Credit Suisse finds ‘material weakness’ in reporting, scraps exec bonuses
cnn.com
cnn.com
Sometimes in a bankruptcy, bondholders take a "haircut" and agree to get less money back because the company simply can't pay them what they're owed.
https://www.optionsplaybook.com/options-introduction/what-is...
In addition, you have to take net present value of the settlement into account. Money compounds, it doesn't grow linearly. Let's say there's a 10% chance of a credit event in a year, a 0% chance today, and the chance grows linearly (27 bps/day). Even if the chance of a credit event grows linearly, and you hold the recovery rate steady, the net present value of the recovery amount grows as a function of e.
All that to say, I don't think what you are saying is correct.
See here for the correct formula: https://news.ycombinator.com/item?id=35154072
The spread can be solved using the inverse S = ln ( 1 - P ) * ( ( R - 1 ) / t )
Probabilities and rates are both expressed as percentages not basis points.
S is the spread. t is years. R is the recovery rate.
Source is my notes from undergrad. Options, Futures, and Other Derivatives (9th Edition) by John C. Hull. Take all this with a grain of salt as I am not a quant. (but I am looking for a job!)
Doing some additional reading, there are some more precise approximations but they are less general.[1]
Last number I was able to pull up the $CS CDS was trading at 551 BP. Up from 446 yesterday (an all-time high for $CS)
Lehman Bros hit 640 BP just days before collapse.
[1] https://quant.stackexchange.com/questions/15986/how-to-compu...
Weird thing about the recovery rate is that everyone I've asked says the same thing, and I've traded CDS: the recovery rate is 40%. It's a bit of a free variable in that equation, and it matters. Trouble is how on earth do you estimate it? But random people I've met in the business will just say 40%, for every issuer, somehow.
A peculiarity of finance as a field of study is that a lot of the people studying finance only care about direct applications and a lot of the people teaching finance had this mindset when they learnt.
It’s easy to end up with some poorly taught material. If you carefully looked at the model which gave rise to the equation you are considering, there probably is a very tangible meaning to the figure everyone is ball parking.
40 is awfully close to 42
We are living in times of idiosyncratic risk and my approximations above are likely no better than hearsay.
That being said I'm not rushing to buy or sell $CS stock even with my elevated risk tolerance and the seemingly low price.
My mental picture is a very unsteady hub and spoke like in Wipeout or something where the parties and counter parties are intertwined in ways that the dynamics are, as you put it, idiosyncratic.
To answer your question, "idiosyncratic risk" in this context means that an individual company might have problems that don't broadly apply to the rest of its industry. For example Credit Suisse might have management that is bad at running a bank, leading to repeated investment losses and regulatory actions well beyond what's normal for big multinational banks.
Look at the CS balance sheets over the past few years, or its stock price and PE ratio, or hell just Google "Credit Suisse books loss" and look at how many times they tried to stick their fingers in the wrong cookie jar. They got hit by the Hwang thing, they got hit by Greensill, and apparently they can't even accurately report how much money they're making (losing).
I wouldn't want to have any position on their equity either.
I’d also welcome any interesting further reading on the subject!
However, if you’d like to learn more about $CS and Archegos I’d recommend reading the Report put out by $CS on the topic.
Colloquially known as, “Credit Suisse Group Special Committee of the Board of Directors Report on Archegos Capital Management”
https://www.sec.gov/Archives/edgar/data/1159510/000137036821...
It’s all about the material risks Archegos posed to Credit Suisse.
CS failed to capture a number of specific risks which were intrinsic to Archegos’ specific trading strategy. I won’t go through them all but they explicitly call out “idiosyncratic risk” due to their use of equity total return swaps, baskets of them, to hide equity positions. The risk being if the components of the basket, which were may have been billed to be diversified, all the sudden begin to move violently and in sequence, it would be a material idiosyncratic risk to $CS.
A large number of these swaps from 2021 are coming due this week and next. Including likely a large number today, March 15, which is a commonly used date for expiry of EuroDollar and Forex contracts, as well as presumably equity swaps as well?
Now, what’s in those swaps? Who knows, the CFTC announced an exemption back in 2021 allowing NO REPORTING of swaps through at least the fall of this year, which has subsequently been extended through 2025. So we shall see how the dominoes fall and only after will they let us see how they were setup.
Edit: I asked ChatGPT. "The recovery rate of a credit default swap (CDS) is typically specified in the contract and agreed upon by the parties involved. The recovery rate is the percentage of the notional value of the underlying debt that the protection buyer would receive in the event of a credit event, such as a default, of the reference entity.
To find the recovery rate of a specific CDS contract, you can refer to the contract documentation, which should include details on the recovery rate. This information may also be available from the CDS provider or through financial data providers such as Bloomberg, Reuters, or other financial news sources.
It's worth noting that the recovery rate can vary depending on the specific CDS contract, the reference entity, and the prevailing market conditions. Therefore, it's important to confirm the recovery rate specified in the contract and to keep track of any changes in the market or credit conditions that could affect the recovery rate."
