Melvin Capital's $4.5 billion GME loss looks like amateur night

[bwall]

compared to this one:

https://finance.yahoo.com/news/billions-secretive-derivatives-center-archegos-102415242.html

Initial reports are that Archegos  Capital (see article above) was so levered via derivatives that when the underlying stocks moved against them on Friday, there was $20 billion in forced selling. Apparently the selling was so heavy and intense that it caused some of the stocks involved to drop significantly.

Credit Suisse and Nomura Bank provided the rope. Goldman Sachs and Morgan Stanley provided the gallows. By this morning Archegos Cap. was swinging and all indications are a complete wipeout of their capital, somewhere between $5billion and $10billion, plus losses at Credit Suisse and Nomura, which should also run in the billions:
https://finance.yahoo.com/news/large-block-trades-tied-archegos-211050253.html

Later reporting should provide more clarity to these numbers.

Just another example of why margin debt and derivatives are risky.

Stay safe out there!

[reeshau]

One angle on this is that they controlled more than 10% of some of these companies, but did not have to report it beecause it was through those derivatives, rather than through share ownership.  That is a legitimate concern for regulators to look at both for their bankers and for others investing in those companies.  (long or short)

[effigy98]

We have about 3 days before we might see a massive liquidity event. This could be the spark, who knows.

[Alternatepriorities]

Credit Suisse and Nomura Bank provided the rope. Goldman Sachs and Morgan Stanley provided the gallows. By this morning Archegos Cap. was swinging and all indications are a complete wipeout of their capital, somewhere between $5billion and $10billion, plus losses at Credit Suisse and Nomura, which should also run in the billions:

Maybe if there were actual gallows involved people like Bill Hwang would stop risking other peoples fortunes to make their own... Until then this will continue. Even a few years in jail is trivial compared to setting your family up generations.

[marty998]

Credit Suisse and Nomura Bank provided the rope. Goldman Sachs and Morgan Stanley provided the gallows. By this morning Archegos Cap. was swinging and all indications are a complete wipeout of their capital, somewhere between $5billion and $10billion, plus losses at Credit Suisse and Nomura, which should also run in the billions:

Maybe if there were actual gallows involved people like Bill Hwang would stop risking other peoples fortunes to make their own... Until then this will continue. Even a few years in jail is trivial compared to setting your family up generations.

Yes well... when you're a fund manager who charges 2% of assets under management, there's an incentive to take $1 of equity capital and lever it up a few dozen times with derivatives to inflate that $1 to something much larger, and then charge your 2% fee on that much larger number.

Lessons obviously forgotten from 2008. Regulators asleep at the wheel again.

[ctuser1]

Lessons obviously forgotten from 2008. Regulators asleep at the wheel again.

Regulations were diluted around 2017 or so.

The Trump administration deregulation push - for example - took the real teeth out of some of the Valuation Adjustment measures that were supposed to take full effect around 2019-2020. Had these measures come into full effect as had been planned after 2008, and applied to Nomura/CS (not sure of the regulatory jurisdiction over Japanese/Swiss banks and what their regulators think) then these types of positions on the bank's books would have been very expensive. 

[bwall]

It appears as if one way Archegos was able to amass such a position unnoticed was ..... because he wanted to go unnoticed.

Archegos was set up as a family office, which have much much looser reporting requirements and regulations.
https://finance.yahoo.com/news/one-world-greatest-hidden-fortunes-002617417.html

And Mr. Hwang had also been caught once for insider trading already, so....... a leopard can't change it's spots? 

[ctuser1]

It appears as if one way Archegos was able to amass such a position unnoticed was ..... because he wanted to go unnoticed.

Archegos was set up as a family office, which have much much looser reporting requirements and regulations.
https://finance.yahoo.com/news/one-world-greatest-hidden-fortunes-002617417.html

And Mr. Hwang had also been caught once for insider trading already, so....... a leopard can't change it's spots?

