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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

#21

Post by bidirectional »

tootie wrote: post #11
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.

Eh, all is fair in love and war. The bank are charging a risk premium on any transactions with him, it's their fault if they underestimate it. It's a family office, not a hedge fund taking outsider capital, so he's entering into transactions with willing counterparties using his own money.

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

#22

Post by duxup »

lordnacho wrote: post #13

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…

I read elsewhere (can't read this article) that some other banks had made similar deals with Archegos, but they saw the trouble coming and were able to offload their exposure / shares (sell the house using the analogy) before other banks and thus were able to get out with limited or no losses.

Does that sound right?

It seems strange to me that using the house analogy ... there's potentially WAY more than say a 15 percent loss (using the 115% number) if other lenders decide to nope out.

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

#23

Post by freebee4567 »

lordnacho wrote: post #13

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…

if you are levered 10 to 1 and the stock has an implied vol of 10% you only need a 1 SD move to eat all your capital. Viacom is now at 60% implied vol so they could get those losses with a position as small as $10 billion.

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

#25

Post by incrudible »

lordnacho wrote: post #13

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…

It was not a loan, it was a total return swap on leveraged CFDs. CS took the market risk for a fee, picking up pennies in front of a steamroller.

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

#26

Post by lordnacho »

incrudible wrote: post #25
lordnacho wrote: post #13

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…

It was not a loan, it was a total return swap on leveraged CFDs. CS took the market risk for a fee, picking up pennies in front of a steamroller.

Principle is the same. There's still some kind of margin maintenance with swaps (I traded swaps too). Plus as the PB you can ask for sensible terms.

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

#27

Post by sschueller »

incrudible wrote: post #25
lordnacho wrote: post #13

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…

It was not a loan, it was a total return swap on leveraged CFDs. CS took the market risk for a fee, picking up pennies in front of a steamroller.

Well they seem to be getting run over by a steamroller every other week. Greensill is already yesterdays news...

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

#28

Post by lordnacho »

freebee4567 wrote: post #23
lordnacho wrote: post #13

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…

if you are levered 10 to 1 and the stock has an implied vol of 10% you only need a 1 SD move to eat all your capital. Viacom is now at 60% implied vol so they could get those losses with a position as small as $10 billion.

That implied vol is annualized. It follows a square-root law, so that daily is something under 4% (60/sqrt(trading days)).

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

#29

Post by osrec »

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.)

Lara Warner (Chief Risk Officer), was fired today, so I guess she's lost a fair bit.

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

#30

Post by lordnacho »

duxup wrote: post #22
lordnacho wrote: post #13

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…

I read elsewhere (can't read this article) that some other banks had made similar deals with Archegos, but they saw the trouble coming and were able to offload their exposure / shares (sell the house using the analogy) before other banks and thus were able to get out with limited or no losses. Does that sound right? It seems strange to me that using the house analogy ... there's potentially WAY more than say a 15 per…

Disregard the 115%, that's from the pre-GFC times when banks used to give you more money than you needed to buy the house, plus some more to buy a car.

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.

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