Market Commentary: Archegos

Perhaps the One Call You'd Prefer Not to Get

You’ve probably read how Archegos “blew” up the market.

It sounds like the result of a deliberate decision by Archegos.

What it seems happened is that A couldn’t make a margin call, prompting creditors to sell off the pledged shares.  Billions of USD worth.  No small beer here.

Also there has been a lot of talk about Archegos' responsibility, but not so much about those who provided the explosives.

Some additional observations.

Sophisticated Investors

No so long ago, I read an article in the financial press, either the FT or WSJ, discussing the “big boys’ market”.

That’s the market for supposed sophisticated investors. 

It is generally a tenet of free market economic dogma that regulation and protections aren’t required in this market, because unlike retail investors, the “big boys” know enough to look out for themselves.

As near as I can tell, two of the big boys apparently managed to do just that. Others not so well.

Risk Management and Profit

It’s also a story about the dynamic tension in firms between those two elements.

As sadly is the case, the lure of profit overcomes the hard cold facts of risk management.

No surprises here.

We’ve seen this in Gamestock where the short positions were multiples of the free float, setting up a “classic” illiquidiity trap for the shorts to name just one of many such occurrences.

LTCM.

Greensill.

Mr. Hwang was encumbered by some past regulatory enforcement baggage. 

But redemption is possible in the market when accompanied by the right level of profit to wash “sins” away. 

The Sermon at the Bourse

Reuters had an interesting article under the title “Comeback quashed for faith-driven investor Bill Hwang.”

In it he is quoted as saying: 

When we create good companies through the capitalism that God has allowed, it enhances people’s lives….God delights in those things.

I’ve searched my copy of both the so-called Old Testament and New Testament and cannot find the Sermon at the Bourse. Perhaps I missed it. 

Perhaps, this teaching is based on more skillful exegesis than I am capable of. A not unthinkable possibility.

Analyst Disclosure: I don’t hold much with anthropopathism given my categorical rejection of anthropotheism. (See Xenophanes.)

But for argument’s sake let’s take Bill at his word.

Or perhaps I should say the Lord’s word?

A host of theological questions come from his statement.

Here are but a few.

If God is delighted at times, it seems that logically at other times He must be (a) sad or (b) neither glad nor sad.

Given the size of the reported losses at Archegos, Nomura, Credit Suisse might God be severely depressed today?

Besides the emotions of delight and sadness, does God have other emotions?

Does God feel hot or cold depending on the season of the year?

If God allowed capitalism, did He also allow socialism?

Assuming the translation of Bill’s remarks is accurate, “allowed” doesn’t seem to be much of an endorsement of capitalism by God.

God has apparently “allowed” all sorts of things. 

Not all of which are good: Brexit, Disco, Spam, supply side economics, lost matches and missed trophies by Arsenal,  Not to mention more serious events.

If all the above questions sound absurd to you, you've gotten my point about the absurdity of the assumption that got us here as well of the validity of the two "a's" above.

Investment Bank Analyst “Angst” – Bootcamp It Takes a Team (Preferably in Person)

Borstal Investment Bank UK
Had Greater Success with More Cohesive Teams

Having called out those who offered theories why IB analysts were experiencing angst, today I’m here to offer my own theory. Kettle meet pot.

In an earlier post, I described the employment “life” of IB analysts as composed of three elements: audition, apprenticeship, and bootcamp.

A military bootcamp is designed to break old individual “molds” and create a new communal one.

What does this mean?

The prioritization of a single shared mission over personal identity, individual goals, ways of thinking, whatever.

In the military “national defense” is the replacement priority mission.

The civilian is turned into a soldier whose primary goal is to fight and perhaps die for the country.

Bootcamps are generally grueling. Not particularly attractive experiences.

50 for 50. Fifty pound backpacks for 50 mile hikes. Physical and military arts training.

Some of this well required by the needs of the apprenticeship – developing the aptitude and attitude to “do the job”.

But if you look closely, much of it is of doubtful direct use in a military situation. 

Soldiers who can make their beds so tight that a quarter will bounce when dropped on them are not generally more effective than others.

Soldiers whose boots are polished to a blinding shine and whose uniforms are crisply ironed don’t necessarily do better in war than those clad in black pyjamas or wearing flip flops.

The goal of these practices is psychological.

To “break” the civilian and once “broken” turn him into soldier.