Quantitative finance really is a fascinating field, not because it will make you rich, but because you can dive much deeper into understand exactly what the market believes about the probability of different events.
Of course what the market believes doesn't have to be correct, but nonetheless very interesting to dive into.
I am certain the Swiss government will bail them out, direct democracy be damned.
Swiss bankers already lost a lot of customers to US banks, letting CS fail would have very bad consequence on Swiss economy long term
They lost money on Archegos and Greensill, had a run in November, have run through a bizarre set of CEOs (one had a PI follow a wealth manager who was suspected of defecting) and generally been the poster child of big bank mismanagement.
Where they are in that cycle typically depends on how much money investment banking/trading made over the previous year or two.
do you have a source? this sounds nuts
https://amp.theguardian.com/uk/2012/jan/20/undercover-police...
>dismantled by Fed’s using obscene methods, like getting suspects pregnant
The article says:
>One of the spies was Bob Lambert, who has already admitted that he tricked a second woman into having a long-term relationship with him, as part of an intricate attempt to bolster his credibility as a committed campaigner.
I guess the statement is technically true in the sense that the group got infiltrated by the feds, that somehow led to the group being "dismantled", and because the infiltration involved getting the activists pregnant you could say that it was "dismantled by [...] getting suspects pregnant". However, it's massively misleading because reading it at face value makes me think the government was getting people pregnant with the explicit aim of preventing them from protesting (because they're too busy being pregnant). I'm not sure why you didn't go with went with that framing rather than a more reasonable one of "dismantled by Fed’s using obscene methods, like having children with activists to gain their trust".
>government was getting people pregnant with the explicit aim of preventing them from protesting
Undercover cops getting people pregnant to maintain cover since they can’t control their sexual promiscuity?
Example: $100 missing from a single petty cash account would have almost no impact on a multi-site business and wouldn't be reported as "material" losses. $100 missing from every petty cash account would be different and probably would be reported as a "material" deficiency because it means there is an issue with controls.
disclaimer: My experience with accounting is a single accounting class and having run a budget for a business with $60k monthly for a few months before I left.
If they say 'fraud', 'theft', 'lying' they are implying intent, which can be hard to prove (maybe they were just incompetent or mislead by someone else?).
A material weakness means there is a significant to the business (aka material) difference between what was written/reported, and what investigation found was true.
WHY that is doesn't matter for the purposes of clawing things back, and since they have solid proof of it, there you go.
Speculating on the reason or if a crime was committed until it's proven in a court of law is what gets high powered and highly paid attorneys excited, and the folks who are getting fired and the money clawed back can still afford those in spades even afterwards. Credit Suisse probably feels they already have enough problems.
Billion, million, googol, whatever. For CNN and Swiss bankers it doesn't make difference. Executives assuring that everything is all calm and orderly means how many breaths it has left?
> Other countries use the word billion (or words cognate to it) to denote either the long scale or short scale billion. (For details, see Long and short scales § Current usage.)
> Milliard, another term for one thousand million, is extremely rare in English, but words similar to it are very common in other European languages.
https://en.wikipedia.org/wiki/Billion#:~:text=Other%20countr....
I expect ChatGPT can pass the wug test. In fact, unlike a random two year old it will certainly have read about the actual Wug test, so definitely don't ask it about that word in particular, make up a new word.
Now, human kids are learning a spoken language, the model is learning a written language, but they're both linear so it's not that different.
Banking in switzerland has not been the same since. And US citizens are effectively kryptonite for swiss banks too.
You would have to be blind to not see every industry and person, from execs to engineers, seeing greed is good. I mean, weren’t 400k+ google engineers unionizing? Are the start-up craze of the past 10 years and crypto craze in 2020 just a bunching of people trying to get rich quick?
Not to Credit Suisse. They had their run in November [1]. That they remain stable after this disclosure is evidence against contagion, not for it.
[1] https://www.wsj.com/articles/credit-suisse-warns-of-1-6-bill...
There, summarised their public relations spiel for you.
Basically the key is to stimulate inflation so that they get the chance to hike rates. By doing so many people choose to stop investing in stocks, funds and more on longer term saving accounts.
Essentially this heals the asset-liability structure of financial institutions. They now have liabilities of longer term so they can issue longer term loans. This eventually will stimulate real economy.
Historically the Fed’s job was to “take away the punch bowl” and wring the bad debt and malinvestment out of the system before it became a systemic risk. Since 2008 the system has primarily focused on how to move the bad debt around to avoid default.
The fed didn't stimulate inflation by choice. The rates were at 0 for most of the decade and inflation was very low.
Increasing interest rates was a response to inflation -- partially created by QE and stimulus spending, supply chain disruptions, and other supply/demand shifts.
As for how interest rates work: they make borrowing more expensive. There's a bunch of second-order effects from that but borrowing cost and time value of money are the main thing to keep in mind.
EDIT: Fixed correlation sign.