Archegos was too busy for margin calls

I'm speaking about this at a conference next week. Here is the MONEY QUOTE from Paul Weiss investigative report:

>>> ...further, the various Risk Committees only had access to data that were four to six weeks old.

As a consequence, Risk was unaware of, and unable to fully appreciate in real time, the magnitude and pace of the exponential growth in Archegos’s positions... <<<

Ref: https://www.credit-suisse.com/about-us/en/reports-research/a...

I'd like to also point out that unlike the 2008 crisis with margin calls which were highly subjective based on difficult projections of housing prices and defaults and correlations (think AIG-FP), here, these were pretty simple equity swaps. Valuing these assets is not difficult

>Another PB I worked with had a similar issue. A high rolling Gulf guy came in, wanting to do big FX trades on little margin. Risk said no, boss overruled them. Dude blew up, PB lost a lot of capital, boss got fired.

I used to work in finance but quit. The industry is still by far driven by mostly by sales/relationships/politics. It seems like in this case the right person got fired. I knew of a trader on a credit desk that blew up their desk (lost many times their pnl in a year). His boss (head of desk) got fired instead and he got promoted to his position. Yet it was a completely unsurprising outcome and spoke so much about the industry

Can you expand some of these acronyms? CS, PB, etc.? I'm guessing most of us won't know them. CS=Credit Suisse, PB=Personal Banking, FX=Foreign Exchange?

> The problem is actually one of internal incentives, from my reading.

It looks a lot more like a feature of those incentives. Functionally the risk persons job is to tell gambling addicts "I dunno guys, looks too juicy. High rollers only."

To paraphrase Sinclair: It's difficult to get someone to employ second-order thinking when his salary increases dramatically and there's no real downside if he doesn't.

A little hopefully constructive feedback:

1. The original link was to the source, which I would think would take precedence over a second-party review of it, even a skilled one like Levine's.

2. The source's actual title is "Credit Suisse Group Special Committee Of The Board of Directors Report On Archegos Capital Management". The editorizialized title ""Postmortem in finance: How Credit Suisse lost $6B [pdf]" isn't bad, includes a [pdf] warning, and is more descriptive of the content for anyone not aware that Archegos lost $6b of CS's capital. And how they lost it is certainly interesting.

3. Maybe if you change a post link from the original source, also link the source back in the comments. Levine includes it in his article below the fold [1][2], at least, but that might not always be the case. Lots of web writers these days like to write about reports and studies without actually linking to it.

[1]:https://www.credit-suisse.com/about-us-news/en/articles/medi...

[2]:https://www.credit-suisse.com/media/assets/corporate/docs/ab...

Why do you change URLs instead of submitting the one you like instead as a regular user and let upvotes decide? I appreciate and am thankful to the effort you put into moderating HN, but the user did not submit this URL and changing it from under them is super weird, even with a comment explaining it. Not only that you changed it to a paywalled link which is simply bad form.

HTML version of the original PDF: https://www.sec.gov/Archives/edgar/data/0001159510/000137036...

The new URL (at bloomberg) seems to be paywalled. Is there an alternative link?

This is common practice in post mortem analysis to try to determine the root cause in a blameless manner.

On the next iteration of this issue the eventual culprits of the first probably won't be there to remember what went wrong.

What might survive until then though is the set of procedures and guidelines put in place following the investigation recommendations.

So it's more effective to determine what process were insufficient than which person had the capacity to avoid something.

They’ve clawed back nearly $100m of bonuses…

It's tough to quantify. It's not just about the PB revenue itself. It's the fact that it's an entry point for a lot of institutional client activity that's necessary for a lot of other lines of business.

For example, investment banking is a very lucrative business. Let's say you're trying to win a big-ticket IPO. To run a credible IPO you need to be able to fill an order book of deep-pocketed, credible public equity investors. That requires having a relationship with these institutions. The primary way those relationships are built is through a prime brokerage business.

Maybe the motivation is not a constant profit for your bank, but a big bonus at the end of the year. With some luck you can collect a few of those bonuses before the next implosion.

PB is a loss leader for everything else.

Can individuals access that sort of margin?

The best I've seen is portfolio margin at some brokers.

What's the name of the "margining systems" you are referring to?

There's the saying of "if you owe the bank $100k you have a problem but if you owe the bank $100 million they have a problem." You're small enough fish you don't have a nearly dedicated person who's bonus and compensation is tied to keeping you from taking your pile of cash and going somewhere else. Individually your business and risk mean basically nothing to your broker most likely.

Do you have multiple billions of dollars at stake with the broker?

If yes: he might annoy you enough with his impertinent margin demands that you go elsewhere, which makes his boss Very Unhappy.

If no: his boss has never heard of you.

Also it sounds like liquidating many of these positions would be no easy feat, when they represented 3-5 days mean trading volume in the underlying asset.

They had a contract for static margin and wanted to change to dynamic margin. If your broker changes their terms of service, they likely won't immediately liquidate you pending approval.