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''Everyone'' involved in the business of prime services, and global markets broking generally, should read {{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|the Credit Suisse Report}}. | ''Everyone'' involved in the business of prime services, and global markets broking generally, should read {{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|the Credit Suisse Report}}. | ||
And while the goings on at | And while the goings on at this brokerage were breathtakingly, class-leadingly chaotic — it is hard to believe that any one organisation could have made ''so'' many unforgivable errors, in such scale, over such a long period, so consistently, missing many opportunities to cotton on, without catching even ''one'' lucky break as the apocalypse unfolded around it — this really is a royal flush of idiocy — the ''makings'' of all these [[joint and several liability|joint and several]] catastrophes is imprinted in the DNA of ''every'' multinational organisation. An onlooker who denies it — who does not shudder and think, ''there, but for the grace of God, go I — is showing precisely the lack of awareness that caused this situation. | ||
After all, | After all, this broker was by no means alone in taking a hammering in the fallout from Archegos. It just took the worst hammering, and has been the most candid about why. Its special committee makes a number of excellent recommendations — all worth heeding — but stops short of the one that must have been most tempting to the Board: ''get the hell out of the broking business altogether''. | ||
Almost all the most egregious errors were sociological, and not systemic: they speak of human foibles, the thrall of power, human seduction by the simplicity of models and the internal primacy afforded to capital calculations — a proxy means of measuring ones ability to withstand catastrophe and not avoiding catastrophe as an end in itself — with arse-covering, deference to hierarchy, fiefdoms and silos, inexplicable insouciance in the face of steadily escalating risk and, when it comes to it, outright idiocy. | Almost all the most egregious errors were sociological, and not systemic: they speak of human foibles, the thrall of power, human seduction by the simplicity of models and the internal primacy afforded to capital calculations — a proxy means of measuring ones ability to withstand catastrophe and not avoiding catastrophe as an end in itself — with arse-covering, deference to hierarchy, fiefdoms and silos, inexplicable insouciance in the face of steadily escalating risk and, when it comes to it, outright idiocy. | ||
This sums up how dire the whole sorry business was: In early March, 2021, | This sums up how dire the whole sorry business was: In early March, 2021, the broker gingerly ''asked'' Archegos to consider a new margin proposal under which the broker would take $1.35 billion of ''funds it currently held for Archegos'' and recharacterise them as [[initial margin]]: ''asked'', that is, when it was contractually entitled to ''demand'' that, and more, on 3 days’ notice. | ||
Archegos promised to consider the request but, meanwhile, demanded the broker pay ''out'' $2.4 billion in excess [[variation margin]] it was holding. And, two weeks before Archegos blew up causing this broker a $5.5billion loss, the broker paid the excess variation margin out. | |||
If that isn’t painful enough, Archegos then used that excess to put on a further billion and a half dollars in additional long positions in the same stocks with Credit Suisse. | |||
Breathtaking. | Breathtaking. | ||
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*'''They didn’t take ''enough'' margin''': Archegos pressured CS to lower its swap margins, citing more favourable margins it was getting from other brokers due to the effect of [[cross-margining]]. | *'''They didn’t take ''enough'' margin''': Archegos pressured CS to lower its swap margins, citing more favourable margins it was getting from other brokers due to the effect of [[cross-margining]]. | ||
===The greatest fool theory=== | ===The greatest fool theory=== | ||
{{quote|''Archegos’s long bias was driven by the evolution of its swaps portfolio. Given the substantially reduced swap margin, Archegos began putting on long swaps (at the new lower margin) with CS, whereas it had historically held its long positions in Prime Brokerage (at a higher margin rate). The lower swap margins—which Archegos assured CS were “pretty good” compared to what its other prime brokers required—no doubt led Archegos to trade more swaps with CS, and Archegos’s holdings at CS increased markedly.''}} | |||
Here is a sort of convexity risk: If you offer the most favourable terms on the street, then customers will tend to put their positions on with you. If your swap margins are lower than your [[cash brokerage]] margins, your customers will tend, [[all other things being equal]], to put their positions on swap. Water runs downhill. | |||
