Archegos: Difference between revisions

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 <nowiki>''</nowiki>''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''.  

Thye episode is a masterclass in how organisations work; how people in positions in responsibility are propelled by internally-constructed [[second order derivative]]s of the risks they are meant to be monitoring: what matters is not ''what happens'' nor ''holding adult conversations with customers, even where that requires delivering unpalatable truths'' but that ''I should not be held responsible for what happens'', a state of affairs one can vouchsafe by ensuring one follows internal models, policies and diktats regardless of their absurdity or fitness for purpose. There is a tension, between Sales on the one hand, whose north star is ''do not upset the client'', and senior management, whose is ''make sure all the RAG indicators are green''.

The job of reconciling this fundamental contradiction is left to those at the coal face, who are obliged to come up with solutions that squeeze the balloon.  

So, to deal with the problem that Archegos was persistently breaching its stress limits with one CS entity, the solution was to repaper it with another one that had a higher stress scenario appetite. This was an opportunity to head off a coming crisis a year out. inflection point: ''wrong decision''. When, after the migration, Archegos was ''still'' substantially in breach of its scenario limit, the business switched from the extreme “Severe Equity Crash” scenario to the more benign “Bad Week” scenario. Even then, six months from disaster, Archegos’ “Bad Week” exposure was still double the $250m limit. Another bad [[decision]].  

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 report}} puts it, each was “inundated with [[Management information and statistics|management information]], underscoring the overall mismanagement of the business”.

It was not only the co-heads who operated in silos. Silos, as anyone who has worked in financial services will know, are endemic. They are no regrettable externality of a modern organisation, but a ''fundamental ideological choice'' that it makes. “[[Downskilling]]” and specialisation — and by “specialisation” I mean “atomising a process into a myriad of functions so limited in scope that they can be carried out by ''non'' specialists, following a [[playbook]]” — is no accident, but precisely what our [[modernist]], [[reductionist]], data-obsessed times demand. Not an accident, but ''one waiting to happen''.

 

Silos also give everyone grand pooh-bah titles and diffused responsibility. Co-heads of ''anything'' is either a failure of nerve (the case here) or a Spartan fight to the death to [[Aus der Kriegsschule des Lebens|see who is strongest]] (the [[Goldman]] approach), but the more practical point is that, {{shitfan}}, it is not co-grand-pooh-bahs you want directing the traffic — far better to lock them in a dark cupboard, actually — but [[subject matter expert]]s with time to think and space to act who can figure out what has happened, what needs to happen, and how best to make it happen.