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Credit Suisse Takes $4.7B Hit on Archegos Meltdown

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

#31

Post by ashconnor »

QuestionC wrote: post #12
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.

Layman here. Why was Credit Suisse left holding the bag instead of the losses being distributed between the banks? Was it because they were the broker?

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

#32

Post by duxup »

lordnacho wrote: post #30
duxup wrote: post #22

Earlier quoted context omitted.

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.

>you should have a think about it.

Yeah in a couple other articles it seems some banks refused to lend to / cut off Archegos at some point(s). These guys who are all leverage all the time ... seems inevitable they get it wrong.

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

#33

Post by mannykannot »

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…

According to Matt Levine, Archegos's positions in sevaral companies was large enough that it had, by its own actions, significantly driven up their prices. The bubble burst when one of these companies - ViacomCBS - issued new stock with the intent of capturing more of this sudden interest, and sales of the offering fell way short of expectations.

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

#34

Post by mason55 »

saucoidev wrote: post #14
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…

> and it's the rules that need changing

Why? The shareholders & execs were free to impose stricter compliance and risk rules. They chose not to.

As long as you don't have contagion spreading to the rest of the financial system then who cares. The new rules put into place re: bank capitalization after the GFC seem to have worked here. Shareholders & execs are taking the hit, the rest of the banking system doesn't seem to be affected, and everything seems to have worked as it's supposed to in this case.

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

#35

Post by noisy_boy »

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…

The entire model is balancing risk and reward. Being careful means you'll be eaten by your competitors, your shareholders will punish you and executive comp will take a hit - what is the point of playing the game then? Instead reward taking risks and if shit hits the fan, there are always heads that can roll (if need be), fines that can be negotiated with DOJ/SEC and ever-sneakier tactics can be invented to structure even more clever deals - it is all just normal part of doing business. The two execs that got fired would have been handsomely rewarded if Bill Hwang's bet went the right way, irrespective of the recklessness.

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

#36

Post by kristjansson »

ashconnor wrote: post #31
QuestionC wrote: post #12

Earlier quoted context omitted.

> 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.

Layman here. Why was Credit Suisse left holding the bag instead of the losses being distributed between the banks? Was it because they were the broker?

The other firms were better at listening to the music, and knew that it had stopped?

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

#37

Post by tedunangst »

ashconnor wrote: post #31
QuestionC wrote: post #12

Earlier quoted context omitted.

> 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.

Layman here. Why was Credit Suisse left holding the bag instead of the losses being distributed between the banks? Was it because they were the broker?

Because they were last to sell.

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

#38

Post by herodoturtle »

jerf wrote: post #9
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…

A casual reading of that may make it sound like Credit Suisse made some sort of conscious decision to lend money, but from what I see in the financial industry, lending is handed out like candy on Halloween, almost right down to the bowl left out on the street that says "Take Two" and uses the honor system. It's just "leverage". It came with the account and they used it, and it's likely very minimal oversight was eve…

I just wanted to quickly say thanks for taking the time to reply to my comment with so much insight.

I don't have anything valuable to add, but hell, your response was very interesting to read!

It also sent me down some fun rabbit holes on credit cycles.

Cheers from South Africa.

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

#39

Post by fractionalhare »

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…

> 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.

It was $20B. Hwang's whole schtick from the outset of his family office was to hyper lever up on high growth companies. By doing this he went from $1B to $20B of actual capital in about 2 years. Then he blew up spectacularly because he was levered up about 5x in a ridiculous concentration.

There's no royal road to excess returns, etc. He probably could have kept this going longer, but sooner or later one of his superholdings was going to have a market event sparking a loss (like VIAC) and even his volume wasn't going to be able to prop up the price anymore. Chain reaction from there.

This is a good cautionary tale: going around to a bunch of banks and getting crazy leverage Big Short style doesn't always end in a lionizing outcome. In fact it usually doesn't. What sucks is the leverage is going to be demonized here, when the actual problem is Hwang's lack of transparency (albeit legal) to his brokers and his frankly stupid risk management.

Plenty of funds safely chug along for years running at 3-4x leverage, they just have the good sense to keep beta < 1 and stay roughly market neutral in their long/short holdings...

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

#40

Post by tedunangst »

lordnacho wrote: post #30
duxup wrote: post #22

Earlier quoted context omitted.

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.

Turns out banks don't like telling other banks what all their internal positions are.
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