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Vivax
22089 Posts
An exemplary story of how a bank cooperated with an hedgefund to pump shares they own, blow up the fund, sell the shares before it becomes news and leave another bank as the sucker that thought it could gain from it. Obviously those are the hedgefunds 'doomed bets' in the narrative, not a scheme. Which bank + hedgefund combo is next I wonder. | ||
KwarK
United States43203 Posts
On April 09 2021 06:36 Vivax wrote: Wouldn't the best next question be: Who bought the shares at a discount? And how many of them are going to be sold on an exchange? An exemplary story of how a bank cooperated with an hedgefund to pump shares they own, blow up the fund, sell the shares before it becomes news and leave another bank as the sucker that thought it could gain from it. Obviously those are the hedgefunds 'doomed bets' in the narrative, not a scheme. Which bank + hedgefund combo is next I wonder. The bank didn’t really own the shares. They held them as collateral but the rights to the economic benefits of the shares were held by the fund. The bank got fucked here. They weren’t complicit, just stupid. The shares also weren’t really sold at a discount. The value was pumped and was about to go into free fall. The bank tricked funds into taking the overpriced shares off their hands by offering them at a discount from the pumped price, selling them, and then flooding the market with the dump. | ||
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Vivax
22089 Posts
Morgan Stanley was the biggest holder of the top 10 stocks traded by Archegos at the end of 2020 with about $18 billion in positions overall, according to an analysis of filings by market participants. Not really discernable from this passage. Sounds like the scenario you mentioned but also like Archegos bought mostly stuff already owned by the bank depending on the interpretation. Probably just not a text that tells the story fully accurately I guess? It's just hard to believe two big shot banks end up on a loss there without fraud being in play somewhere. Why should a hedgefund use CFDs as primary vehicle otherwise. Up to regulators to find out but it'll be the usual slap on the wrist + bailout if needed. | ||
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KwarK
United States43203 Posts
On April 09 2021 07:37 Vivax wrote: Not really discernable from this passage. Sounds like the scenario you mentioned but also like Archegos bought mostly stuff already owned by the bank depending on the interpretation. Probably just not a text that tells the story fully accurately I guess? It's just hard to believe two big shot banks end up on a loss there without fraud being in play somewhere. Why should a hedgefund use CFDs as primary vehicle otherwise. Up to regulators to find out but it'll be the usual slap on the wrist + bailout if needed. If I may be blunt, you don't understand this story. So a fund goes to a bank and says we'd like to invest on margin. When you invest on margin you put up, for example, 20% of the money and the bank puts up 80% of the money. You pay them interest on the 80% you're borrowing. If the investment goes up then you can sell everything for a profit and only owe them for the interest. If it goes down then the bank will sell everything at a loss and then take back their 80% of the initial money from the proceeds which guarantees they get their cash back. For example you buy 100 shares of a company at $1. You put $20 in and the bank puts $80 in. It goes up to $1.10/share. You sell your 100 shares for $110, pay the bank back their $80, you've turned your $20 into $30, that's 50% profit on a 10% price movement. Now let's say it goes down to $0.90/share. The bank says "this is getting risky" and sells the 100 shares for $90. They take back their $80 and you're left with $10 from your $20. That's 50% losses on a 10% price movement. This seems a pretty safe bet for the bank on the surface because they have the right to exit the position whenever it looks risky and you take the first losses. They only ever lose money if it drops from $1/share to below $0.80/share overnight and they can't sell your position fast enough. That means that for a bank the main threat to margin is volatility and therefore the main proof against volatility is diversification. If you're investing on margin in a basket of different non correlated stocks then it's unlikely that all of them will drop overnight. The more diversification, the less volatile the collateral, therefore the more margin they're willing to offer. The fund bought a bunch of stocks on margin. The act of the fund buying those stocks pushed the price up which returned some nice paper profits to the fund. Rather than realize those paper profits by selling the stocks the fund then used those profits to buy more of the same stocks on margin, increasing the amount borrowed. Remember in our first example when the bank matched the $20 of shares with $80 of their own and it went up 10%. The fund in that scenario would now have $30 and, if the bank was still offering 4:1, could increase the amount of margin from $80 to $120. That increased margin buying action pushed the stocks