Credit Suisse Takes $4.7B Hit on Archegos Meltdown

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.

it's also a good reminder of an economic reason for why we don't want wealth concentrating, because the chances of it be allocated efficiently fall. concentration worsens the effect of poor allocation. if that money was split among 1000 investors, a few would act stupidly, but a few would allocate exceptionally, and the many would be somewhat average, giving a much better overall outcome for the same amount of capital.

the more widely dispersed capital is, and the more dynamic an economy is, the more opportunities for capital to find its best use. it makes sense then why efforts along these lines (dispersion and dynamism) are vehemently opposed by the already wealthy. it's not because of capitalistic purity, but the threat it represents to their own power and influence.

ViacomeCBS was a high growth company? wtf?

Seems to me the onus is on CS and other prime brokers to require Hwang to disclose or otherwise do due diligence on his other bets.

That movie was the worse thing that ever happened for a generation of traders. It reinforces all the worse biases traders tend to have. The moral of the story was to make a single concentrated bet, to throw risk management to the wind, to double down as you lost money, and to completely ignore any expert that disagreed with your investment thesis.

In reality for every Michael Burry, there's 100 stubborn overconfident idiots who YOLO everything into a bet that blows up in their face. First off, it's much better to make as many small independent bets than to have one big trade. It's also better to make trades with a fixed, ideally short, time horizon. Even if you're ultimately right, without a catalyst, the market can remain irrational longer than you can remain solvent.

Finally the best traders tend to be extremely open minded and willing to change their views on a dime. The human mind is heavily biased towards overconfidence. Good traders should be flipping their views as evidence comes in. This has been empirically verified by Philip Tetlock. The best forecasters are those who are quickest to change their mind. If they hear some expert with an opposing opinion, they don't dig in their heels like the heroes of The Big Short.

The problem is the qualities that make a great narrative hero are almost exactly the opposite of those that make a great trader or forecaster. We love a story about a bold contrarian, who goes all in on a single bet, and sticks to his guns no matter what obstacles come his way. The story practically writes itself.

But it's precisely this mythologizing that causes this style of trading to be the least rewarded in the market. Everybody wants to be the hero of their own story. There's way too many Michael Burry wannabes, and not nearly enough George Soroses.

Why? The shareholders & execs were free to impose stricter compliance and risk rules. They chose not to.

As long as you don't have contagion spreading to the rest of the financial system then who cares. The new rules put into place re: bank capitalization after the GFC seem to have worked here. Shareholders & execs are taking the hit, the rest of the banking system doesn't seem to be affected, and everything seems to have worked as it's supposed to in this case.

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.

Some people are regulatory hires.

Beyond those losses, the head of investment banking and the head of risk were both fired yesterday.

The real problem is lower down the ranks, where someone on the trading floor can take outsized risk to boost their potential bonus, where worst case scenario they're fired without much ceremony and get another job somewhere else.

Unfortunately, most risk managers I knew barely understood the theory enough to identify the hidden risks in the books they oversaw. Most even struggled to get the right data out of the systems to do their jobs properly!

You do make a valid point - if the recklessness somehow pays off, you're a hero (eg. Paulson).

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.

"[T]he practice of 'buying on margin' allowed a person to acquire stock by expending in cash as little as ten percent of the price of a stock. The balance was covered by a loan from a broker, who was advanced the money by his bank, which, in turn, accepted the stock as collateral for the loan. Credit was easy, and the Federal Reserve System did little to restrict the availability of money for stock investment." -- article on the stock market crash of 1929

https://www.encyclopedia.com/history/encyclopedias-almanacs-...

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.