You read variations of the following a ''lot'' in the Archegos report: “if we increase margins [to risk-acceptable levels], we will lose the business”. Indeed, you will hear variations of that theme, every day, uttered by anxious [[salespeople]] in every brokerage in the City. Salespeople ''would'' say this: their ''role'' is to say things like this: they speak for their clients, and their own bonus prospects, at the table where business is discussed. But others at that table — notably risk — should be taking the other side of that conversation. | You read variations of the following a ''lot'' in the Archegos report: “if we increase margins [to risk-acceptable levels], we will lose the business”. Indeed, you will hear variations of that theme, every day, uttered by anxious [[salespeople]] in every brokerage in the City. Salespeople ''would'' say this: their ''role'' is to say things like this: they speak for their clients, and their own bonus prospects, at the table where business is discussed. But others at that table — notably risk — should be taking the other side of that conversation. | ||
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===Had weapons. Didn’t use them.=== | ===Had weapons. Didn’t use them.=== | ||
{{quote|''At the same time, the contractual protections CS had negotiated with Archegos were illusory, as the business appears to have had no intention of invoking them for fear of alienating the client.''}} | |||
===Formal versus [[informal systems]]=== | ===Formal versus [[informal systems]]=== | ||
And here we see the behavioural crux: we tell ourselves that what matters in risk management are the formal boundaries we draw; the official channels; the technical superstructure of the relationship; the architecture of the parties’ rights and obligations versus each other. But this isn’t true. In practice the relationship is governed by soft, morphing, invisible, ''informal'' boundaries. Interpersonal relationships. Understandings. Past practices. Precedents. Expectations. Trust. The [[commercial imperative]].<ref>This isn’t the place for it, but note: these fundamental qualities of commercial life are utterly [[Legible|illegible]] to [[neural networks]], [[Policy|policies]] and [[algorithm]]s.</ref> | And here we see the behavioural crux: we tell ourselves that what matters in risk management are the formal boundaries we draw; the official channels; the technical superstructure of the relationship; the architecture of the parties’ rights and obligations versus each other. But this isn’t true. In practice the relationship is governed by soft, morphing, invisible, ''informal'' boundaries. Interpersonal relationships. Understandings. Past practices. Precedents. Expectations. Trust. The [[commercial imperative]].<ref>This isn’t the place for it, but note: these fundamental qualities of commercial life are utterly [[Legible|illegible]] to [[neural networks]], [[Policy|policies]] and [[algorithm]]s.</ref> | ||
Not only that, but there is a fundamental asymmetry in that softness ''between'' the parties | Not only that, but there is a fundamental asymmetry in the ''degree'' of that softness ''between'' the parties. | ||
The relationship, after all, is one of service provider and customer: the customer sees its rights and obligations largely as hard-edged economic options, which it is free to exercise without regret, regardless of their impact on “the house”. Thus, Archegos was entitled to withdraw excess variation margin, and its broker had little option but to comply ''''without “blowing up the relationship”''. On the other hand, the broker’s right to recalibrate [[initial margin]], whilst framed as an equally clear option, was nothing of the kind. It was implicit in the [[commercial imperative]] that the right would lie untouched ''unless the conditions justifying exercise were so unbearably dire as to give the broker no plausible alternative''. | |||
Now clearly, this broker miscalculated how bad the conditions were. But this is not Archegos’ fault, nor the lawyers’. | |||
The broker is a ''service provider''; it wishes the client only well. It presents its risk management parameters (for example, rights to raise margin) not as targets it intends to hit mechanistically of their conditions are triggered, but last resorts it will deploy with a heavy heart and ''only if calamity otherwise awaits''. | The broker is a ''service provider''; it wishes the client only well. It presents its risk management parameters (for example, rights to raise margin) not as targets it intends to hit mechanistically of their conditions are triggered, but last resorts it will deploy with a heavy heart and ''only if calamity otherwise awaits''. | ||