up further which yielded the appearance of more profits which could be presented to the bank as a more valuable security and increased the margin the bank offered. The bank thought this was safe because they thought that the fund was a minority holder of the stock and that they were the only bank letting the fund do this. They thought the stocks were diversified and were unaware that the fund's own margin borrowing was the main reason the stock price was increased. They were also unaware that all these supposedly diversified stocks had all increased for the same reason, investment by the one fund, and therefore were all exposed to the exact same risk. What they thought was a relatively stable basket of diversified collateral which could be liquidated for near the book value was actually a massively inflated basket of highly correlated collateral for which there was not a ready market to buy. A decrease in value of any one of the stocks would decrease the value of the collateral which would trigger liquidation of the margin loans for all of the stocks which meant the banks would have to firesell all of these supposedly non correlated stocks which would cause the apocalypse. Under normal conditions if there is concentration of ownership in a company by a single fund then the company discloses that in their ownership reports. However due to the way they structured their margin borrowing the bank retained the legal ownership of the stock but gave the borrower the rights to any profits/losses from the sale of the stock. So the borrower had the effective benefits of ownership but their name never appeared on the ownership reports, the bank's name did. It's like if your brother asked you to buy a house for him and told you he'd give you the money to buy it, he'd live there, he'd do any upkeep and pay insurance/taxes, he'd decide when to sell it and to who, and if it was sold at a profit/loss then he'd keep that. But on paper it's your house. When the banks did their due diligence they didn't know that the fund represented almost all the buying interest in the shares and owned most of the stock because it wasn't in the name of the fund. Then the stock went down a little and the bank decided that it looked a bit risky and tried to sell the stock to close the position. But when they tried to sell it they realized that there weren't any buyers at the inflated price because the only party that had been buying the stock was the now bankrupt fund that had been buying it with the bank's money. And they didn't have a little stock to sell, they had most of the stock of these companies to sell. They found themselves seizing the collateral and in the unfortunate position of no longer having the cash they loaned out, just most of the shares of a massively overpriced company. This was the dump part of the pump and dump. Morgan Stanley knew they were going to dump all of the shares and that the act of dumping the shares onto a market that didn't want them would inevitably tank the stock price to pennies on the dollar. But they also knew that other people didn't know that this was a pump and dump. And so hours before the dump part of the pump and dump started they offered other funds an option to buy the dumped shares at below the pumped market price. Other funds figured they'd take them at a discount and flip them because they didn't know that sky was falling. Morgan Stanley took their money and then, when the market opened, dumped the rest. The banks got scammed and took a big hit because they didn't do due diligence on where their money was going and didn't consider the risks of increasing their margin loans using the proceeds of existing margin loans as security. $200m of fund money got turned into $20b by the banks and then that $20b got turned into shit. Credit Suisse took a big hit. Morgan Stanley also took a big hit but managed to sell some of the worthless stocks to other investors before dropping the bomb. It’s exactly like the Margin Call clip linked above. A bank recognizes they’re holding assets that their risk department thought were stable but are about to crash and so they hit up their contacts and offer to sell them a little below face value and then crash the whole market afterwards. | ||
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Yaqoob
Canada3337 Posts
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GreenHorizons
United States23451 Posts
It’s exactly like the Margin Call clip linked above. A bank recognizes they’re holding assets that their risk department thought were stable but are about to crash and so they hit up their contacts and offer to sell them a little below face value and then crash the whole market afterwards. I haven't seen the movie (did watch the clip) but as I understand it, it's based in the 08 crash, so this is like a sequel with the same bank doing it again? | ||
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KwarK
United States43203 Posts
