10 ms·

Archegos was too busy for margin calls

205 points by mlla 5y ago

gjvc 5y ago
Some of the formatting of this document is remarkably poor.
baq 5y ago
> Notably, this is not a situation where the business and risk personnel engaged in fraudulent or illegal conduct or acted with ill intent. Nor is it one where the architecture of risk controls and processes was lacking or the existing risk systems failed to operate sufficiently to identify critical risks and related concerns. The Archegos risks were identified and were conspicuous. The persistent failure of he business and risk to manage and remediate the risks, and pervasive issues of business competence and resourcing adequacy, described in detail in this Report, require CS’s urgent attention. wow. this reads like 'culprits have been found and let go with their bonus packages'.
- satellite2 5y ago
  This is common practice in post mortem analysis to try to determine the root cause in a blameless manner. On the next iteration of this issue the eventual culprits of the first probably won't be there to remember what went wrong. What might survive until then though is the set of procedures and guidelines put in place following the investigation recommendations. So it's more effective to determine what process were insufficient than which person had the capacity to avoid something.
  - mannykannot 5y ago
    In cases like this, I doubt you can determine which process were insufficient without noticing which people had the capacity to avoid the problem, yet did not exercise it.
    - satellite2 5y ago
      That's correct, but unless the investigation determined they acted with malice, they should not be explicitly mentioned.
      - mannykannot 5y ago
        Good point.
- deleted 5y ago
  [deleted]
- qeternity 5y ago
  They’ve clawed back nearly $100m of bonuses…
TrainedMonkey 5y ago
Matt Levine did a pretty good writeup on this: https://www.bloomberg.com/opinion/articles/2021-07-29/archegos-was-too-busy-for-margin-calls https://www.bloomberg.com/opinion/articles/2021-07-29/archeg...
- glasss 5y ago
  I did enjoy reading through his updates about the situation as it was developing, pretty interesting stuff. I don't remember the exact line Matt Levine wrote, but he made a point of stating normally you couldn't get away with being this over leveraged, but since Archegos was a family firm it avoided some scrutiny. Interesting to think there will probably always be a way to avoid scrutiny when you're moving that much money around.
- csours 5y ago
  See dang's comment. HN article link previously pointed to a pdf, now it points to this link.
vmception 5y ago
If you’ve ever traded with anything better than Reg-T margin, you know this whole system is ripe for implosion. The leverage is insane! Reg-T (like the kind Robinhood has) doesn’t allow long options to be bought on margin. Other margining systems allow as low as 6% down even on options. And when you’re talking real money, your personal risk/compliance team understands their employment is contingent on looking the other way! They’re at-will employees too.
- Dlanv 5y ago
  Can individuals access that sort of margin? The best I've seen is portfolio margin at some brokers. What's the name of the "margining systems" you are referring to?
  - vmception 5y ago
    portfolio margining does what I describe and has a regulatory minimum of $125,000 or so net liquidation value (portfolio size), SPAN margining can as well which is what the futures and futures options market uses at any portfolio size so yes individuals can access both the primary benefits are cross margining, using other assets to fulfill or calculate margin requirements for a new position and portfolio margin requirements are easy to calculate, just take the loss at a 15% move and whatever that loss is becomes your current margin requirement, it is a 6% move for indexes (like S&P) the way to get in trouble is by confusing the margining system and hiding exposure behind synthetic positions (example, a combination of derivatives to make it look like you are long stock)
  - djanogo 5y ago
    The closest for retail customers is IBKR, needs >110k they have lowest margin rates. They approve pretty easily. On other hand Fidelity will reject portfolio margin even if you have significantly more than 100k.
    - sooheon 5y ago
      Caveat emptor: IBKR's TOS makes it clear they reserve the right to liquidate your positions at any time for basically any reason, including margin requirement changes.
deleted 5y ago
[deleted]
mdlm 5y ago
Who wrote this?
- jeffbee 5y ago
  The authors are listed on page 1.
blunte 5y ago
