Credit Suisse Takes $4.7B Hit on Archegos Meltdown • Hacker News Board

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

#41

Post by osrec » Tue, Apr 06, 2021, 3:17 PM UTC

noisy_boy wrote: post #35

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…

Yeah, but the "measure of recklessness" needs to go beyond just value at risk and portfolio sensitivities. Those things can be gamed by clever people and risk can be easily hidden.

Unfortunately, most risk managers I knew barely understood the theory enough to identify the hidden risks in the books they oversaw. Most even struggled to get the right data out of the systems to do their jobs properly!

You do make a valid point - if the recklessness somehow pays off, you're a hero (eg. Paulson).

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

#42

Post by herodoturtle » Tue, Apr 06, 2021, 3:18 PM UTC

kristjansson wrote: post #36

ashconnor wrote: post #31

Earlier quoted context omitted.

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?

This comment reminded me of that awesome scene by Jeremy Irons in Margin Call :-)

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

#43

Post by Spinnaker_ » Tue, Apr 06, 2021, 3:21 PM UTC

bidirectional wrote: post #20

rwmj wrote: post #18

Earlier quoted context omitted.

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…

It's called the Bob Rubin trade. For years you stack up risk and profit immensely from it ($125 million). When things eventually blow up you simply... step away.

So sure, people were fired, but it's not like they are giving back all the money they made.

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

#44

Post by CapriciousCptl » Tue, Apr 06, 2021, 3:21 PM UTC

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…

Archegos was at 15% equity / gross positions and had stakes as large as 25% in their investees. Their positions were enormous, concentrated and not reported on a 13F because Archegos was a set up as a family office. All according to WSJ. What they were thinking, who knows, but I bet it involves lots of talk about beta, other greek letters and VaR.

https://www.wsj.com/articles/inside-archegoss-epic-meltdown-...

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

#45

Post by xhkkffbf » Tue, Apr 06, 2021, 3:25 PM UTC

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…

Which differential equations? The heat equation/option valuation doesn't seem to have such a possibility built into, right?

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

#46

Post by [deleted] » Tue, Apr 06, 2021, 3:27 PM UTC

osrec wrote: post #29

rwmj wrote: post #18

Earlier quoted context omitted.

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.

[deleted]

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

#47

Post by Spinnaker_ » Tue, Apr 06, 2021, 3:35 PM UTC

jgalt212 wrote: post #10

Reg T is very loosely applied, and there are all sorts of work-arounds (TRR swaps, etc) and the regulators just don't seem to care that Reg T is being violated in spirit if not in letter. https://www.investopedia.com/terms/r/regulationt.asp I interviewed for am equity swaps trading position many years ago, in full disclosure to me the prospective employer let me know that applying Reg T to derivatives transactions wo…

Reg T only covers initial equity leverage for retail investors. It probably doesn't apply to anyone you hear about in the wsj.

There are basically no all-encompassing, market-wide regulations for institutions.

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

#48

Post by NortySpock » Tue, Apr 06, 2021, 3:37 PM UTC

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…

This feels like history rhyming...

"[T]he practice of 'buying on margin' allowed a person to acquire stock by expending in cash as little as ten percent of the price of a stock. The balance was covered by a loan from a broker, who was advanced the money by his bank, which, in turn, accepted the stock as collateral for the loan. Credit was easy, and the Federal Reserve System did little to restrict the availability of money for stock investment." -- article on the stock market crash of 1929

https://www.encyclopedia.com/history/encyclopedias-almanacs-...

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

#49

Post by arthurcolle » Tue, Apr 06, 2021, 3:54 PM UTC

herodoturtle wrote: post #42

kristjansson wrote: post #36

Earlier quoted context omitted.

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

This comment reminded me of that awesome scene by Jeremy Irons in Margin Call :-)

Be first, be smarter or cheat

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

#50

Post by clairity » Tue, Apr 06, 2021, 4:03 PM UTC

fractionalhare wrote: post #39

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 abo…

yeah, that's just called gambling and stupid money. a basic task of money management is monitoring how correlated a portfolio is, and putting all of it in one basket is the opposite being mindful in that way.

it's also a good reminder of an economic reason for why we don't want wealth concentrating, because the chances of it be allocated efficiently fall. concentration worsens the effect of poor allocation. if that money was split among 1000 investors, a few would act stupidly, but a few would allocate exceptionally, and the many would be somewhat average, giving a much better overall outcome for the same amount of capital.

the more widely dispersed capital is, and the more dynamic an economy is, the more opportunities for capital to find its best use. it makes sense then why efforts along these lines (dispersion and dynamism) are vehemently opposed by the already wealthy. it's not because of capitalistic purity, but the threat it represents to their own power and influence.