On April 09 2021 11:03 GreenHorizons wrote: I haven't seen the movie (did watch the clip) but as I understand it, it's based in the 08 crash, so this is like a sequel with the same bank doing it again? Different bank. The 08 one was basically the banks that bundle and resell mortgages have mortgages in their inventory because it takes time to resell them. They buy 10 of them at $1, package them into a mortgage backed security, and sell it a week later at $11. Most the time that’s fine but if one week the mortgages drop in value from $1 to $0.50 then that package you’re preparing is only going to be worth $5.50, even though you paid $10 for the mortgages that it’s composed of. The movie is them realizing that they’re so over leveraged that the loss in value on the inventory they have on hand while they flip it will sink the entire bank. So they stop bundling them and sell their entire mortgage inventory to rival banks in the same business at $0.90/each. They take a loss but they get the inventory off their books before the real crash hits. In Margin Call it’s the party that borrowed too much that sells it’s inflated inventory at a “discount” to friends before trashing the entire market. By getting 90c on the dollar they can cover their debts and survive. In this situation it’s the party that loaned too much that realizes that when the borrower defaults they’re left holding a bunch of worthless collateral which it then sells at a “discount” to friends. In either case you should be wary when a bank calls you up and asks if you want to buy something that’s totally worth $1 for $0.90, even if they tell you it’s like free money. | ||
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Vivax
22089 Posts
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KwarK
United States43203 Posts
On April 09 2021 11:50 Vivax wrote: Thanks, it's a nice explanation. So if the ownership is retained by the bank, doesn't that also affect their own leverage? IE they have to account for the deleveraging of the fund and in turn their own leverage, so end up selling things they are owners and not just custodians of. Ergo when a bank overlooks these issues on purpose, doesn't that in turn allow them to get more leverage for themselves (creating an incentive to exploit this type of behaviour)? The ownership here doesn’t really matter. Let’s say you go into a pawnshop and pawn your watch for $100 to be repaid with 10% interest in a month. It’s still your watch, it’s collateral you’ve given them for a loan but they can’t resell it or destroy it because it belongs to you. Now let’s say you go to a friend and sell them your watch because you need $100. But you tell your friend that you really want it back and will have the money to buy it back in a month so he makes a pinky promise that you can buy it back for $110 in a month if you want. The option (promise) entitles you to buy your watch back from them for $110 in a month. In example 1 you own the watch until you default on the loan. It’s collateral being held by them but they can’t sell it and if someone wanted to pay $200 for it then you could sell it and use the money to reclaim it from the pawnbroker ($100 + $10 interest) and keep the profit. The pawnbroker can’t own it and sell it for a month. In example 2 the friend owns the watch until such a time as you buy it back from them. However the option contract gives you rights over it that are functionally identical to example 1. The friend can’t resell it because they need to be able to return it to you. If someone offers you $200 for it your friend is obliged to sell it back to you for $110. They don’t really own it for a month. The fund in this case should have done option 1 and pledged stocks owned by them as collateral on their margin loans. Instead they filed some papers to do option 2 but the point is that they’re functionally identical. The ownership wasn’t really retained by the bank, that’s just some nonsense the fund wrote on their paperwork. From an accounting perspective the bank gave cash away (reduced one asset) and recorded that the fund owed them money (increased another asset). The shares aren’t the banks asset because they don’t have rights to them until default. They don’t become the banks asset until down the line when they record that the debt owed to them is worthless (reduce one asset) but they have all these shares from collateral (increase another asset). The bank can’t have both the debt owed to them and the collateral securing that debt on the books simultaneously because you don’t get rights to the one until the other is gone. Same reason they can’t simultaneously have the cash repaid to them and the debt owed to them on the books. You’re hung up on the bank ownership of the collateral thing. That’s just lawyers playing games. It’s not real. | ||
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DoctorHelvetica
United States15034 Posts
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{CC}StealthBlue
United States41117 Posts
edit: | ||
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{CC}StealthBlue
United States41117 Posts
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Vivax
22089 Posts
Granted, it implies that bitcoin is some off the books financial instrument. I got myself some for online payments, not as investment though. It's a decent alternative to online payment providers as more services adopt it. | ||
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GoTuNk!
