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I'm speaking about this at a conference next week. Here is the MONEY QUOTE from Paul Weiss investigative report:

>>> ...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

There are many interesting quotes, but for me this is the one that explains everything:

"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...

>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.

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

pessimists don't get promoted, but more importantly the most important skill is convincing your boss and the boss's boss that your course of action is the best path forward.

Any idea how they got away with this?

I think the generally acknowledged approach if you work on a trading desk at a bank want to put on some trade with desk-blowup potential is you first send out an email to your boss/head-of-desk outlying the trade and targets and stop loss and whatever, even if he sits right next to you. Once he replies in agreement, he's on the hook and you have the evidence. This makes it perfectly reasonable to argue that its the desk head's responsibility to make sure these kind of blowups don't happen. If head of trading also feels that head of desk wasn't exactly a stellar performer anyways, then poof he's gone. It just so happens in this case that they didn't want to replace headcount anyways so the trader next in line, the guy who actually blew the desk up, got promoted. Maybe it was just the bank I worked at but I saw enough of these charades and couldn't take the job seriously anymore. It was too much of a farce for me so I quite Lol, but hey I guess there are people who enjoy playing that game, nothing wrong with that.

That industry is relationship and influence driven.

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?

PB is prime brokerage

https://en.wikipedia.org/wiki/Prime_brokerage

CS is Credit Suisse, and FX is foreign currency trading.

Apologies, PB is prime broking. It's where the bank offers trade facilitation services, especially lending, to a hedge fund or family office.

Just a general suggestion for comments: if you’re going to use abbreviations, it’s probably a good idea to spell them out on the first mention.

PB is probably prime brokerage, it is a managed service offered by large institutions to other large institutions.

> The problem is actually one of internal incentives, from my reading.

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.

couldn't get themselves to just close out the customer's positions.

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.

Sunk cost fallacy. If you get to the point where pulling the plug means someone has gone bust, it's already over and you need to pull the plug sooner rather than later.

Well the folks at Credit Suisse aren’t perfectly rational beings either, it’s totally understandable why they behaved like that, most folks would engage in wishful thinking when staring at a multi billion dollar loss that hasn’t been realized yet (several hundred times their compensation).