>>> ...further, the various Risk Committees only had access to data that were four to six weeks old.
As a consequence, Risk was unaware of, and unable to fully appreciate in real time, the magnitude and pace of the exponential growth in Archegos’s positions... <<<
Ref: https://www.credit-suisse.com/about-us/en/reports-research/a...
I'd like to also point out that unlike the 2008 crisis with margin calls which were highly subjective based on difficult projections of housing prices and defaults and correlations (think AIG-FP), here, these were pretty simple equity swaps. Valuing these assets is not difficult
"Indeed, the 'Action/Decision' for Archegos was for CRM to 'notify of any changes with the counterparty and revisit the counterparty at afuture meeting.' CPOC did not set a deadline for remediating Archegos’s limit breaches, for moving Archegos to dynamic margining with add-ons, or even for reporting back or revisiting the status of Archegos at a futuremeeting."
The Archeos situation was escalated as far up as possible, up to this CPOC committee, where the Chief Risk Officer of the Investment Bank was a member. Instead of the CRO breathing down their neck until the situation was remediated, they got away with a bullet point in some minutes, without even a set deadline.
It appears that Credit Swiss replaced their CRO though.
https://www.bloomberg.com/news/articles/2021-07-29/credit-su...
I used to work in finance but quit. The industry is still by far driven by mostly by sales/relationships/politics. It seems like in this case the right person got fired. I knew of a trader on a credit desk that blew up their desk (lost many times their pnl in a year). His boss (head of desk) got fired instead and he got promoted to his position. Yet it was a completely unsurprising outcome and spoke so much about the industry
https://en.wikipedia.org/wiki/Prime_brokerage
CS is Credit Suisse, and FX is foreign currency trading.
It looks a lot more like a feature of those incentives. Functionally the risk persons job is to tell gambling addicts "I dunno guys, looks too juicy. High rollers only."
To paraphrase Sinclair: It's difficult to get someone to employ second-order thinking when his salary increases dramatically and there's no real downside if he doesn't.
Exactly. CS let Archegos get into a position where, if they pulled the funding plug on Archegos, Archegos would go bust. At which point everybody hates everybody.
Wow, this is really interesting. So CS actually knew what risk it was taking, the hypothesis that Archegos had kept its positions private from several lenders is false. They knew what was going on and couldn't ask for more margin, and when they did without a response they couldn't get themselves to just close out the customer's positions.
The problem is actually one of internal incentives, from my reading. If you've ever done business with CS (I was a PB customer), you'll notice there's a bunch of different entities, far more than you'd expect. I suspect when you have a number of committees in charge, actually nobody is in charge.
You also have a sales guy / risk guy issue here. Some person is in charge of the relationship and gets paid for bringing in the business. Another person is supposed to say stop once the risk to CS gets too high. There's a natural tension there and if the ownership over the relationship is vague, there's going to be a lot of meetings and not much decided. I saw this first hand at a firm I was at: risk guy comes in, asks to reduce positions. Trader says meh and then if there's no process the issue just sort of sits there awkwardly, with no resolution. Normally there's no blowup, but sometimes...
Another PB I worked with had a similar issue. A high rolling Gulf guy came in, wanting to do big FX trades on little margin. Risk said no, boss overruled them. Dude blew up, PB lost a lot of capital, boss got fired.