I cannot believe that Archegos was "too busy" to read a request for additional collateral. They knew exactly what was going on, and they were hoping to buy more time and pray that the market would change in the direction they needed. This sounds like a desperation play that didn't succeed, and Credit Suisse was left with the loss. Now, I'm not much educated in finance... but risk is risk, and whether you have models or you have tarot cards, sometimes things just do not go the way you thought they would. If you're betting 1x, you can lose what you have. If you're betting with leverage, you can win bigger, or lose 1x (and potentially the creditor can lose the remaining Xx). Unless the creditor can automatically liquidate and close out a client's position if they can't make a margin call, it seems you would have to be crazy to be a creditor for leveraged clients. Eventually you will lose big because of a client.
- lupire 5y ago
  I think you missed Levine's dripping sarcasm.
dang 5y ago
We changed the URL from https://www.credit-suisse.com/media/assets/corporate/docs/about-us/investor-relations/financial-disclosures/results/csg-special-committee-bod-report-archegos.pdf https://www.credit-suisse.com/media/assets/corporate/docs/ab..., which is one of those annoying links that downloads a file, and the title from "Postmortem in finance: How Credit Suisse lost $6B [pdf]", which was editorialized. (Please read the site guidelines! https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html) A user suggested the Levine article as a better alternative, so we'll use that for now. If anyone knows a better URL, we can change it again.
- arthurcolle 5y ago
  How is a browser downloading an html file any different than requesting a PDF other than size? If anything it's useful to be able to pop it over into the Documents app and read later. I guess it's not responsive but to be honest that's a feature not a bug lol. I guess the editorial concern is the bigger issue.
  - geofft 5y ago
    $ curl -SsfI https://www.credit-suisse.com/media/assets/corporate/docs/about-us/investor-relations/financial-disclosures/results/csg-special-committee-bod-report-archegos.pdf | grep -i disposition content-disposition: attachment "Downloading" here means that it sends something to your downloads folder and doesn't participate in the normal browser UI. When I use a browser, I generally expect to use its UI. If it transferred a PDF but showed it in the normal UI (colloquially not referred to as "downloading," although yes, it still is an inbound transfer of data), it'd be less annoying.
  - dang 5y ago
    geofft has it - I wasn't saying pdfs were annoying, but rather that it's annoying to click on a pdf (or html or anything else) and have it save something to my hard drive rather than displaying the damn thing. First, I want to see it, not save it; and second, I want to decide for myself what to save locally. Anyhow, no big deal! just a pet peeve
- 5y ago
lordnacho 5y ago
Former fund manager here. Wow, this is really interesting. So CS actually knew what risk it was taking, the hypothesis that Archegos had kept its positions private from several lenders is false. They knew what was going on and couldn't ask for more margin, and when they did without a response they couldn't get themselves to just close out the customer's positions. The problem is actually one of internal incentives, from my reading. If you've ever done business with CS (I was a PB customer), you'll notice there's a bunch of different entities, far more than you'd expect. I suspect when you have a number of committees in charge, actually nobody is in charge. You also have a sales guy / risk guy issue here. Some person is in charge of the relationship and gets paid for bringing in the business. Another person is supposed to say stop once the risk to CS gets too high. There's a natural tension there and if the ownership over the relationship is vague, there's going to be a lot of meetings and not much decided. I saw this first hand at a firm I was at: risk guy comes in, asks to reduce positions. Trader says meh and then if there's no process the issue just sort of sits there awkwardly, with no resolution. Normally there's no blowup, but sometimes... Another PB I worked with had a similar issue. A high rolling Gulf guy came in, wanting to do big FX trades on little margin. Risk said no, boss overruled them. Dude blew up, PB lost a lot of capital, boss got fired.
- CydeWeys 5y ago
  Can you expand some of these acronyms? CS, PB, etc.? I'm guessing most of us won't know them. CS=Credit Suisse, PB=Personal Banking, FX=Foreign Exchange?
  - throwaway_dcnt 5y ago
    PB is probably prime brokerage, it is a managed service offered by large institutions to other large institutions.
  - lotsofpulp 5y ago
