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271 views(Monte) Carlo (de Lev) Dossi ditto Casio Dossi 31 Mar, 13 tweets, 3 min read Bookmark Save as PDF
To all those claiming that Archegos had no systematic consequences. When ignorance embraces arrogance. A quick thread. First, It’s true that this was neither an LTCM, nor Lehman moment. But Don’t be blind to the backdrop of fragility and systematic risks.
(1/N) Basically the fact that this catalyst did not start a chain of systematic risk unwind, does not mean said chain is not at a critical tipping point, nor that it will not be started as an indirect consequence of Archegos unwind.
(2/N) Pause for a sec to think what constitutes systematic risk. Clearly, the major, not only, cornerstone is LEVERAGE. Now look at these 3 cases (LTCM, Leh, Archegos). What do they have in common? Yep, leverage. And how did contagion spread? Yep, leverage unwind.
(3/N) There has not been a single moment in time, when leverage was as high as today. In all its components. Direct and indirect. Off and On Balance Sheet. Vanilla and Structured. Retail and Institutional. Cash and Options. Banks and non-banks. Across the f*ing board.
(4/N) Systematic risk is by definition unpredictable. So if you are a Bloomberg journo or a second rate analyst somewhere, don’t venture saying Archegos did not cause systematic risk. It hasn’t yet, but the factors underlying this unwind are prevalent.
(5/N) What causes systematic risk to deflagrate? Leverage in and by itself but also macro risks like YC steepening, rates vol, inflation, anticipation shifts on monetary policy, FX vol, etc...and surprise surprise all these risks have been playing out this year.
6/N) Pay attention to patterns: is this an isolated accident or has there been repeated unwinds and exposure liquidation so far this year? This is the 3rd major unwind YTD. Add the blow-up bond funds endured when mortgage convexity hedging kicked-in. Add the SPAC debacle.
(7/N) Add Greensill. Add Europe’s largest recent accounting fraud Wirecard. Add IPO market starting to show signs of fatigue. Add the mainstream media applauding and cheering concentration risk in ETFs ( $ARKK ). Do you not see a pattern so far?
(8/N) What makes Archegos so special? Multiple-counted collateral backing TRS handled by regulated banks with subsequent massive losses. You have to really be naive not to understand what is happening right now: PBs are reviewing every and each ISDA, every and each account.
(9/N) Counterpart risk and leverage will be brought down brutally across the board. Same will be happening at fund levels. Unwinding of leverage when leverage is so high has a good chance of not being orderly. Now here is when it becomes interesting.
(10/N) GS are the sharpest and most ruthless risk managers in the industry. No one gets even close. If this pile of toxic shit was sitting off B/S levered 6:1 on their books, take a moment to imagine the nuclear waste sitting off BS at...(should I say it?)
(11/N) Deutsche or Natixis or Barclays. But also and mostly outside the regulated banks. If this is what GS was carrying, imagine what the off BS of some large non-bank unregulated entities look like. Did someone say no systematic risk?
(12/N) I mentioned above that leverage was not the only factor constituting systematic risk. Counterparty risk, concentration, correlation, use of derivatives, complexity and ill-regulation all play a role. They all played a role in Archegos’ unwind.(End)
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