$17.5 Million In Revenue And $5.4 Billion In Losses: Archegos Was A 300x-Levered Time Bomb For Credit Suisse
A bank’s prime brokerage unit is supposed to be a safe, reliable and predictable generator of revenue, resulting from modest-margin transactions with a bank’s hedge fund client base. It’s safe because the bank’s risk managers scour the bank’s exposure to various hedge funds, and immediately flag any clients that become too big and a potential source of loss (it’s also “safe” because the bank’s prime brokerage management tends to make far less than the frontline Sales and Trading staff).
That is, at least, the theory. The practice, as the recent Archegos fiasco demonstrated, is anything but.
Case in point, the now infamous Credit Suisse disaster in its dealing with Archegos, which as of this moment have resulted in more than $5.4 billion in losses for the Swiss bank, and which as the FT reported today, resulted in a paltry CHF16 million (US$17.5 million) in revenue last year. In simplistic terms, this means that somehow the funding chain and the leverage Credit Suisse afforded to Archegos resulted in over 300x leverage in the wrong direction!
As the FT notes this morning, the paltry fees Credit Suisse received from Archegos “raises further questions about the risks the lender was prepared to shoulder in pursuit of relationships with ultra-wealthy clients” and adds that “the low level of fees and high risk exposure have caused concern among the board and senior executives, who are investigating the arrangement, according to two people with knowledge of the process.” It has also caused a flood of layoffs and terminations as the bank belatedly looked at its books – the infamous scene from Margin Call comes to mind here…
… and realized just how massive its exposure had been all along, and how nobody had any idea how big the loss would end up being until it was finally booked following the now infamous late-March liquidation frenzy.
…click on the above link to read the rest of the article…