    PB is prime brokerage https://en.wikipedia.org/wiki/Prime_brokerage https://en.wikipedia.org/wiki/Prime_brokerage CS is Credit Suisse, and FX is foreign currency trading.
  - 5y ago
fny 5y ago
Can someone provide color as to why this was such a discretionary process? If I get a call from my broker, and I don’t post collateral, I’m liquidated immediately. I’d at least expect a fixed date which triggers liquidation if you catch someone picking their nose. Also, I find it hilarious that this whole thing was bound to blow up after the recent Chinese regulatory crackdown anyway.
- huitzitziltzin 5y ago
  Do you have multiple billions of dollars at stake with the broker? If yes: he might annoy you enough with his impertinent margin demands that you go elsewhere, which makes his boss Very Unhappy. If no: his boss has never heard of you. Also it sounds like liquidating many of these positions would be no easy feat, when they represented 3-5 days mean trading volume in the underlying asset.
  - fny 5y ago
    If I have multiple billions at stake, I would assume my broker would be even more demanding of responding within a time frame. Note, I'm not calling for automatic liquidation, but rather some timeframe wherein discussions must be held or else the posted collateral is seized.
    - rtkwe 5y ago
      The problem there is at that level you're also a significant source of money for both the company and whoever gets bonus/commission on the money you bring in so suddenly there's a lot of reason to not make you annoyed enough to take your business elsewhere.
  - rtkwe 5y ago
    In a quote from the report it says it would have taken two weeks to a month to liquidate their positions just at Credit Suisse.
- rtkwe 5y ago
  There's the saying of "if you owe the bank $100k you have a problem but if you owe the bank $100 million they have a problem." You're small enough fish you don't have a nearly dedicated person who's bonus and compensation is tied to keeping you from taking your pile of cash and going somewhere else. Individually your business and risk mean basically nothing to your broker most likely.
fmajid 5y ago
Nothing new under the sun. Read Arthur Hailey's The Moneychangers.
rvbissell 5y ago
I've recently stumbled upon Matt Levine. His writing is wonderful.
- bigbluedots 5y ago
  I now read his column most days despite starting with zero interest in finance. Mostly because he's funny as hell
f0rgot 5y ago
My question is, how profitable are these services that they can keep losing money on an implosion here and there and still want to be in that business? I guess if the other 99 PB clients are netting you $10B you can lose some to Malachite Capital Management and Archegos now and then.
- dcolkitt 5y ago
  It's tough to quantify. It's not just about the PB revenue itself. It's the fact that it's an entry point for a lot of institutional client activity that's necessary for a lot of other lines of business. For example, investment banking is a very lucrative business. Let's say you're trying to win a big-ticket IPO. To run a credible IPO you need to be able to fill an order book of deep-pocketed, credible public equity investors. That requires having a relationship with these institutions. The primary way those relationships are built is through a prime brokerage business.
- tobltobs 5y ago
  Maybe the motivation is not a constant profit for your bank, but a big bonus at the end of the year. With some luck you can collect a few of those bonuses before the next implosion.
- qeternity 5y ago
  PB is a loss leader for everything else.
naveen99 5y ago
I am surprised there is no conspiracy theory about some third party forcing archegos to blow up on purpose. it would be a convenient way for a secret police or other extra legal group to punish or blackmail a wealthy person while making a little money on the side at the expense of a big bank. I mean billy only put away a few hundred million protected in trusts and charities… do deca billionaires blow up this spectacularly? Doesn’t seem regular to me.
- munchler 5y ago
  Hanlon's razor: Never attribute to malice that which is adequately explained by stupidity.
  - naveen99 5y ago
    And never attribute to stupidity what can be explained adequately by self interest.
sgt101 5y ago
I find this accident to be too suspicious in this context. I know that I am looking backwards and finding patterns where maybe there aren't any, but it's just too tempting to connect this dot to the other dots. https://snbchf.com/2020/02/durden-credit-suisse-md-dies-freak-accident-after-slipping-chairlift-suffocated-jacket/ https://snbchf.com/2020/02/durden-credit-suisse-md-dies-frea...
neonate 5y ago
https://archive.is/MHbh5 https://archive.is/MHbh5