An important element in this is making the individual part of a team.

Mission first, the team a close second, individuals third,

There’s a similar process in Investment Banking.

With similar “character redevelopment” going via the process. Long hours, face time, etc.

Here the communal mission is the priority of the deal. It takes precedence over everything else.

The team is created “We are Morgan Stanley”.

This poster approved by HMG.

As in the military, there is another function to the team.  To lessen the strains of bootcamp.  To make team bonding stronger.

First, misery loves company.

When you’re working long hours, it’s comforting to see someone beside you slogging away as well. Or to hear that another team worked 36 hours straight without a break. Someone has it worse than you!

Second, hardships become badges of honor and rites of passage.

Team B may have worked 36 hours in a row, but your team has worked 37. 51 for 51.

Third, the team offers a sympathetic ear to release one’s frustrations.

They say there is grumbling in the sergeants’ mess about more senior officers.

No doubt the O-1s and the O-2s grumble about those whose O’s have higher numbers.

In the IB world one can complain to one’s peers about the behaviour of one’s team leader, the more senior chap whose dithering or change of mind caused work to be delayed or redone, the last minute “Richard” (more familiarly known as “Dick” to analysts with a few months under their belts) who came up with apparently meaningless revisions to the pitchbook extending the time to completion.  

It's "us" against the "world".

Fourth, at times the unit may be rewarded or individual team members’ distinctive services reognized and honored. 

A timely “pass”. A bump up in rank. Recognition!

In the IB world, in-house dinners are usually provided for evening work. Some times the “usual” pizza. Sometimes, depending on the team leader, more elegant fare.

It is claimed that at some firms some team leaders have non-official “bottles” from which team members would take a libation after the slide deck was finished to “seal the deal”.

A “black car” to take one home – an indication to one and to all those who might see about the importance of one’s position as well as generally being more convenient.

A team leader mentioning your name in front of your fellows. “Nice work on the slide deck. The MD making the pitch mentioned that he especially liked the graphic on the transaction structure. Kudos to you, Rupert, for the suggestion.”

A liquidity preference function – ideally the day before one of those rare off-days.  Either team member organized.  Or hosted by the team leader.

An off-campus off-day celebratory meal -- “somewhere nice” when a particularly big fish was landed. Billed (or attempted to be billed) as team development: “Lessons learned from the [Name] Pitchbook.” (Let's chip in and buy "Dick" a trip to Bosworth Field).

When there aren’t opportunities for these sorts of in-person interactions, bootcamp is even more difficult.

It's also harder to develop the sort of camaraderie among one's fellow rookies over Zoom as one would in person together in the trenches.    

Additionally, unlike a military bootcamp where one's team is all rookies, at an IB the rookie joins an existing team members of which have existing relationships with one another and the shared history of "past battles".  

Over Zoom one is on one's own among the other rookies and the veterans. 

I think that explains a good deal of the angst. 

As well, there is the human factor.

Some bosses don’t know when to lighten the pressure.

Some folks aren’t a “fit” for the demands of IB. That’s nothing against them or AA.

A note on terminology. 

“Slide deck” always sounded to me like the cruise ship deck for kids. Perhaps, it was as well that it carries the connotation of three card monte. 

“Pitchbook” sounds more congenial and substantial.  It's not a collection of slides, but a book.  

With a bit of athletics involved.  Sports is a beloved business metaphor.

And, if one had a particular rough experience preparing one, one could always “pitch” it against a convenient wall.

Investment Banking – Why is It the Way It Is? Part 4 The Nature of the Analyst Position: Audition, Apprenticeship, and Bootcamp

 

Analysts are generally hired for a fixed period.

At the end of which depending on performance and need, they are either invited to remain with the firm as associates or are bid adieu.

One can think of their stay as a prolonged audition.

As we know from watching shows like Britain’s Got Talent, competition is intense. Sometimes the judges can be direct, even cruel. 

And here there are no “golden tickets” or “buzzers” for contestants. 

It’s often an uncomfortable experience, especially since many are called but few are chosen. 

The process is designed to turn “kids” into deal generating machines.

See Part 2 of this series about the pitch intensive culture. 

Think bootcamp for an elite military service. 

It is also a crash course whose goal is to endow the analysts with the experience and skills to discharge their tasks with greater rapidity and competence. 

And at least a feigned indifference to demands on their time.  

Coming soon IB pathologies explored and explained.