This is the foreshock that occurs before the larger seismic event and they are washing their hands clean so they aren't criminally liable when the organization fails later this year. Look at the Credit Suisse 5 year CDS chart so see how the market is pricing their risk.
Implied probability of default over a given time-span can be approximated with the equation P = 1 - ( e ^ ( ( -S * t ) / ( 1 - R ) ) where S is the CDS spread and R is the recovery rate.
The spread can be solved using the inverse S = ln ( 1 - P ) * ( ( R - 1 ) / t )
Probabilities and rates are both expressed as percentages not basis points.
S is the spread. t is years. R is the recovery rate.
Source is my notes from undergrad. Options, Futures, and Other Derivatives (9th Edition) by John C. Hull. Take all this with a grain of salt as I am not a quant. (but I am looking for a job!)
Doing some additional reading, there are some more precise approximations but they are less general.[1]
Last number I was able to pull up the $CS CDS was trading at 551 BP. Up from 446 yesterday (an all-time high for $CS)
Weird thing about the recovery rate is that everyone I've asked says the same thing, and I've traded CDS: the recovery rate is 40%. It's a bit of a free variable in that equation, and it matters. Trouble is how on earth do you estimate it? But random people I've met in the business will just say 40%, for every issuer, somehow.
I'm very interested in your term "idiosyncratic risk" having worked the Street and particularly fond of synthetics / swaps / GICs / etc. as a platform.
My mental picture is a very unsteady hub and spoke like in Wipeout or something where the parties and counter parties are intertwined in ways that the dynamics are, as you put it, idiosyncratic.
The 40% recovery rate isn't written down on the swaps actual terms?
Edit: I asked ChatGPT. "The recovery rate of a credit default swap (CDS) is typically specified in the contract and agreed upon by the parties involved. The recovery rate is the percentage of the notional value of the underlying debt that the protection buyer would receive in the event of a credit event, such as a default, of the reference entity.
To find the recovery rate of a specific CDS contract, you can refer to the contract documentation, which should include details on the recovery rate. This information may also be available from the CDS provider or through financial data providers such as Bloomberg, Reuters, or other financial news sources.
It's worth noting that the recovery rate can vary depending on the specific CDS contract, the reference entity, and the prevailing market conditions. Therefore, it's important to confirm the recovery rate specified in the contract and to keep track of any changes in the market or credit conditions that could affect the recovery rate."
What do you mean by idiosyncratic risk here? It seems as though you just read the word in an online forum where it was used in an context free manner. Read through investopedia.com/terms/i/idiosyncraticrisk.asp and tell me how it applies here?
It's a bit gutsy to ask someone who casually drops a CDS valuation formula into a conversation to justify themselves against an Investopedia article, as if a retail-oriented content farm is the definitive resource on finance.
To answer your question, "idiosyncratic risk" in this context means that an individual company might have problems that don't broadly apply to the rest of its industry. For example Credit Suisse might have management that is bad at running a bank, leading to repeated investment losses and regulatory actions well beyond what's normal for big multinational banks.
Look at the CS balance sheets over the past few years, or its stock price and PE ratio, or hell just Google "Credit Suisse books loss" and look at how many times they tried to stick their fingers in the wrong cookie jar. They got hit by the Hwang thing, they got hit by Greensill, and apparently they can't even accurately report how much money they're making (losing).
I wouldn't want to have any position on their equity either.
Can those of us who aren't a bit gutsy get a translation of these super interesting points. I'm not asking for a tldr, this is fascinating shit. I'm just asking anyone who has the time and interest to teach us uninitiated about what the Hwang and Greensill things were and how this company is apparently getting their hands stuck in all the wrong financial cookie jars.
Personally I’d probably check Patrick Boyle’s videos from Youtube as a start. IMHO he tends to do a good job in summarizing these cases (bear in mind I might not be the best judge of that, of course): https://youtu.be/hhHdtDyQD90https://youtu.be/2t4lGmNDiHo
I’d also welcome any interesting further reading on the subject!
I’m not going to stoop to your level and click your silly little link, as I don’t think there’s much investopedia can help me with this particular incident.
However, if you’d like to learn more about $CS and Archegos I’d recommend reading the Report put out by $CS on the topic.
Colloquially known as, “Credit Suisse Group Special Committee of the Board of Directors
Report on Archegos Capital Management”
It’s all about the material risks Archegos posed to Credit Suisse.
CS failed to capture a number of specific risks which were intrinsic to Archegos’ specific trading strategy. I won’t go through them all but they explicitly call out “idiosyncratic risk” due to their use of equity total return swaps, baskets of them, to hide equity positions. The risk being if the components of the basket, which were may have been billed to be diversified, all the sudden begin to move violently and in sequence, it would be a material idiosyncratic risk to $CS.
A large number of these swaps from 2021 are coming due this week and next. Including likely a large number today, March 15, which is a commonly used date for expiry of EuroDollar and Forex contracts, as well as presumably equity swaps as well?
