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Credit Suisse Takes $4.7B Hit on Archegos Meltdown

wsj.com

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Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown

#11

Post by tootie »

herodoturtle wrote: post #6

"Archegos was a fund run by and managing the personal fortune of Bill Hwang, an investor who had built up large positions in companies worth billions of pounds, despite a previous insider trading conviction." "Credit Suisse’s investment bank under Chin acted as prime broker to Archegos funds, lending it large sums of money to allow it to build up bigger positions in the shareholdings of quoted companies. Hwang had pl…

I don't work in hedge funds and have only a superficial understanding, but it seems the operative word of "hedge" was completely ignore here. He plowed a huge chunk of his positions into two companies and didn't offset with any swaps or other risk absorbers. This seems like downright malpractice and not just a bad luck.

Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown

#12

Post by QuestionC »

herodoturtle wrote: post #6

"Archegos was a fund run by and managing the personal fortune of Bill Hwang, an investor who had built up large positions in companies worth billions of pounds, despite a previous insider trading conviction." "Credit Suisse’s investment bank under Chin acted as prime broker to Archegos funds, lending it large sums of money to allow it to build up bigger positions in the shareholdings of quoted companies. Hwang had pl…

> This reads as if Credit Suisse was bankrolling a maverick fund manager's speculative investments.

Archegos had secured identical positions with a number of investment banks, including Morgan Stanley, Goldman Sachs, and Nomura.

Credit Suisse was just stuck holding the bag while other banks quickly unwound their positions.

Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown

#13

Post by lordnacho »

As a former fund manager, I have some things to explain and some things to ask.

First, the thing to explain:

Basically CS was one of several Prime Brokers. This basically means the guy who lends money to the speculators. Same as buying a house, you have a down payment that's your money, and then a bank lends you between 115% (boom times) and 30% (safe as houses) of the value of the house. If the house falls in value and you can't pay the mortgage, the bank can sell your house, and hopefully that will mean they recover their entire loan. Note that they only lose once the value has declined by your down payment amount.

I actually knew the boss of a PB who got fired because a rich guy came in and wanted a lot of leverage, the risk managers said no, and he overruled them. And then the customer proceeded to lose hundreds of millions speculating, and it ate the bank's capital. So it's not the first time that risk gets overruled.

So somehow, CS has lost $4.7B on this Archegos financing, after Archegos lost whatver they put up. From what I gather, Archegos had $10B of equity in total? Typically (sensibly) you don't put all your eggs in one basket as a fund, even a quite concentrated fund.

How big was the position?

Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown

#14

Post by saucoidev »

osrec wrote: post #8

As someone who has worked in the Investment Banking industry for a while, I'm always amazed that risk professionals get paid significantly less than the front office guys. This in turn attracts less talented people in risk, who can then be outsmarted by the whipper snappers in the front office teams. If IBs don't want to lose bucket loads of money every so often, pay your risk guys a bit more so you hire the same cal…

I agree but i this is still playing the same game, and it's the rules that need changing

There is a system set up which incentivizes your employees to screw over their own company, by taking more risk than they should, frontrunning their own clients, etc. And it necessitates setting up your own internal police (compliance, risk) just to make sure they don't get too out of hand.

There are personal incentives there for the IB people to try to outsmart and get something past risk, or avoid getting caught by compliance, not to try to do what's best for the company or their client

Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown

#16

Post by itsoktocry »

tumetab1 wrote: post #3

Insert MEME: Here we go again :D On a serious note, this is funny to read after the initial reports that this had a small and contained impact. Let's hope no further cascading bankruptcies happen.

>Here we go again :D

Maybe so. There was a year between Bear Stearns Asset Management funds blowing up in 2007, and Lehman failing...

Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown

#17

Post by itsoktocry »

osrec wrote: post #8

As someone who has worked in the Investment Banking industry for a while, I'm always amazed that risk professionals get paid significantly less than the front office guys. This in turn attracts less talented people in risk, who can then be outsmarted by the whipper snappers in the front office teams. If IBs don't want to lose bucket loads of money every so often, pay your risk guys a bit more so you hire the same cal…

>pay your risk guys a bit more so you hire the same calibre of individual that would otherwise end up on the trading/structuring/quant desks.

Reverse the causation here: they don't pay risk guys enough because they don't really care about the risks they are taking.

Because, you're right, if they cared they could solve issues like this tomorrow.

Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown

#18

Post by rwmj »

osrec wrote: post #8

As someone who has worked in the Investment Banking industry for a while, I'm always amazed that risk professionals get paid significantly less than the front office guys. This in turn attracts less talented people in risk, who can then be outsmarted by the whipper snappers in the front office teams. If IBs don't want to lose bucket loads of money every so often, pay your risk guys a bit more so you hire the same cal…

Has anyone senior working at Credit Suisse lost any money here? There's your answer.

(Perhaps in hypothecated future gains in share options - but even there, maybe not.)

Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown

#19

Post by robk »

herodoturtle wrote: post #6

"Archegos was a fund run by and managing the personal fortune of Bill Hwang, an investor who had built up large positions in companies worth billions of pounds, despite a previous insider trading conviction." "Credit Suisse’s investment bank under Chin acted as prime broker to Archegos funds, lending it large sums of money to allow it to build up bigger positions in the shareholdings of quoted companies. Hwang had pl…

the money went somewhere. unless you hold CS shares it may well have gone into your retirement fund's allocation indirectly. who knows, but you're probably no worse off.

Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown

#20

Post by bidirectional »

rwmj wrote: post #18
osrec wrote: post #8

As someone who has worked in the Investment Banking industry for a while, I'm always amazed that risk professionals get paid significantly less than the front office guys. This in turn attracts less talented people in risk, who can then be outsmarted by the whipper snappers in the front office teams. If IBs don't want to lose bucket loads of money every so often, pay your risk guys a bit more so you hire the same cal…

Has anyone senior working at Credit Suisse lost any money here? There's your answer. (Perhaps in hypothecated future gains in share options - but even there, maybe not.)

Yes, of course they have. How does a company losing a sum equal to nearly 2 years of profit not have the most dramatic impact on senior officials at said company? Where do you think the executive bonuses and value of shares (not just options, senior officials will already be vested) come from?

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.

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