205 points by mlla 5y ago

gjvc 5y ago

Some of the formatting of this document is remarkably poor.

baq 5y ago

> Notably, this is not a situation where the business and risk personnel engaged in fraudulent or illegal conduct or acted with ill intent. Nor is it one where the architecture of risk controls and processes was lacking or the existing risk systems failed to operate sufficiently to identify critical risks and related concerns. The Archegos risks were identified and were conspicuous. The persistent failure of he business and risk to manage and remediate the risks, and pervasive issues of business competence and resourcing adequacy, described in detail in this Report, require CS’s urgent attention. wow. this reads like 'culprits have been found and let go with their bonus packages'.

satellite2 5y ago
This is common practice in post mortem analysis to try to determine the root cause in a blameless manner. On the next iteration of this issue the eventual culprits of the first probably won't be there to remember what went wrong. What might survive until then though is the set of procedures and guidelines put in place following the investigation recommendations. So it's more effective to determine what process were insufficient than which person had the capacity to avoid something.
- mannykannot 5y ago
  In cases like this, I doubt you can determine which process were insufficient without noticing which people had the capacity to avoid the problem, yet did not exercise it.
  - satellite2 5y ago
    That's correct, but unless the investigation determined they acted with malice, they should not be explicitly mentioned.
    - mannykannot 5y ago
      Good point.
deleted 5y ago
[deleted]
qeternity 5y ago
They’ve clawed back nearly $100m of bonuses…

TrainedMonkey 5y ago

Matt Levine did a pretty good writeup on this: https://www.bloomberg.com/opinion/articles/2021-07-29/archegos-was-too-busy-for-margin-calls https://www.bloomberg.com/opinion/articles/2021-07-29/archeg...

glasss 5y ago
I did enjoy reading through his updates about the situation as it was developing, pretty interesting stuff. I don't remember the exact line Matt Levine wrote, but he made a point of stating normally you couldn't get away with being this over leveraged, but since Archegos was a family firm it avoided some scrutiny. Interesting to think there will probably always be a way to avoid scrutiny when you're moving that much money around.
csours 5y ago
See dang's comment. HN article link previously pointed to a pdf, now it points to this link.

vmception 5y ago

If you’ve ever traded with anything better than Reg-T margin, you know this whole system is ripe for implosion. The leverage is insane! Reg-T (like the kind Robinhood has) doesn’t allow long options to be bought on margin. Other margining systems allow as low as 6% down even on options. And when you’re talking real money, your personal risk/compliance team understands their employment is contingent on looking the other way! They’re at-will employees too.

Dlanv 5y ago
Can individuals access that sort of margin? The best I've seen is portfolio margin at some brokers. What's the name of the "margining systems" you are referring to?
- vmception 5y ago
  portfolio margining does what I describe and has a regulatory minimum of $125,000 or so net liquidation value (portfolio size), SPAN margining can as well which is what the futures and futures options market uses at any portfolio size so yes individuals can access both the primary benefits are cross margining, using other assets to fulfill or calculate margin requirements for a new position and portfolio margin requirements are easy to calculate, just take the loss at a 15% move and whatever that loss is becomes your current margin requirement, it is a 6% move for indexes (like S&P) the way to get in trouble is by confusing the margining system and hiding exposure behind synthetic positions (example, a combination of derivatives to make it look like you are long stock)
- djanogo 5y ago
  The closest for retail customers is IBKR, needs >110k they have lowest margin rates. They approve pretty easily. On other hand Fidelity will reject portfolio margin even if you have significantly more than 100k.
  - sooheon 5y ago
    Caveat emptor: IBKR's TOS makes it clear they reserve the right to liquidate your positions at any time for basically any reason, including margin requirement changes.

deleted 5y ago

[deleted]

mdlm 5y ago

Who wrote this?

jeffbee 5y ago
The authors are listed on page 1.