Now, what’s in those swaps? Who knows, the CFTC announced an exemption back in 2021 allowing NO REPORTING of swaps through at least the fall of this year, which has subsequently been extended through 2025. So we shall see how the dominoes fall and only after will they let us see how they were setup.
A fudge factor that makes your models agree with observation? Yeah, pretty much. I was never an expert in CDS so I always wondered if other people had better ways of dealing with it. But nobody I've come across has ever offered anything other than 40%.
A peculiarity of finance as a field of study is that a lot of the people studying finance only care about direct applications and a lot of the people teaching finance had this mindset when they learnt.
It’s easy to end up with some poorly taught material. If you carefully looked at the model which gave rise to the equation you are considering, there probably is a very tangible meaning to the figure everyone is ball parking.
Quantitative finance really is a fascinating field, not because it will make you rich, but because you can dive much deeper into understand exactly what the market believes about the probability of different events.
Of course what the market believes doesn't have to be correct, but nonetheless very interesting to dive into.
Credit default swaps pay the full value of a bond when a bond defaults, and pay nothing when it doesn’t. If a 1-year CDS is 10% of face value there’s a 10% chance of default in a year
I'm not a quant or banker but I don't think that's true. When a credit event is triggered, there's an auction for recovery of the defaulted bonds/loans, and then recovery is what's left from par.
In addition, you have to take net present value of the settlement into account. Money compounds, it doesn't grow linearly. Let's say there's a 10% chance of a credit event in a year, a 0% chance today, and the chance grows linearly (27 bps/day). Even if the chance of a credit event grows linearly, and you hold the recovery rate steady, the net present value of the recovery amount grows as a function of e.
All that to say, I don't think what you are saying is correct.
Not the person you're replying to, but you can calculate the "implied volatility" using the current option pricing vs the current stock price. As the consensus of price movement (up or down) increases, the option prices go up.
I've been hearing for 9 months now that people think they're going under but I haven't heard a concise explanation of why. Can someone with more knowledge of the situation provide one?
> Can someone with more knowledge of the situation provide one?
They lost money on Archegos and Greensill, had a run in November, have run through a bizarre set of CEOs (one had a PI follow a wealth manager who was suspected of defecting) and generally been the poster child of big bank mismanagement.
I think part of it is general laypeople (like myself) think Archegos and other failures we've heard about are in the past. I wonder if the reality is that Credit Suisse (or other banks) still hold onto whatever losses resulted from those failures and then try various things to shore up/mitigate those losses as a business should do. When they've exhausted those various methods and/or the value of other assets (securities, bonds, bundles of loans aka MBS, etc.) have gone down dramatically then their balance sheet is a mess. There could be a point of no-return somewhere along the line if they've been horribly mis-managed and taking on or permitting customers to take on too much risk. That point of no-return might mean contagion to other banks/financial firms.
they're also the poster child - over many decades - of letting fraudulent/organized crime money run through their systems, with the associated lack of controls and morals that comes along with that
The thing is with the big Swiss banks like UBS, Credit Suisse etc is they regularly oscillate business models between "We are a full service universal bank" and "We are a private bank with a bit of investment banking attached to keep our HNWI clients happy."
Where they are in that cycle typically depends on how much money investment banking/trading made over the previous year or two.
Credit Suisse is a investment bank. UBS is a typical personal bank for majority of Suisse people and they also offer a few personal investment options. They have a separate investment side.
I understand 'material weakness' to mean falsified/faked/misleading/corrupted. 1) what happened to basic language?, 2) do the legal/PR people using these words honestly believe they are fooling anyone?
My understanding is that "material" is a technical term in accounting. A "material" effect is one that will have a noticable impact on the business.
Example: $100 missing from a single petty cash account would have almost no impact on a multi-site business and wouldn't be reported as "material" losses. $100 missing from every petty cash account would be different and probably would be reported as a "material" deficiency because it means there is an issue with controls.
disclaimer: My experience with accounting is a single accounting class and having run a budget for a business with $60k monthly for a few months before I left.
They're covering their asses so they don't get sued for defamation.
If they say 'fraud', 'theft', 'lying' they are implying intent, which can be hard to prove (maybe they were just incompetent or mislead by someone else?).
A material weakness means there is a significant to the business (aka material) difference between what was written/reported, and what investigation found was true.
WHY that is doesn't matter for the purposes of clawing things back, and since they have solid proof of it, there you go.
Speculating on the reason or if a crime was committed until it's proven in a court of law is what gets high powered and highly paid attorneys excited, and the folks who are getting fired and the money clawed back can still afford those in spades even afterwards. Credit Suisse probably feels they already have enough problems.
That's correct. And the fact that the board disclosed it rather than the auditors is a big "we're caught"/"emperor has no clothes" moment. Who's the audit firm and when are they losing their license?
Nobody cared or the proletariat was coincidently not shown? this scandal seems to have been completely swept under the rug lending my argument credence. Also, were you living under a rock during occupy? These movements got systematically infiltrated and dismantled by Fed’s using obscene methods, like getting suspects pregnant. It’s unlikely we’ll ever actually know how bad their methods were because they were successful at forcing people back underground. Make no mistake though, these people are still around and still agitating, they’re just smarter now.
