April 1

Weekend reading: Wall Street to Reddit – hold my beer

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Weekend reading: Wall Street to Reddit – hold my beer post image

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!

From Monevator

The Slow and Steady passive portfolio update: Q1 2021 – Monevator

From the archive-ator: A mortgage is money rented from a bank – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Boom! Liverpool house prices are up 16.7% since the first lockdown, followed by 15.7% in Oldham… – The Oldham Times

…while London led UK house prices down in March – Guardian

Will a law change relieve the plight of thousands of mortgage prisoners? – ThisIsMoney

Minimum wage rises for two million British workers – BBC

Pound at one-year high against Euro as prior UK growth figures are revised very slightly upwards – ThisIsMoney

How two decades of EU migration went into reverse [Search result]FT

Commission on Race and Ethnic Disparities: The Report [PDF]UK Gov

Zoom and other work-from-home tech darlings will suffer as the developed world returns to normal, judging by New Zealand – Yahoo Finance

Products and services

The shares ISA where going for a walk could reduce your fees – Which

PayPal launches crypto checkout service – Reuters

Three major banks now offer lottery-style savings accounts – ThisIsMoney

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Beware the fake Royal Mail text message scam – ThisIsMoney

Taxes due on cryptocurrency holdings [Search result]FT

Growth house de jour Ark Invest has launched a [US-listed] Space Exploration ETF – CNBC

Comment and opinion

If you play with FIRE don’t get burned – Of Dollars and Data

Reconsider your retirement plan, says Vanguard [Search result]FT

Will the Treasury bond rout continue? – Morningstar

Beware of the bubble – Mr Money Mustache

Coiled spring, or a cautionary tale from a strange year – Simple Living in Suffolk

Could UK house prices really boom for another five years? – Simon Lambert

Not wanting something is as good as having it – The Escape Artist

How to be a good role model for your kids when you’re wealthy – Humble Dollar

An oversupply of NFTs is going to kill the golden goose – Marker

Can the stock market crash during an economic boom? – A Wealth of Common Sense

The case for ‘Fundspiracy’ – The Evidence-based Investor

Is there are replication crisis in finance? [Nerdy]Alpha Architect & Cliff Asness

You can’t take it with you mini-special

Enjoying life while best you can – Abnormal Returns

Sell your hotdogs at a loss – Incognito Money Scribe

Revenge spending money to get back at life – Financial Samurai

Naughty corner: Active antics

Diving into data on the dividend alternative decumulation – Getting Minted

Buy and hold no more: the resurgence of active trading – Andresssen Horowitz

When investment trusts fire their managers – IT Investor

My ABC of investing [preceded by a brief portfolio review]Maynard Paton

Earnings estimates are flying higher for US companies – Dr. Ed’s Blog

A review of an environmentally-friendly active portfolio – DIY Investor UK

Coronavirus corner

Germany suspends AstraZeneca jab for under-60s on rare blood clots… – Sky

…is there a blood clot risk? – BBC

The Sudbury street where neighbours eat, dance and party together – BBC

Kindle book bargains

Don’t have a Kindle? Buy one – they’re great and save a ton of space!

The New Corner Office: How the Most Successful People Work From Home – Laura Vanderkam – £0.99 on Kindle

Business Adventures: Twelve Classic Tales from the World of Wall Street – John Brooks – £2.99 on Kindle

[Sorry: dearth of very low price money and investing options this week!]

Environmental factors

Sewage discharged into rivers in England 400,000 times in 2020 – BBC

India says net zero carbon targets are “pie in the sky”BBC

Off our beat

Message in a bottle – Indeedably

Mr Brightside: the hit that just won’t die – BBC

Mapping the world’s key maritime choke points [Graphic]Visual Capitalist

“I tried the iPhone app that makes you trip”Vice

This is the sign of a great thinker – Inc.

John Stuart Mill’s philosophy of equality – Farnam Street

And finally…

“If at eighty you’re not a cripple or an invalid, if you have your health, if you still enjoy a good walk, a good meal (with all the trimmings), if you can sleep without first taking a pill, if birds and flowers, mountains and sea still inspire you, you are a most fortunate individual and you should get down on your knees morning and night and thank the good Lord for his savin’ and keepin’ power. If you are young in years but already weary in spirit, already on the way to becoming an automaton, it may do you good to say to your boss — under your breath, of course — “Fuck you, Jack! You don’t own me!””
– Henry Miller, On Turning Eighty

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

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