blunte 5y ago

I cannot believe that Archegos was "too busy" to read a request for additional collateral. They knew exactly what was going on, and they were hoping to buy more time and pray that the market would change in the direction they needed. This sounds like a desperation play that didn't succeed, and Credit Suisse was left with the loss. Now, I'm not much educated in finance... but risk is risk, and whether you have models or you have tarot cards, sometimes things just do not go the way you thought they would. If you're betting 1x, you can lose what you have. If you're betting with leverage, you can win bigger, or lose 1x (and potentially the creditor can lose the remaining Xx). Unless the creditor can automatically liquidate and close out a client's position if they can't make a margin call, it seems you would have to be crazy to be a creditor for leveraged clients. Eventually you will lose big because of a client.

lupire 5y ago
I think you missed Levine's dripping sarcasm.

dang 5y ago

We changed the URL from https://www.credit-suisse.com/media/assets/corporate/docs/about-us/investor-relations/financial-disclosures/results/csg-special-committee-bod-report-archegos.pdf https://www.credit-suisse.com/media/assets/corporate/docs/ab..., which is one of those annoying links that downloads a file, and the title from "Postmortem in finance: How Credit Suisse lost $6B [pdf]", which was editorialized. (Please read the site guidelines! https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html) A user suggested the Levine article as a better alternative, so we'll use that for now. If anyone knows a better URL, we can change it again.

arthurcolle 5y ago
How is a browser downloading an html file any different than requesting a PDF other than size? If anything it's useful to be able to pop it over into the Documents app and read later. I guess it's not responsive but to be honest that's a feature not a bug lol. I guess the editorial concern is the bigger issue.
- geofft 5y ago
  $ curl -SsfI https://www.credit-suisse.com/media/assets/corporate/docs/about-us/investor-relations/financial-disclosures/results/csg-special-committee-bod-report-archegos.pdf | grep -i disposition content-disposition: attachment "Downloading" here means that it sends something to your downloads folder and doesn't participate in the normal browser UI. When I use a browser, I generally expect to use its UI. If it transferred a PDF but showed it in the normal UI (colloquially not referred to as "downloading," although yes, it still is an inbound transfer of data), it'd be less annoying.
- dang 5y ago
  geofft has it - I wasn't saying pdfs were annoying, but rather that it's annoying to click on a pdf (or html or anything else) and have it save something to my hard drive rather than displaying the damn thing. First, I want to see it, not save it; and second, I want to decide for myself what to save locally. Anyhow, no big deal! just a pet peeve
5y ago

lordnacho 5y ago

Former fund manager here. Wow, this is really interesting. So CS actually knew what risk it was taking, the hypothesis that Archegos had kept its positions private from several lenders is false. They knew what was going on and couldn't ask for more margin, and when they did without a response they couldn't get themselves to just close out the customer's positions. The problem is actually one of internal incentives, from my reading. If you've ever done business with CS (I was a PB customer), you'll notice there's a bunch of different entities, far more than you'd expect. I suspect when you have a number of committees in charge, actually nobody is in charge. You also have a sales guy / risk guy issue here. Some person is in charge of the relationship and gets paid for bringing in the business. Another person is supposed to say stop once the risk to CS gets too high. There's a natural tension there and if the ownership over the relationship is vague, there's going to be a lot of meetings and not much decided. I saw this first hand at a firm I was at: risk guy comes in, asks to reduce positions. Trader says meh and then if there's no process the issue just sort of sits there awkwardly, with no resolution. Normally there's no blowup, but sometimes... Another PB I worked with had a similar issue. A high rolling Gulf guy came in, wanting to do big FX trades on little margin. Risk said no, boss overruled them. Dude blew up, PB lost a lot of capital, boss got fired.