Chile4591 Posts
On April 15 2021 05:08 Vivax wrote: Seen a theory float around that bitcoin is designed as an inflation buffer (so it doesn't flow into other assets or in other words: You get paid for buying bitcoin vs buying real goods as the money supply skyrockets). Granted, it implies that bitcoin is some off the books financial instrument. I got myself some for online payments, not as investment though. It's a decent alternative to online payment providers as more services adopt it. Yes, btc is an alternative to national governments trashing their currencies printing money | ||
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iPlaY.NettleS
Australia4355 Posts
On April 16 2021 01:00 GoTuNk! wrote: Yes, btc is an alternative to national governments trashing their currencies printing money Yes, this is why countries with failing currencies keep banning cryptos.Turkey with its failing Lira is today’s example https://www.reuters.com/technology/turkey-bans-use-cryptocurrencies-payments-sends-bitcoin-down-2021-04-16/ | ||
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{CC}StealthBlue
United States41117 Posts
Morgan Stanley (MS.N) lost nearly $1 billion from the collapse of family office Archegos Capital Management, the bank said on Friday, muddying its 150% jump in first-quarter profit that was powered by a boom in trading and deal-making. Morgan Stanley was one of several banks that had exposure to Archegos, which defaulted on margin calls late last month and triggered a fire sale of stocks across Wall Street. Morgan Stanley lost $644 million by selling stocks it held related to Archegos' positions, and another $267 million trying to "derisk" them, Morgan Stanley Chief Executive James Gorman said on a call with analysts. "I regard that decision as necessary and money well spent," he said. The bank did not disclose losses right away because they were not deemed material in the context of its overall results, he added. Morgan Stanley is not alone in nursing losses as a prime broker for Archegos. Switzerland's Credit Suisse Group AG (CSGN.S) and Japan's Nomura Holdings Inc (8604.T) bore the brunt, having lost $4.7 billion and $2 billion, respectively. Goldman Sachs Group Inc (GS.N), Deutsche Bank (DBKGn.DE) and Wells Fargo & Co (WFC.N) also handled Archegos positions but exited them without losses, Reuters and other media outlets have reported. read more Morgan Stanley did not realize that Archegos had similar, concentrated positions at several banks across Wall Street, Chief Financial Officer Jonathan Pruzan told Reuters. As such, the collateral requirements it imposed were only reflecting Archegos's particular risks at Morgan Stanley, not the risks across the fund's broader portfolio. Morgan Stanley has reviewed its prime brokerage business for similar problems but not found any, Pruzan said. The bank is looking more broadly at its method for stress testing, and will recalibrate positions with clients as necessary. "We are never happy when we take a loss," he said. "But the event is over...and we will learn from the experience." The Archegos saga is likely to have regulatory repercussions, however, with a slew of U.S. watchdogs as well as the Senate Banking Committee all probing the incident to better understand why some banks were so exposed to a single client. Gorman appeared exasperated at times during the call as he faced repeated questions from analysts about Archegos, distracting from the bank's otherwise stellar performance. Source | ||
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khurramjamshaid
1 Post
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britanyweel
Australia2 Posts
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{CC}StealthBlue
United States41117 Posts
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Acrofales
Spain18108 Posts
On May 12 2021 12:23 {CC}StealthBlue wrote: Think investors making a fortune or even a sizeable gain through say Bitcoin is a little too late. Only chance now is a secondary Crypto to gain mainstream attention and economic traction like DOGE, but even that is way too early to see it as viable. I don't think it's too late to invest in Bitcoin. It has been an absolute rollercoaster that can make you millions or lose you all your money. It still is. The dogecoin is a ridiculous joke that just got hyped because all crypto got hyped. It started as a joke and still is a joke. Just a joke that made people millions. It won't gain serious economic traction because it's a joke. It could make you millions tho.. but it could also lose you all your money. Anybody "investing" in crypto is playing with fire. Crypto is fun for speculation. | ||
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