Mr. Hwang is a private citizen and is able to do many things without regulatory scrutiny. However, his prime brokers (I'm assuming that is CS and Nomura) also failed at their jobs as soon as the losses went beyond Mr. Hwangs portfolio and went to their capital.

If it is just one such case, we are likely fine. Hundreds of such firms doing it simultaneously when the bubble has grown bigger can again bring the entire financial system down.

After this episode, it'll be a travesty if all the Basel rules are not dusted off, amped up more than was planned in 2009, and applied on the banks once again. Make banks apply stricter margin requirements and take larger P/L charge on their own book, and hold reserves for all kinds of Valuation adjustments (Capital/Funding/Credit) that have punitive additions for leverage/credit-rating/complexity and these types of shenanigans suddenly become a lot less profitable during the good times whether Mr. Hwang wants to hide the positions or not.

Someone needs to page Elizabeth Warren. She was involved when many of these rules were initially formulated.

FWIW - American banks, even after the 2017 Trump deregulation, are generally following stricter rules than European ones. Not sure about Nomura/Japan.

[MustacheAndaHalf]

To be specific, this wasn't derivatives like put or call options.  It involved swaps, which should ring a bell from 2008 (credit default swaps).  Seems like swaps are still unregulated.

The market might pull back if new regulations are introduced, which is not a good way to keep a recovery going.  I think the recovery will take priority, and not much will happen over the swaps used by Archegos.

[ChpBstrd]

Just wait until cryptocurrencies correct again.

Or just wait until coastal urban real estate prices correct again.

Rest assured, the only thing learned in 2008-2009 was that the economic stimulus after bank crashes needs to be big.

[reeshau]

Another interesting angle:  Goldman Sachs and Morgan Stanley, also investment bankers to Archegos, got out early, rather than meet with the other banks to work out how to save Archegos portfolio (which Hwang had requested).  Looks like they left Credit Suisse and Nomura holding the bag.

[bwall]

One of the first damage reports are in, and it's a doozy.

It looks like Credit Suisse has subsidized Mr. Hwang's stock picking hobby to the tune of $4.7 billion USD. Two executives in charge of Risk Management have been fired, Executive bonuses (boni?) have been scrapped and Chairman of the Board will not collect his $1m + fee. At least someone is being held to account.

https://finance.yahoo.com/news/credit-suisse-reveal-losses-archegos-032230076.html

Goldman Sachs and Morgan Stanley issued statements earlier saying their losses would be negligible and I haven't seen any subsequent reports to the contrary.

I wonder what Nomura's losses will be?

Archegos' losses also need to be fully tallied.

[ender]

The only problem is the risk isn't going to outweigh the possible rewards here, unfortunately.

[ChpBstrd]

The only problem is the risk isn't going to outweigh the possible rewards here, unfortunately.

We solved that problem once before. Then we un-solved it and have had to worry about banking chaos ever since.

https://en.wikipedia.org/wiki/Glass–Steagall_legislation

[markbike528CBX]

I'm currently reading Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System--and Themselves by Andrew Ross Sorkin.
About the GFC of 2007-2008
I hear the Jaws theme in the background.

Another link to the issue https://fortune.com/2021/03/29/busted-for-insider-trading-this-former-hedge-fund-manager-is-believed-to-be-behind-last-weeks-margin-call-mayhem/

"was deemed such a risk by Goldman Sachs Group Inc. that as recently as late 2018 the firm refused to do business with him.

Those misgivings didn’t last."

[MustacheAndaHalf]

It looks like Credit Suisse has subsidized Mr. Hwang's stock picking hobby to the tune of $4.7 billion USD. Two executives in charge of Risk Management have been fired, ...

Want to hear a joke?  Credit Suisse Risk Management.  :)
I have to give credit to CNBC's Jim Kramer for that one... he said that Credit Suisse's research and risk management departments both seem to have a sense of humor.

