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Many are ignoring the fact that his leverage increased partially because the positions went up (a lot). If you buy $200mm of Viacom on $100mm of capital, that's
by singhrac 5y ago
Many are ignoring the fact that his leverage increased partially because the positions went up (a lot). If you buy $200mm of Viacom on $100mm of capital, that's 2x leverage. But if VIAC grows 2.5x (as it did between January and end of March) that's a $500mm position, so 5x leverage.
Yes, you're entitled to the gains, but at the end of the day the prime brokers hold $500mm in VIAC stock and $100mm in cash. The prime brokers should not have been lied to, should not have been allowed to get these positions on swaps, and finally should have had an internal risk alert that says "this client is way past their leverage budget!".
- Grustaf 5y agoNo, you put in 100 and then made 300, so your equity is 400 hence your leverage is down to 1.25x. Another way to see it is that the size of your loan is always 100, it doesn’t grow just because you made a lucky bet.
- bhk 5y agoI think you have it backwards. Leverage is the ratio of your notional stake to your net equity. If you buy $200mm of Viacom with $100mm then you have $100mm of debt. When it goes up 2.5X, you now hold $500mm stock and still have debt of $100mm -- net equity $400mm -- so your leverage becomes relatively small. In the Archegos case, a lot of their positions were swaps, so instead of outright ownership they held contracts with banks, but similar logic applies. The problems happen when the assets go down, not up.