Archegos was too busy for margin calls
bloomberg.com
bloomberg.com
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.
https://en.wikipedia.org/wiki/Prime_brokerage
CS is Credit Suisse, and FX is foreign currency trading.
>>> ...further, the various Risk Committees only had access to data that were four to six weeks old.
As a consequence, Risk was unaware of, and unable to fully appreciate in real time, the magnitude and pace of the exponential growth in Archegos’s positions... <<<
Ref: https://www.credit-suisse.com/about-us/en/reports-research/a...
I'd like to also point out that unlike the 2008 crisis with margin calls which were highly subjective based on difficult projections of housing prices and defaults and correlations (think AIG-FP), here, these were pretty simple equity swaps. Valuing these assets is not difficult
"Indeed, the 'Action/Decision' for Archegos was for CRM to 'notify of any changes with the counterparty and revisit the counterparty at afuture meeting.' CPOC did not set a deadline for remediating Archegos’s limit breaches, for moving Archegos to dynamic margining with add-ons, or even for reporting back or revisiting the status of Archegos at a futuremeeting."
The Archeos situation was escalated as far up as possible, up to this CPOC committee, where the Chief Risk Officer of the Investment Bank was a member. Instead of the CRO breathing down their neck until the situation was remediated, they got away with a bullet point in some minutes, without even a set deadline.
It appears that Credit Swiss replaced their CRO though.
https://www.bloomberg.com/news/articles/2021-07-29/credit-su...
It looks a lot more like a feature of those incentives. Functionally the risk persons job is to tell gambling addicts "I dunno guys, looks too juicy. High rollers only."
To paraphrase Sinclair: It's difficult to get someone to employ second-order thinking when his salary increases dramatically and there's no real downside if he doesn't.
I used to work in finance but quit. The industry is still by far driven by mostly by sales/relationships/politics. It seems like in this case the right person got fired. I knew of a trader on a credit desk that blew up their desk (lost many times their pnl in a year). His boss (head of desk) got fired instead and he got promoted to his position. Yet it was a completely unsurprising outcome and spoke so much about the industry
Exactly. CS let Archegos get into a position where, if they pulled the funding plug on Archegos, Archegos would go bust. At which point everybody hates everybody.
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.
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.
$ 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
1. The original link was to the source, which I would think would take precedence over a second-party review of it, even a skilled one like Levine's.
2. The source's actual title is "Credit Suisse Group Special Committee Of The Board of Directors Report On Archegos Capital Management". The editorizialized title ""Postmortem in finance: How Credit Suisse lost $6B [pdf]" isn't bad, includes a [pdf] warning, and is more descriptive of the content for anyone not aware that Archegos lost $6b of CS's capital. And how they lost it is certainly interesting.
3. Maybe if you change a post link from the original source, also link the source back in the comments. Levine includes it in his article below the fold [1][2], at least, but that might not always be the case. Lots of web writers these days like to write about reports and studies without actually linking to it.
[1]:https://www.credit-suisse.com/about-us-news/en/articles/medi...
[2]:https://www.credit-suisse.com/media/assets/corporate/docs/ab...
The originally posted link is in my GP comment, no?
A 170 page report isn't a really useful thing to drop on anyone especially if they don't already know what's happening. This article has a good summary of what happened and includes a link to the report if you want to see it.
> Please submit the original source. If a post reports on something found on another site, submit the latter.
https://news.ycombinator.com/newsguidelines.html
Perhaps this rule needs a refreshment?
I agree with dang that the Bloomberg article is more useful than the report itself, but the moderation action does not seem to be in line with the actual guidelines.
"Changing [the url] from under them" is standard moderation practice on HN - we do that every day. Ditto for titles. So I'm not sure it counts as "super weird"?
The paywall issue is orthogonal to this one. If there is a workaround, a paywalled URL is ok. If there is no workaround, it's not ok, no matter how "good" the URL is.
wow. this reads like 'culprits have been found and let go with their bonus packages'.
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.
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.
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.
The best I've seen is portfolio margin at some brokers.
What's the name of the "margining systems" you are referring to?
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)
On other hand Fidelity will reject portfolio margin even if you have significantly more than 100k.
What do you want them to do? bag hold a loosing or risky trade and pass the effects to other clients?
Yep, I can get lots and lots of margin from IBKR. It helps that I'm not an American.
Also, I find it hilarious that this whole thing was bound to blow up after the recent Chinese regulatory crackdown anyway.
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.
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.
https://snbchf.com/2020/02/durden-credit-suisse-md-dies-frea...
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.