Although this matter has come to an end, its influence is far from far away. The economic business of the affected investment bank may lose $654.38+0 billion in the explosion, and Credit Suisse became the first investment bank to be sued by investors after the explosion.
After the outbreak of the COVID-19 epidemic, the Federal Reserve released a large amount of water, the banks had abundant liquidity, strong willingness to lend, asset prices rose, and the bubble risk increased. As a warning signal, this warehouse explosion shows that there are considerable systemic risks in the financial system. Financial regulators from Washington to Zurich and Tokyo are carefully studying the structural problems involved in the warehouse explosion, and investment banks and hedge funds may face adjustments to cope with the most significant changes since the financial crisis.
Why can't you see high leverage?
The reason for the explosion was that a Korean-American named Bill Hwang adopted a highly leveraged long-short strategy, but his investment strategy was to bet on a few stocks.
Large investment banks constantly provide Bill Huang with the leverage he needs, which means that for every dollar he invests, he will buy several times his favorite stocks, but the investment banks can't see all the bets. Because of its high leverage, the Archegos Fund managed by Huang Yanlin leveraged its own funds several times with its own $654.38+000 billion.
What is the overall situation of this position? From tens of billions of dollars, 50 billion dollars, even hundreds of billions of dollars, the estimated data are constantly rising. Morningstar estimates that its leverage ratio has jumped from the earliest 3-5 times to more than 8 times, which means that even if there is a slight loss, the fund principal will be quickly consumed.
With the rapid decline of stock price, Huang Yanlin may lose $20 billion a day. A former partner of Goldman Sachs commented that he had never seen such a rapid concentration and rapid loss of wealth. This is definitely one of the biggest single losses of personal wealth in history.
Samana, senior global market strategist at Wells Fargo Investment Research Institute, said that although Wall Street may have avoided a systemic disaster, the crash was an example of "leverage failure". This crash really reminds people of how many unknown levers have accumulated in the market, including brokerage accounts, options and credit fields.
After the financial crisis in 2008, Wall Street's original practice of high leverage and risk diversification was restrained to some extent. Why did this highly leveraged product full of systemic risks operate successfully, and why did the fund dare to gamble so much but fell short? Why can't investment banks predict these risks?
A family financial office that does not need to disclose its location.
The first reason why leverage is invisible is that Archegos is not an ordinary hedge fund, but a family office that exists only in the form of its own capital. This means that Bill Huang bears all the losses alone, so the outside world knows nothing about the highly leveraged operation mode of its products.
Before moving from hedge funds to family offices, Bill Huang's career was long and controversial. As a disciple of legendary hedge fund Tiger Management Company Juliens Robertson, Bill Huang founded Asian Tiger Management Company in new york with his own efforts and partial support from his former boss Juliens.
Huang Yanlin invested billions of dollars, focused on the Asian market, and once achieved excellent returns. However, in 20 12, because of insider trading, he agreed to reach a settlement agreement with the regulatory authorities of more than 60 million US dollars, and then turned the previously managed Asian Tiger Fund into his family office and renamed it Archegos.
It is understood that family financial institutions that specialize in managing their own wealth can usually be exempted from being registered as investment consultants with the US Securities and Exchange Commission. They don't have to disclose the size of their owners, executives or assets under management. However, if the fund accepts external investors, it needs to disclose relevant information as long as it holds more than $6,543.8 billion.
Bill Huang's strategy and performance have been kept secret, because there is no need to sell his fund to outside investors and there is no obligation to disclose any information. Even though Bill works in a well-known tiger fund, he is not well-known in the social circles of Wall Street and new york, so that few people in the investment community have heard of his name before the investment company went bankrupt.
The supervision of external interference is reasonable for small family financial offices, but if it is expanded to tens of billions or even hundreds of billions of positions through leverage, it is still unknown to the outside world and may constitute an uncontrollable "black hole".
This is also why after many Chinese stocks began to plummet, the market has not fully figured out who is behind it. It was once misunderstood by the market that China Stock Exchange faced the risk of delisting.
Highly leveraged The Secret Behind 3360 swap transaction.
Unlike the usual direct investment, Bill Huang does not directly hold the stocks he holds, but builds a portfolio through total return swaps. Swaps are agreements between them and investment banks. They are settled according to the change of share price, but the real positions are recorded on the balance sheets of these large investment banks, so they are more hidden.
