What caught my eye this week.
Competition to work for one of the bulge bracket investment banks is always fierce.
Young graduates from the best universities around the world compete for the chance to make millions in the markets.
Indeed, many onlookers – myself included – have lamented this brain drain. Finance takes too many clever people away from science and engineering.
So it’s especially galling that all that striving for academic achievement and going toe-to-toe in grueling interviews wasn’t enough stop bankers at some of these big institutions losing billions of dollars in the past fortnight.
Several investment banks had enabled an obscure family office, Archegos, to leverage up its $10 billion portfolio until it reportedly had more than $50 billion in exposure to just a handful of companies.
Which was a nice little earner, until the music stopped – like it always does.
When share prices began to fall, Archegos needed to stump up more money that it didn’t have to meet its margin calls.
This meant forced selling, and plunging share prices of the companies Archegos held:
Which was a problem for the banks.
You know what they say: when you owe the bank £10,000 you have a problem. When you owe the bank £1 million the bank has a problem.
Well, when you owe the banks tens of billions, everyone has a problem.
A billion here, a billion there
The Archegos SNAFU unwound like the finale of the criminally under-watched movie Margin Call:
According to the Financial Times [search result]:
…before the troubles at the family office burst into public view at the end of the week, representatives from its trading partners Goldman Sachs, Morgan Stanley, Credit Suisse, UBS and Nomura held a meeting with Archegos to discuss an orderly wind-down of troubled trades.
The banks had each allowed Archegos to take on billions of dollars of exposure to volatile equities through swaps contracts, and Hwang was struggling to deal with margin calls triggered by a plunge in ViacomCBS shares.
An orderly wind-down would minimise the market impact and the hit to their own balance sheets as they worked to sell down stakes in companies that Archegos had amassed through the derivatives instruments.
It is unclear whether an understanding was reached but several sources said it was quickly clear that some banks had begun selling to stem their own losses. People familiar with the trading said Credit Suisse and Morgan Stanley both appeared to have unloaded small batches of shares in the market after the meeting.
“It was like a game of chicken,” one person said.
By Friday morning, any hopes of co-ordination had been snuffed out and the floodgates opened when Goldman began pitching global investors on billions of dollars of Archegos-linked stocks.
Morgan Stanley joined hours later, and the two sold roughly $19bn in big block trades that day alone, according to the people.
That was probably painful for those US banks, but not as much as for (European) Credit Suisse and (Japanese) Nomura.
The two non-US banks dragged their feet. Perhaps they are less familiar with the ruthlessness of Wall Street banks than are, um, Wall Street bankers.
Nomura says it may have lost as much as $2bn on the trades. Credit Suisse has reportedly lost between $3 billion and $4 billion.
And people said the Reddit traders had issues…
Marginalia
Some readers – even my co-blogger – often question how I can be so arrogant as to invest actively when I’m up against the smartest financial minds on the planet.
And it’s true, we all know the evidence shows that most active investors would be better off as passive investors.
But I’ve seen very little over the years to suggest this doesn’t equally apply to The Smartest Financial Minds On The Planet.
Perhaps I’ll just point them towards this article in the future.
As for the investment bank recruiters, maybe they should ask to see an applicant’s Netflix viewing record alongside their C.V.?
Viewing Margin Call should be mandatory.
Then again, the banks probably would have facilitated the trades anyway.
As Bloomberg notes:
…global banks embraced [Archegos founder Bill Hwang] as a lucrative customer, despite a record of insider trading and attempted market manipulation that drove him out of the hedge fund business a decade ago.
Sure, why not enable tens of billions of dollars in leveraged exposure with that guy? Bankers gotta bank!
And to think I struggled to get a mortgage.
p.s. I’m out with Weekend Reading early this week so I can spend a few days in various local gardens. Have a great Easter weekend everyone!