[bwall]

The numbers are starting to come out and it's staggering. Archegos had $20 billion in equity and levered up to $100 billion, mainly concentrated in a handful of stocks. When one of those stocks, CBSViacom, went from $22 to $102 based on Archegos' buying, the company's management decided to issue shares. Share price dropped quickly, triggering margin calls that Archegos couldn't meet.

https://www.bloomberg.com/news/features/2021-04-08/how-bill-hwang-of-archegos-capital-lost-20-billion-in-two-days?utm_campaign=news&utm_medium=bd&utm_source=applenews

Fortunately for us, he was only levered 5 to 1  and a $100 billion position, not 25 to 1 like LTCM in 1998. LTCM's $125 billion position and leverage was so severe the Fed had to act to prevent contagion. Fortunately, it appears that's not the case with Archegos--so far.

https://en.wikipedia.org/wiki/Long-Term_Capital_Management

[bwall]

A quick tally of the scorecard shows:

Archegos: Lost $20 billion
Credit Suisse: lost $4.7 billion
Nomura: early indications are $2 billion--still waiting to hear their report.
Various other holders: about $ 1 billion

So, $27.7 billion in shareholder value gone in a matter of days. Compare to Melvin Capital's $4.5 billion loss over the course of a few weeks; one fund showed how to lose big money surgically, like a professional, the other looks rather amateurish, issuing ridiculous statements and making silly videos over small potatoes. 

The good news is that no lives were lost and no reports of physical injuries in this crash, just bruised bank accounts and egos.

[ctuser1]

A quick tally of the scorecard shows:

Archegos: Lost $20 billion
Credit Suisse: lost $4.7 billion
Nomura: early indications are $2 billion--still waiting to hear their report.
Various other holders: about $ 1 billion

So, $27.7 billion in shareholder value gone in a matter of days. Compare to Melvin Capital's $4.5 billion loss over the course of a few weeks; one fund showed how to lose big money surgically, like a professional, the other looks rather amateurish, issuing ridiculous statements and making silly videos over small potatoes. 

The good news is that no lives were lost and no reports of physical injuries in this crash, just bruised bank accounts and egos.

To be fair, there is likely a lot of double counting in this $27.7 billion.

I think the more important bottom-line number is the losses reported by the prime brokers - as that represents the shock to the interlinked global financial system. If a private investor or two loses their shirt then nobody should care.

So the $4.7B from CS + whatever Nomura comes out with is the real "problem" at this point.

Let's hope it stays in this ballpark and does not get any worse.

[Alternatepriorities]

The good news is that no lives were lost and no reports of physical injuries in this crash, just bruised bank accounts and egos.

If someone could wave their hand and takeaway 10,000 hours of your life, would you really be uninjured? It seems that people with careers sometimes forget that many people only have jobs where they trade their life away for money. It's hard for me to buy that theft isn't physical harm to the brick layer whose body still aches from earning the money that's now gone. Maybe in this case it's just some billionaires and no one cares, but when a firefighter or teacher's union loses it's pension fund to the ego of it's managers people are actually harmed. 

[BicycleB]

Appreciating this thread very much for timely insight. Wish I had some to add, but thanks to everyone for commenting.

[bwall]

So, more body counts are coming in and it's ugly. No surprise there.

Here's the latest scorecard:

Archegos: Lost $20 billion
Credit Suisse: Lost $5.5 billion (revised upward from $4.7 billion in the quarterly earnings report)
Nomura: Lost $2.9 billion
UBS: Lost $774 million
Morgan Stanley: Lost $1 billion
Goldman Sachs: Loss "Not Material"

So, by my count the banks are out $10.17 billion. I think the only number that left to be revised would be the loss suffered by Archegos. They were wiped out, so as their equity went to zero, the banks had to absorb the loss when they closed Archegos' open positions.

Nomura might also revise their loss in about six to nine months, after the scandal has died down and no one is paying attention anymore.

https://finance.yahoo.com/news/ubs-q1-profit-14-switzerlands-045542409.html