It is understood that the bulk brokerage business is usually located in the stock department of an investment bank, which will provide cash and securities loans and various derivative trading tools to the fund and help with transactions. Total income swap is one of the swap derivatives they provide.
One advantage of the swap is that it allows investors like Bill Huang to open positions anonymously. The prime brokerage department of the investment bank will buy these shares and report itself as the beneficial owner. The positions of listed companies will only be shown as investment banks, but Archegos will actually take risks.
Because the swap contract only allows investors to invest a limited amount of money in advance, which means they have leverage. Archegos will provide a certain percentage of the position value as a deposit in cash, and the rest will be provided by the investment bank in the form of leverage.
Swap transactions are not only anonymous, but also highly volatile. As the swap transaction is settled every day, the profit and loss have been deducted. If the value of its portfolio declines, Archegos must provide a pledge again, that is, a floating margin. But if the value of the stock increases, the bank will pay the company cash.
Judging from the stock positions that have already exploded, the "holding" of investment banks is quite concentrated. Statistics show that investment banks
* * * holds at least 68% of the issued shares of the company and at least 40% of the shares of iQiyi. This leveraged derivative itself contains huge risks. Once the stock falls and the swap contract can't meet the additional margin, the investment bank will sell the stock held as pledge, which will further lead to the decline of the stock, thus further raising the margin requirement, which will often lead to spiral selling and pave the way for short positions.
Block trading sales
Increase the risk of "trampling"
In addition to the aforementioned China Stock Exchange, Archegos' biggest position is Viacom CBS, a media group, whose unexpected decline has become the fuse.
On March 22, Viacom announced the sale of $3 billion in shares and convertible bonds, and its share price plummeted by 30% in the following two days. Other than that, the other locations of Archegos are not ideal. As of mid-March, its share price has fallen by more than 20%. The deterioration of the position forced Archegos, which adopted a highly leveraged strategy, to touch the liquidation line, which was in jeopardy.
With the stock price correction, the enlarged leverage and concentrated positions aggravated the losses of Archegos, and investment banks began to ask Bill Huang to take the initiative to sell to meet his ever-expanding margin requirements.
Selling in block trades always makes investors uneasy, especially when the seller is unknown and the transaction price is lower than the market price. The market is worried that people close to the source will know some bad news that the market has not yet understood and start to act in advance. This not only prompted the trading departments of major investment banks to compete for selling because the stock prices entered a spiral decline, but other traders holding stocks also rushed to short positions without thinking of the reasons, resulting in "trampling". This also explains why the share prices of Baidu and other Chinese stocks fell so fast when they plummeted.
The other side of the high lever
The winner is the one who runs ahead.
On the one hand, in order to expand leverage, Archegos has established cooperative relations with brokerage departments of many investment banks such as Nomura Holdings, Morgan Stanley, Deutsche Bank and Credit Suisse. When providing leverage to Archegos, fragmented investment banks often don't know about other counterparties, thus accumulating higher leverage ratio invisibly.
On the other hand, when faced with risks, these closed institutions often choose to maximize their profits and try to sell their stocks before the stock price plummets. As the chaos escalates, whoever runs ahead seems to be the winner. On March 26th, before the market opened, Goldman Sachs had sold its position of $3.3 billion through a block trade, followed by investment banks such as Morgan Stanley and Wells Fargo.
However, not all investment banks think so. Credit Suisse is not the only bank with high leverage risk in derivatives, but it is one of the few institutions that have not closed their positions as quickly as other investment banks to reduce losses. The biggest loss in this round of short positions is Credit Suisse. Judging from the degree of losses, Credit Suisse Bank of Switzerland hoped to wait for the stock price to stop falling and rebound to reduce losses, so it did not continue to add margin.
Credit Suisse revealed that it suffered a loss of $4.7 billion due to the Archegos explosion, which was much higher than previously expected. This will cause the bank to lose about $654.38 billion in the first quarter. According to its 2020 annual report, the investment bank's net assets (after deducting goodwill) are about $41600 million, which means that this loss is equivalent to erasing one tenth of its net assets.
Credit Suisse subsequently fired at least seven executives, traders and risk managers, suspended its share repurchase plan of 654.38 billion Swiss francs, and cut its dividend by two-thirds. The annual bonus of senior executives of Credit Suisse Bank has been cancelled, and Rohnell, the outgoing chairman, also gave up the bonus of 6,543,800+5,000 Swiss francs.
