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===Concerns about Archegos=== | ===Concerns about Archegos=== | ||
What emphasis should you place on a record of misfeasance and bad management? A lot, you would think. [[All other things being equal]], | [[File:Archegos NAV to 2020.png|alt=Archegos NAV 2012-2020|350px|right|thumb|Archegos’ performance between 2012 and 2020 was ''all over the shop''...]][[File:Archegos NAV to armageddon.png|350px|right|thumb|... and then it got ''worse''.<ref>Figures taken from the {{CS report}}</ref>]]What emphasis should you place on a record of misfeasance and bad management? A lot, you would think. [[All other things being equal]], be more careful with those who have proved themselves cavalier with ethical boundaries than those who have not. (Though, ''pace'' [[Nassim Nicholas Taleb]]: “he who has never sinned is less reliable than he who has only sinned once.”)<ref>''[[Antifragile: Things that Gain from Disorder]]''... but only because you ''know'' him to be a potential sinner; she who is entirely without sin ''may'' be a saint, or it may just be she hasn’t sinned — or been caught — ''yet''.</ref> | ||
Archegos had plenty of form for misfeasance — outright criminality, in fact — and mismanagement | Archegos had ''plenty'' of form for misfeasance — outright criminality, in fact — ''and'' mismanagement. | ||
Between 2012 and 2014 Archegos’ principal was convicted of wire fraud, settled charges of [[insider trading]], and was banned from the Hong Kong securities industry, and was only able to continue to trade by returning all outside capital and “rebranding” as a [[family office]]: | |||
Between 2012 and 2014 Archegos’ principal was convicted of wire fraud, settled charges of [[insider trading]], and was banned from the Hong Kong securities industry, and was only able to continue to trade by returning all outside capital and “rebranding” as a [[family office]] | |||
{{Quote|''The SEC alleges that Sung Kook “Bill” Hwang, the founder and portfolio manager of Tiger Asia Management and Tiger Asia Partners, committed insider trading by short selling three Chinese bank stocks based on confidential information they received in private placement offerings. Hwang and his advisory firms then covered the short positions with private placement shares purchased at a significant discount to the stocks’ market price. They separately attempted to manipulate the prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions by placing losing trades in an attempt to lower the price of the stocks and increase the value of the short positions. This enabled Hwang and Tiger Asia Management to illicitly collect higher management fees from investors.'' | {{Quote|''The SEC alleges that Sung Kook “Bill” Hwang, the founder and portfolio manager of Tiger Asia Management and Tiger Asia Partners, committed insider trading by short selling three Chinese bank stocks based on confidential information they received in private placement offerings. Hwang and his advisory firms then covered the short positions with private placement shares purchased at a significant discount to the stocks’ market price. They separately attempted to manipulate the prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions by placing losing trades in an attempt to lower the price of the stocks and increase the value of the short positions. This enabled Hwang and Tiger Asia Management to illicitly collect higher management fees from investors.'' | ||
:—SEC press release, 12 December 1012 <ref>https://www.sec.gov/news/press-release/2012-2012-264htm</ref>}} | :—SEC press release, 12 December 1012 <ref>https://www.sec.gov/news/press-release/2012-2012-264htm</ref>}} | ||
And nor was Archegos’ performance through time anything to crow about. Over the 10 years between the insider trading debacle and the final collapse, Archegos suffered multiple massive drawdowns. | |||
And nor was Archegos’ performance through time anything to crow about | |||
Archegos’ published [[net asset value]] (note this data is incomplete: what I have comes from the {{CS report}}) gyrates wildly. If someone asked you to imagine the pattern you might expect from a blindfolded, monkey throwing darts at the financial pages while hopped up to the eyeballs with gradually increasing leverage (thanks, Credit Suisse!), then this is pretty much exactly what you’d expect it to look like. To be sure, over time, it does trend up, but there are gaping chasms between the peaks — and in any case that’s [[survivor bias]] right there: the game stops the moment you hit zero. In any case | |||
Dunno about you, but if one of my clients, was that erratic and trading in that size, I’d have a S.W.A.T. team on every overlooking roof. Especially a client with form for insider trading: isn’t the point that you are backing surefire winners? Yet this was not how CS saw it. | |||
Not that any of this stopped the CS Risk team portraying Archegos to its own reputational risk committee as a client with “strong market performance” and “[[best in class]]” infrastructure and compliance. | Not that any of this stopped the CS Risk team portraying Archegos to its own reputational risk committee as a client with “strong market performance” and “[[best in class]]” infrastructure and compliance. | ||
*'''Skill''': | *'''Skill''': Extreme volatility which sounds like Huang had no real skill as a money manager, and was rather riding around like a child holding a firehose of leverage. | ||
*'''Controls''': As early as 2012 the Credit team had identified Archegos’ [[key man]] risk (in Huang), volatility, mediocre operational management practices, fraud risk, and poor risk management as significant concerns. | *'''Controls''': As early as 2012 the Credit team had identified Archegos’ [[key man]] risk (in Huang), volatility, mediocre operational management practices, fraud risk, and poor risk management as significant concerns. | ||
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As balloon continued to resist tactical squeezing, and in the wake of the Malachite failure a year earlier, management adopted the “People’s Front of Judea gambit” and, in an initiative to “identify early warning signs of a default” and “enhance its controls and [[escalation]] framework across functions during periods of stress,” the broker created a new committee. The job of the Counterparty Oversight Committee (“CPOC”), was to “analyse and evaluate counterparty relationships with significant exposure relative to their revenue generation and to direct remedial measures where appropriate”. | As balloon continued to resist tactical squeezing, and in the wake of the Malachite failure a year earlier, management adopted the “People’s Front of Judea gambit” and, in an initiative to “identify early warning signs of a default” and “enhance its controls and [[escalation]] framework across functions during periods of stress,” the broker created a new committee. The job of the Counterparty Oversight Committee (“CPOC”), was to “analyse and evaluate counterparty relationships with significant exposure relative to their revenue generation and to direct remedial measures where appropriate”. | ||
But there was plenty of information, and plenty of oversight already at hand. Indeed, too much: the prime services had two heads (though conveniently, neither saw the US financing business as his responsibility) and, as the {{CS | But there was plenty of information, and plenty of oversight already at hand. Indeed, too much: the prime services had two heads (though conveniently, neither saw the US financing business as his responsibility) and, as the {{CS report}} puts it, each was “inundated with [[Management information and statistics|management information]], underscoring the overall mismanagement of the business”. | ||
As {{author|John Gall}} notes in his {{br|Systemantics: The Systems Bible}}, “prolonged data-gathering is not uncommonly used as a means of ''not'' dealing with a problem. ... When so motivated, information-gathering represents a form of Passivity”. | As {{author|John Gall}} notes in his {{br|Systemantics: The Systems Bible}}, “prolonged data-gathering is not uncommonly used as a means of ''not'' dealing with a problem. ... When so motivated, information-gathering represents a form of Passivity”. | ||