>dismantled by Fed’s using obscene methods, like getting suspects pregnant
The article says:
>One of the spies was Bob Lambert, who has already admitted that he tricked a second woman into having a long-term relationship with him, as part of an intricate attempt to bolster his credibility as a committed campaigner.
I guess the statement is technically true in the sense that the group got infiltrated by the feds, that somehow led to the group being "dismantled", and because the infiltration involved getting the activists pregnant you could say that it was "dismantled by [...] getting suspects pregnant". However, it's massively misleading because reading it at face value makes me think the government was getting people pregnant with the explicit aim of preventing them from protesting (because they're too busy being pregnant). I'm not sure why you didn't go with went with that framing rather than a more reasonable one of "dismantled by Fed’s using obscene methods, like having children with activists to gain their trust".
CS has had a range of challenges with its leadership and operational practices for years. This is just the latest in a string of events, some of them borderline just bizarre, calling into question the competency of the bank’s leadership its and long term direction.
Billion, million, googol, whatever. For CNN and Swiss bankers it doesn't make difference. Executives assuring that everything is all calm and orderly means how many breaths it has left?
Is this one of those billion = long million mistakes in some languages? Not everyone agrees that a billion is 1000 million and it can get really confusing sometimes.
> Other countries use the word billion (or words cognate to it) to denote either the long scale or short scale billion. (For details, see Long and short scales § Current usage.)
> Milliard, another term for one thousand million, is extremely rare in English, but words similar to it are very common in other European languages.
Probabilities matter. So the machine ends up with a model of human language, in which errors are present but uncommon, same trick a child is doing. For other reasons I was looking recently at the Wug test. If you run that test on very young kids in Japan, two year olds pass no problems, in Japanese there's no plurals so, "1 Wug" => "2 Wug". But English native kids at this age struggle, "1 Wug" => ??? they're aware there's a rule for how this works, but they aren't yet confident what the rule is. A year or two later, "1 Wug" => "2 Wugs" they have learned the rule, make plurals by adding a -S sound to the word.
I expect ChatGPT can pass the wug test. In fact, unlike a random two year old it will certainly have read about the actual Wug test, so definitely don't ask it about that word in particular, make up a new word.
Now, human kids are learning a spoken language, the model is learning a written language, but they're both linear so it's not that different.
Contagion is spreading now. It’s interesting that we’re calling it “contagion” isn’t it? I think the real problems are deeper, like cancer, and it’s systematic. This isn’t just a light cough with some sniffles. We’re talking a body riddled with pus-filled tumors.
Ok. How is what you are saying falsifiable? What do you even mean that "contagion is spreading"? What is the specific claim or prediction that is being made?
That’s the normal state of things in Wall Street. Do whatever you can to make money, greed is good etc. They’re not fools though, it only works if there’s some truth in it.
Not to defend Wall Street, but people act like “greed is good” only applies to them.
You would have to be blind to not see every industry and person, from execs to engineers, seeing greed is good. I mean, weren’t 400k+ google engineers unionizing? Are the start-up craze of the past 10 years and crypto craze in 2020 just a bunching of people trying to get rich quick?
I've been watching this firm slowly die via a thousand self inflicted wounds since 2016. I wish someone had the courage to just close up shop instead of barely limping along.
On a side note I think I figured out part of Fed's plan.
Basically the key is to stimulate inflation so that they get the chance to hike rates. By doing so many people choose to stop investing in stocks, funds and more on longer term saving accounts.
Essentially this heals the asset-liability structure of financial institutions. They now have liabilities of longer term so they can issue longer term loans. This eventually will stimulate real economy.
The fed respond to inflation *AND* unemployment rate, and they respond to their own forecasts of those things.
The fed didn't stimulate inflation by choice. The rates were at 0 for most of the decade and inflation was very low.
Increasing interest rates was a response to inflation -- partially created by QE and stimulus spending, supply chain disruptions, and other supply/demand shifts.
As for how interest rates work: they make borrowing more expensive. There's a bunch of second-order effects from that but borrowing cost and time value of money are the main thing to keep in mind.
The Fed wants to push unemployment. To save the economy previously they injected tons of money and need Billionaires and big businesses (because the injection process is not directed to your average mom and pop) to use that money. Now that they need to reduce money, they take away jobs for the working class. Nice system. Free government money to some and government pushing for you to lose your job for others, the two levers the Fed loves.
The FED is not trying to push unemployment, they just accept it as a cost to curb inflation which is always enemy number one. Interests rates and unemployment are correlated; you make borrowing more expensive, people invest less and become more conservative, often by trimming.
Pricing is the primary economic signal that guides investment in a capitalist system. When inflation runs too high the pricing signals break down as the result of speculation and hoarding. That can lead to malinvestment.
Historically the Fed’s job was to “take away the punch bowl” and wring the bad debt and malinvestment out of the system before it became a systemic risk. Since 2008 the system has primarily focused on how to move the bad debt around to avoid default.
