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*[[Archegos#Juniorisation of the meatware|Juniorisation of the meatware]] | *[[Archegos#Juniorisation of the meatware|Juniorisation of the meatware]] | ||
*[[Archegos#People’s front of Judea|People’s front of Judea]] | *[[Archegos#People’s front of Judea|People’s front of Judea]] | ||
*[[Archegos#How organisations work|How organisations work]] | |||
*[[Archegos#Red flags|Red flags]] | *[[Archegos#Red flags|Red flags]] | ||
===Intro=== | ===Intro=== | ||
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I mean, out of the mouths of babes. There was quite a bit of human wreckage at CS in the aftermath, but you really hope the author of that email wasn’t part of it. But the wider point is this: when all is plain sailing, you can, if you wish, operate a complex business through the agency of cheap staff in remote locations with an instruction manual, which you hope has been suitably translated into Bulgarian. But the thing about complex businesses navigating open water is that ocean weather can quickly change, and a quiet potter around the heads can turn into a Fastnet tempest, and then your Bratislavan school-leavers are going to be hopelessly out of their depth. Relying on rigid application of [[playbook]], [[policy]], [[Process|processes]], [[system]], [[algorithm]] or work-to-rules especially when, as it happens, your senior management are disinclined to enforce them properly anyway, is no way to survive a hurricane. | I mean, out of the mouths of babes. There was quite a bit of human wreckage at CS in the aftermath, but you really hope the author of that email wasn’t part of it. But the wider point is this: when all is plain sailing, you can, if you wish, operate a complex business through the agency of cheap staff in remote locations with an instruction manual, which you hope has been suitably translated into Bulgarian. But the thing about complex businesses navigating open water is that ocean weather can quickly change, and a quiet potter around the heads can turn into a Fastnet tempest, and then your Bratislavan school-leavers are going to be hopelessly out of their depth. Relying on rigid application of [[playbook]], [[policy]], [[Process|processes]], [[system]], [[algorithm]] or work-to-rules especially when, as it happens, your senior management are disinclined to enforce them properly anyway, is no way to survive a hurricane. | ||
=== How organisations work === | |||
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. | |||
====When the problem breaks your model, you don’t change the model. Fix the problem.==== | |||
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]]. | |||
====Quick! Form a committee!==== | |||
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 special 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”. | |||
''Sometimes, data and oversight gets in the way.'' | |||
====Silos==== | |||
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 itinerantly 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. | |||
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 play to see who is strongest (the [[Goldman]] approach, but | |||
===Red flags=== | ===Red flags=== | ||
*[[Don’t answer that|Not answering calls]] | |||
*[[Key person]] risk | *[[Key person]] risk | ||
*[[Volatility|Volatile]] performance | *[[Volatility|Volatile]] performance | ||