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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

#51

Post by QuestionC »

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?

There wasn't a single broker. Each of these banks (8 in total I think?) all let Archgeos separately secure this levered up high-risk position.

The margin call references are quite apt. I believe it was a literal margin call. Goldman and Morgan Stanley forced Archgeos to square up their position, which forced Archgeos to liquidate their stock, which drove down the stock, which left Credit Suisse (who had been hoping for the banks to slowly unwind the position) in a terrible spot.

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

#52

Post by TuringNYC »

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.

>> How big was the position?

I think you're trying to get to "how was the loss so big?" The size of the position is only part of the answer.

The other comments answer the size of the position. But there are several other factors here.

They probably liquidated too late -- they ended up liquidating with giant block trades. That unwind also cost a lot because the block trade is at a discount to market value. Further, the larger the unwind, the bigger the price hit you take.

Finally, these types of unwinds can spook others in the market and further drive down the price.

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

#53

Post by whatshisface »

Spinnaker_ wrote: post #43
bidirectional wrote: post #20

Earlier quoted context omitted.

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.

Principal-Agent problem, we meet again.

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

#54

Post by xyst »

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…

dont worry - the us will bail them out like we did in 2008 when they directly caused the housing market crash.

it's priced in at this point. there is no such thing as accountability in the finance industry anymore. Make bad decisions, get bailed out. All of them are moral hazards.

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

#56

Post by manishsharan »

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…

>> hyper lever up on high growth companies

ViacomeCBS was a high growth company? wtf?

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

#57

Post by ethbr0 »

mannykannot wrote: post #33
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.

In insane scenarios like this, is there anything preventing a company from issuing new stock, waiting for the price drop from liquidating major holders, and buying back an equivalent amount?

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

#58

Post by lotsofpulp »

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…

>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.

Seems to me the onus is on CS and other prime brokers to require Hwang to disclose or otherwise do due diligence on his other bets.

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

#59

Post by ethbr0 »

itsoktocry wrote: post #17
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.

I think it can be chalked up to cost center vs profit center.

Staffing trading makes money.

Staffing risk costs money.

It's inevitable the latter is going to get the short end of the stick, probably the bare minimum requires to satisfy regulation, when salaries are allocated.

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

#60

Post by minikites »

xyst wrote: post #54
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…

dont worry - the us will bail them out like we did in 2008 when they directly caused the housing market crash. it's priced in at this point. there is no such thing as accountability in the finance industry anymore. Make bad decisions, get bailed out. All of them are moral hazards.

Not bailing them out would be ruinous for the economy, which therefore means they must be heavily regulated. This half-implemented system of privatized gains and socialized losses is not sustainable.
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