CydeWeys 5y ago
Can you expand some of these acronyms? CS, PB, etc.? I'm guessing most of us won't know them. CS=Credit Suisse, PB=Personal Banking, FX=Foreign Exchange?
- throwaway_dcnt 5y ago
  PB is probably prime brokerage, it is a managed service offered by large institutions to other large institutions.
- lotsofpulp 5y ago
  PB is prime brokerage https://en.wikipedia.org/wiki/Prime_brokerage https://en.wikipedia.org/wiki/Prime_brokerage CS is Credit Suisse, and FX is foreign currency trading.
- 5y ago

fny 5y ago

Can someone provide color as to why this was such a discretionary process? If I get a call from my broker, and I don’t post collateral, I’m liquidated immediately. I’d at least expect a fixed date which triggers liquidation if you catch someone picking their nose. Also, I find it hilarious that this whole thing was bound to blow up after the recent Chinese regulatory crackdown anyway.

huitzitziltzin 5y ago
Do you have multiple billions of dollars at stake with the broker? If yes: he might annoy you enough with his impertinent margin demands that you go elsewhere, which makes his boss Very Unhappy. If no: his boss has never heard of you. Also it sounds like liquidating many of these positions would be no easy feat, when they represented 3-5 days mean trading volume in the underlying asset.
- fny 5y ago
  If I have multiple billions at stake, I would assume my broker would be even more demanding of responding within a time frame. Note, I'm not calling for automatic liquidation, but rather some timeframe wherein discussions must be held or else the posted collateral is seized.
  - rtkwe 5y ago
    The problem there is at that level you're also a significant source of money for both the company and whoever gets bonus/commission on the money you bring in so suddenly there's a lot of reason to not make you annoyed enough to take your business elsewhere.
- rtkwe 5y ago
  In a quote from the report it says it would have taken two weeks to a month to liquidate their positions just at Credit Suisse.
rtkwe 5y ago
There's the saying of "if you owe the bank $100k you have a problem but if you owe the bank $100 million they have a problem." You're small enough fish you don't have a nearly dedicated person who's bonus and compensation is tied to keeping you from taking your pile of cash and going somewhere else. Individually your business and risk mean basically nothing to your broker most likely.

fmajid 5y ago

Nothing new under the sun. Read Arthur Hailey's The Moneychangers.

rvbissell 5y ago

I've recently stumbled upon Matt Levine. His writing is wonderful.

bigbluedots 5y ago
I now read his column most days despite starting with zero interest in finance. Mostly because he's funny as hell

f0rgot 5y ago

My question is, how profitable are these services that they can keep losing money on an implosion here and there and still want to be in that business? I guess if the other 99 PB clients are netting you $10B you can lose some to Malachite Capital Management and Archegos now and then.

dcolkitt 5y ago
It's tough to quantify. It's not just about the PB revenue itself. It's the fact that it's an entry point for a lot of institutional client activity that's necessary for a lot of other lines of business. For example, investment banking is a very lucrative business. Let's say you're trying to win a big-ticket IPO. To run a credible IPO you need to be able to fill an order book of deep-pocketed, credible public equity investors. That requires having a relationship with these institutions. The primary way those relationships are built is through a prime brokerage business.
tobltobs 5y ago
Maybe the motivation is not a constant profit for your bank, but a big bonus at the end of the year. With some luck you can collect a few of those bonuses before the next implosion.
qeternity 5y ago
PB is a loss leader for everything else.

naveen99 5y ago

I am surprised there is no conspiracy theory about some third party forcing archegos to blow up on purpose. it would be a convenient way for a secret police or other extra legal group to punish or blackmail a wealthy person while making a little money on the side at the expense of a big bank. I mean billy only put away a few hundred million protected in trusts and charities… do deca billionaires blow up this spectacularly? Doesn’t seem regular to me.

munchler 5y ago
Hanlon's razor: Never attribute to malice that which is adequately explained by stupidity.
- naveen99 5y ago
  And never attribute to stupidity what can be explained adequately by self interest.

sgt101 5y ago

I find this accident to be too suspicious in this context. I know that I am looking backwards and finding patterns where maybe there aren't any, but it's just too tempting to connect this dot to the other dots. https://snbchf.com/2020/02/durden-credit-suisse-md-dies-freak-accident-after-slipping-chairlift-suffocated-jacket/ https://snbchf.com/2020/02/durden-credit-suisse-md-dies-frea...

neonate 5y ago

https://archive.is/MHbh5 https://archive.is/MHbh5