "a never-ending cascade of margin calls occurs", rather than a smooth one. (I may post a model of this. Someone may beat me to it, too. It's not that hard.)
  - jerf 6y ago
    I'm not saying this is an accurate model of the financial system, just the sort of thing I was going for: import random import itertools def withProb(p): return random.random() < p def avg100(f): return sum(f() for i in range(100))/100 # Independent probabilities; look what happens as you get close to 1. def marginCallChain(prob): total = 0.0 while withProb(prob) and total < 100000: total += 1 return total # Dependent probabilities: def marginCallDependent(prob): total = 0.0 while withProb(prob) and total < 100000: total += 1 prob = 1 - 1 /((1 / (1 - prob)) * 1.01) return total If you play with that with something like "avg100(lambda: marginCallChain(.95))", you can find that the chain starts extending a lot as you get close to 1. It's not a terribly sharp phase change, though. "avg100(lambda: marginCallDependent(.95))" shows more interesting behavior. That only slightly raises the probability of the next margin call based on the fact that one occurred, and what you can see is that around .93-.95, you start seeing that every once in a while, the probability manages to occasionally work itself up to effectively 1 and the chain hits the upper limit I set. As you raise up towards one, you start to see it more and more often; .96 still sometimes manages to have a run of 100 without a crash, but even .965 the odds that one will occur in that run of 100 start to approach 1. There's a phase change between where 100 runs of the model have almost no probability of having a runaway to where the probability of at least 1 runaway is quite probable, and it's more sudden than a linear understanding of the process would suggest. Again, this is not a model of the financial system; this is a simple model of the point I was making.

tootie 6y ago

I don't work in hedge funds and have only a superficial understanding, but it seems the operative word of "hedge" was completely ignore here. He plowed a huge chunk of his positions into two companies and didn't offset with any swaps or other risk absorbers. This seems like downright malpractice and not just a bad luck.

bidirectional 6y ago
Eh, all is fair in love and war. The bank are charging a risk premium on any transactions with him, it's their fault if they underestimate it. It's a family office, not a hedge fund taking outsider capital, so he's entering into transactions with willing counterparties using his own money.
dcolkitt 6y ago
Archegos was hedged. All of its long positions were matched with short index futures, and the fund was running at or near market neutral. Hedging doesn't mean zero risk. It just means removing the risk of whatever it is being hedged. In this case it wasn't a general market decline that took out Archegos. It was a decline in the specific basket of stocks they were holding relative to the broader market.

QuestionC 6y ago

> This reads as if Credit Suisse was bankrolling a maverick fund manager's speculative investments. Archegos had secured identical positions with a number of investment banks, including Morgan Stanley, Goldman Sachs, and Nomura. Credit Suisse was just stuck holding the bag while other banks quickly unwound their positions.

ashconnor 6y ago
Layman here. Why was Credit Suisse left holding the bag instead of the losses being distributed between the banks? Was it because they were the broker?
- kristjansson 6y ago
  The other firms were better at listening to the music, and knew that it had stopped?
  - herodoturtle 6y ago
    This comment reminded me of that awesome scene by Jeremy Irons in Margin Call :-)
    - arthurcolle 6y ago
      Be first, be smarter or cheat
      - lotsofpulp 6y ago
        https://www.youtube.com/watch?v=ag14Ao_xO4c https://www.youtube.com/watch?v=ag14Ao_xO4c
- tedunangst 6y ago
  Because they were last to sell.
- QuestionC 6y ago

robk 6y ago

the money went somewhere. unless you hold CS shares it may well have gone into your retirement fund's allocation indirectly. who knows, but you're probably no worse off.