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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 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. | 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, 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''. | After all, this broker was by no means alone in taking a hammering in the fallout from Archegos.<ref>Famously, of all the brokers, Goldman fared bestr, suffering “immaterial losses”. This may well be superior risk management practice — it’s Goldman, right? — but may have something to do with the fact that, according to the Credit Suisse report, Goldman didn’t have Archegos on its books at all until at least April 2020 </ref> 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. | ||
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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''. | ||
So while a contractual right held by the client more or less means exactly what it says, the broker it draws its formal boundaries well ''inside'' the area it is prepared to let the client, in practice, wander. ''[[NAV triggers]] are never exercised''. If the client approaches the edge of that wider area — a ''real'' point of no return for the broker — the broker will not mechanicistically pull triggers and detonate positions: instead, it will reason with the client, realising that precipitous action | So while a contractual right held by the client more or less means exactly what it says, the broker it draws its formal boundaries well ''inside'' the area it is prepared to let the client, in practice, wander. ''[[NAV triggers]] are never exercised''. If the client approaches the edge of that wider area — a ''real'' point of no return for the broker — the broker will not mechanicistically pull triggers and detonate positions: instead, it will reason with the client, realising that precipitous action/ | ||
===The broker that didn’t bark in the night-time=== | |||
What follows is heavily derivative and based on assumptions and extrapolations from a single footnote that may well be entirely mistaken. Nevertheless, I think it illustrates an interesting hypothetical point. | |||
While other brokers shipped losses most conveniently measured in the ''billions'', one — [[Goldman]] — yes, ''that'' [[Goldman]] — reported “immaterial losses”. Be assured, other brokers will be stamping their feet, cracking their cheeks, cursing obstreperous ill fortune and beseeching whatever God there is who looks after the interests of regulated broker dealers “how iun the name of all that is holy did that Goldman outfit get away ''again''? What kind of second sight, what extra-sensory perception have they got that we mortal dealers do not?” | |||
Perhaps it is as simple as this: ''Goldman didn’t have much risk on in the first place''. This may be prudent business selection; it may be that Goldman didn’t have much of a relationship with Archegos in the first place. According to a communication from CS’s credit risk team in April 2020, “Archegos had disclosed that its long positions with CS were “representative” of the positions Archegos held with its six other prime brokers at the time (namely Morgan Stanley, Jefferies, Nomura, Wells Fargo, Deutsche Bank, and UBS).” | |||
Notice anyone ''missing''? | |||
If this is right, then less than 12 months before ''Götterdämmerung'', Archegos ''wasn’t on Goldman’s books at all''. If, as it claimed, Archegos preferred to “leg into” positions pro rata across its prime brokers, then a very-late-to-the-party Goldman may not have had much Archegos risk on its book in the first place. Without that long, deep, fearful, profitable client relationship, Goldman had less skin in the game, is likely to have treated Archegos with less reverence — it would not have been a “platinum client” — and may therefore have declined to put positions on in such a cavalier fashion, and would have been less bothered about upsetting its customer by closing it out at the first sign of trouble. This is consistent with how, by all accounts, Goldman conducted its book during the end game. | |||
Whether this is really true or not is beside the point. But it points to another potential source of destabilising risk: a fellow broker who cares less about the [[commercial imperative]] than you do. Even a small block sale could have triggered, or amplified, a catastrophic run on concentrated holdings in a thin market with a single, incapacitated bidder. | |||
===Red flags=== | ===Red flags=== | ||