This can not help but arouse people's doubts about the company's senior management and risk management mechanism. Due to the risks brought by its high leverage, on April 16, an American pension institution sued Credit Suisse, claiming that it misled investors and participated in excessive risk lending, which was the first lawsuit faced by the bank after the explosion. Affected by this, Credit Suisse's share price has fallen by 27% from this year's high.
Other participating investment banks are also facing considerable losses. Nomura Securities is facing a loss of about $2 billion caused by short positions, and Morgan Stanley announced on April 16 that it faces a loss of $9 1 1000 billion. At present, the loss caused by this explosion to the banking industry is about tens of billions of dollars.
This article is from China Fund.
Related question and answer: futures leverage loss 10 times. In futures, with leverage, investors can buy more subjects with less money. At the same time, leverage also magnifies the investor's rate of return and loss. Under the leverage of 10 times, when the subject matter purchased by investors rises by 10%, the long investors will realize the yield of 100% under the leverage of10 times. When the subject matter purchased by investors fell by 65,438+00%, the long investors lost to 65,438+000% under the action of 65,438+00 times leverage, that is, short positions. Therefore, when the leverage of futures is 10 times and the decline is 10%, (the increase is 10%), take long positions (short positions). For example, under the leverage of 10 times, investors make 100 lots on a futures target. At the time of purchase, the price of the subject matter is 40 yuan. After a period of time, the price of the subject matter was 36 yuan, which means it fell by 10%. At this time, the loss rate of investors has reached 65,438+000%, resulting in short positions. However, in the absence of extreme market conditions, when the investor's loss rate reaches 90%, the futures company will inform the investor to add margin, and if the investor does not add margin, it will be forced to close the position by the futures company. Futures, whose English name is futures, is completely different from spot. Spot is actually a tradable commodity. Futures are mainly not commodities, but standardized tradable contracts with certain mass products such as cotton, soybeans and oil and financial assets such as stocks and bonds as the subject matter. Therefore, the subject matter can be commodities (such as gold, crude oil and agricultural products) or financial instruments. The delivery date of futures can be one week later, one month later, three months later or even one year later. A contract or agreement to buy or sell futures is called a futures contract. The place where futures are bought and sold is called the futures market. Investors can invest or speculate in futures. Main features The commodity variety, trading unit, contract month, margin, quantity, quality, grade, delivery time and delivery place of futures contracts are established and standardized, and the only variable is price. The standards of futures contracts are usually designed by futures exchanges and listed by national regulatory agencies. Futures contracts are concluded under the organization of futures exchanges and have legal effect. Prices are generated through public bidding in the trading hall of the exchanges. Most foreign countries adopt public bidding, while our country adopts computer trading. The performance of futures contracts is guaranteed by the exchange, and private transactions are not allowed. Futures contracts can fulfill or cancel their contractual obligations through the settlement of spot or hedging transactions. Minimum fluctuation price of terms and conditions: refers to the minimum fluctuation of the unit price of futures contracts. Maximum fluctuation limit of daily price: (also known as price limit) means that the trading price of futures contracts shall not be higher or lower than the prescribed price limit within a trading day, and the quotation exceeding this price limit will be deemed invalid and cannot be traded. Delivery month of futures contract: refers to the delivery month stipulated in the contract. Last trading day: refers to the last trading day when a futures contract is traded in the contract delivery month. Futures contract trading unit "hand": Futures trading must be carried out in an integer multiple of "hand", and the number of commodities contracted in each hand of different trading varieties should be specified in the futures contract of that variety. Transaction price of futures contract: it is the value-added tax price of benchmark delivery goods of futures contract delivered in benchmark delivery warehouse. Contract transaction prices include opening price, closing price and settlement price. If the buyer of a futures contract holds the contract until the expiration date, he is obliged to purchase the subject matter corresponding to the futures contract; If the seller of a futures contract holds the contract until it expires, he is obliged to sell the subject matter corresponding to the futures contract (some futures contracts do not make physical delivery when they expire, but settle the difference, for example, the expiration of stock index futures means that the open futures contract is finally settled according to a certain average value of the spot index. Of course, traders of futures contracts can also choose to reverse the transaction before the contract expires to offset this obligation.