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$17.5 Million In Revenue And $5.4 Billion In Losses: Archegos Was A 300x-Levered Time Bomb For Credit Suisse

May 4, 2021

$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…

The $2.3 Quadrilliion Global Timebomb

April 19, 2021

THE $2.3 QUADRILLION GLOBAL TIMEBOMB

Credit Suisse is hours from collapse and the consequences could be a systemic failure of the financial system.

Disappointingly, my dream last night stopped there. So unfortunately I didn’t experience what actually happened.

As I warned in last week’s article on Archegos and Credit Suisse, investment banks have created a timebomb with the $1.5 quadrillion derivatives monster.

A few years ago, the BIS (Bank of International Settlement) in Basel reduced the $1.5 quadrillion to $600 trillion with a pen stroke. But the real gross figure was still $1.5q at the time. According to my sources, the real figure today is probably over $2 quadrillion.

A major part of the outstanding derivatives are OTC (over the counter) and hidden in off balance sheet special purpose vehicles.

LEVERAGED ASSETS JUST GO UP IN SMOKE

The $30 billion in Archegos derivatives that went up in smoke over a weekend is just the tip of the iceberg. The hedge fund Archegos lost everything and the normal uber-leveraged players Goldman Sachs, Morgan Stanley, Credit Suisse, Nomura etc lost at least $30 billion.

These investment banks are making casino bets that they can’t afford to lose. What their boards and top management don’t realise or understand is that the traders, supported by easily manipulated risk managers, are betting the bank on a daily basis.

Most of these ludicrously high bets are in the derivatives market. The management doesn’t understand how they work or what the risks are and the account managers and traders can bet billions on a daily basis with no skin in the game but massive potential upside if nothing goes wrong.

DEUTSCHE BANK – DERIVATIVES 600X EQUITY

But we are now entering an era when things will go wrong. The leverage is just too high and the bets totally out of proportion to the equity.

…click on the above link to read the rest of the article…

 

THIS is What a Margin Call Looks Like: the Consequences of Stock Market Mania

April 4, 2021

THIS is What a Margin Call Looks Like: the Consequences of Stock Market Mania

THIS is What a Margin Call Looks Like: the Consequences of Stock Market Mania

Financial World

A couple of weeks ago, we reported on various examples of stock market mania that have exploded in 2021.

Now it’s time to examine a major event that could be a clear harbinger for “the big one” to come. It starts with a name you never heard of before March, a modest hedge fund operating as a “family office” named Archegos Capital, and it ends with some of the world’s biggest brokers engaged in a mutually-destructive fire sale that wiped out $35 billion in market value.

Let’s take a closer look at what Slate’s Alex Kirshner calls The Dumbest Financial Story of 2021 (so far).

Leverage: Fantastic on the Way Up, Hideous on the Way Down

Bill Hwang, convicted inside trader, founded Archegos as a “family office.” Kirshner explains this legal nicety “functions like a hedge fund but manages the assets of just one or a few wealthy families. In theory, a family office gives a problem trader less opportunity to harm others, because they are not playing with outsiders’ money.”

At Forbes, Antoine Gara explains why this matters: “a family office exempts it from the Securities and Exchange Commission’s reporting requirements for investment firms.”

Hwang’s new firm approached big banks including Goldman Sachs, Morgan Stanley, Japan’s Nomura and Switzerland’s Credit Suisse. These firms extended leverage, or margin loans, to Archegos, which invested heavily on swap trades:

Swaps are an effective tool to take big risks without disclosing much. Total return swaps, for instance, allow an investor to negotiate a trade with their broker to own the total return of a stock, or basket of stocks, for a predetermined size and period of time, and at an agreed cost…

…click on the above link to read the rest of the article…

birch gold group, archegos, financial markets, leverage, hedge funds, leverage

Rehypothecated Leverage: How Archegos Built A $100 Billion Portfolio Out Of Thin Air… And Then Blew Up

April 2, 2021

Rehypothecated Leverage: How Archegos Built A $100 Billion Portfolio Out Of Thin Air… And Then Blew Up

One week after the biggest, and most spectacular hedge fund collapse since LTCM, we now have an (almost) clear picture of how Bill Hwang’s Archegos family office managed to single-handedly make a boring media stock the best performing company of 2021, but then when its luck suddenly ended it was margin called into extinction, leading to billions in losses for the banks that enabled what Bloomberg has dubbed its “leveraged blowout.”

Thanks to detailed reports by the Financial Times and Bloomberg, we now have the missing pieces to complete the picture of the biggest hedge fund implosion of the 21st century.

As a reminder, and as we previously discussed, we already knew how Archegos was building up stakes in its various holdings: unlike most other investors, the fund never actually owned the underlying stock or even calls on the stock, but rather transacted by purchasing equity swaps known as Total Return Swaps (TRS) or Certificates For Difference (CFD). Similar to Credit Default Swaps, TRS exposed Archegos to the daily variation margin on the underlying stock, and as such while the fund would benefit economically from increases in the underlying stock price (and, inversely, would be hit by price drops forcing it to put up more cash as margin any day the stock price dropped) it would never be the actual owner of record of the underlying stock. Instead, the stock that Archegos was long would be “owned” by its prime broker, the same entity that allowed it to enter into TRS in the first place…

…click on the above link to read the rest of the article…

archegos, rehypothecation, zerohedge, financial markets, leverage

Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks

March 29, 2021

Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks

Banks, as prime brokers and counterparties to the hedge fund, are eating multi-billion-dollar losses as they try to get out of these secretive stock derivative positions.

The implosion of an undisclosed hedge fund, now widely reported to be Archegos Capital Management, is hitting the stocks of banks that served as prime brokers to the fund. The highly leveraged derivative positions, based on stocks, had blown up spectacularly. Banks get into these risky leveraged deals because they generate enormous amounts of profit – until they blow up and banks get hit as counterparties.

Credit Suisse [CS] is down 13% at the moment in US trading after it warned this morning that “a significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” and that it and “a number of other banks are in the process of exiting these positions,” and that the loss resulting from this exit “could be highly significant and material to our first quarter results.” The bank deemed it “premature to quantify” the loss.

Nomura Holdings [NMR] is down 14% at the moment in US trading after it warned this morning that “an event occurred that could subject one of its US subsidiaries to a significant loss arising from transactions with a US client.” It estimated the loss from this one client at “approximately $2 billion, based on market prices as of March 26.”

As Credit Suisse pointed out, “a number of other banks” are also involved as counterparties to that one unnamed hedge fund, and have been trying to get out of these positions since last week.

…click on the above link to read the rest of the article…

financial markets, archegos, wolf richter, wolfstreet, stock market leverage, credit suisse, banks, nomura

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