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| {{a|risk|}}No. It’s still too soon. | | {{essay|disaster|Archegos|{{image|disaster cafe|jpg|<br>“Can I have my refund ''before'' I pay for the meal?”}} }} |
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| ''Later...''
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| It is no longer too soon, for on July 29, 2021 the Credit Suisse Special Committee to the Board of Directors has presented its ''{{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|Report on Archegos Capital Management}}'' to the board and, for some reason known only to the board, they have published to it to the known world. This seems to be a final act of self-harm from an organisation whose serial acts of self-harm the report catalogues in such clinical, precise detail.
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| ''What on Earth did they think they would achieve by releasing this report?'' It caused ''another'' precipitous drop in the firm’s stock price — nearly four percent — to go with the twenty percent drop it suffered when news of the default first broke.
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| That said, it is an act of self-harm for which the watching world should feel tremendously grateful. Not only a sizzling read, arriving just in time for Bank executives as they head for a fortnight to the sun loungers of Mykonos and Ibiza, but it is a beautifully clear explanation of the business of [[equity prime brokerage]] in particular and global markets broking in general, and a coruscating dismemberment of the way investment banking operates, both inside Credit Suisse and without.
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| This is a proper horror story: Stephen King has not a patch on this.
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| ''Everyone'' involved in the business of prime services, and global markets broking generally, should read this report.
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| And while the goings on at CS 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 nmot shudder and think, ''there, but for the grace of God, goes my employer — is showing precisely the lack of awareness that nearly sank CS.
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| After all, CS was by no means alone in taking a hammering in the fallout from Archegos.
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| The 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''.
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| ===Concerns about Archegos===
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| *'''Trustworthiness''': Between 2012 and 2014 [[Bill Huang]] and his Tiger Asia fund was convicted of wire fraud, settled charges of [[insider trading]], and was banned from the Hong Kong securities industry for four years. Huang was only able to continue by returning all outside capital to its investors and “rebranding” as a family office exclusively running Huang’s own (and, well, his prime brokers’) money.
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| *'''Skill''': Over the 10 years between the insider trading debacle and the final collapse, Archegos suffered multiple massive drawdowns. 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.
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| *'''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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| ===Mismargining===
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| Credit Suisse’s margining methodology for swaps was, from the outset, positively moronic. The JC is a legal eagle, not a credit guy, but even I could spot the flaws in this.
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| *[[TRS]] not [[synthetic equity]]: CS appears to have documented the trades as “total return swaps” under a standard equity derivatives master confirmation agreement, and not synthetic equity derivatives under a portfolio swap master confirmation. The differences are subtle, but there are two in particular: TRS tend to be “bullet” swaps with a scheduled termination date and as a result do not “[[re-strike|restrike]]” before maturity, and are [[static margin|statically margined]]. Portfolio swaps are designed to replicate cash prime brokerage; there is not a specified maturity date, so the notional restrikes periodically (like, monthly), and [[initial margin]] is calculated daily against the prevailing “{{eqderivprov|Final Price}}” rather than the original “{{eqderivprov|Initial Price}}”. As Hwang’s positions appreciated, the margin value as a proportion of the position eroded, and Hwang apparently used the [[variation margin]] to double down on the same trades, pushing the equity price further up, exacerbating the problem.
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| *'''They didn’t keep an eye on the direction of the portfolio''': Archegos at first used the swap book to put on short positions that offset the long bias on its cash book. It used this bias to argue for lower margins — a request the business accommodated, provided the combined portfolio bias did not exceed 75% long or short. Over time Archegos crequently exceeded these limites, often for months at a time, but CS took no action, accepting Archegos’ promises to correct the bias.
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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]].
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| ===Had weapons. Didn’t use them.===
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| {{sa}}
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| ''{{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|Report on Archegos Capital Management}}''
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