Archegos Capital Management:

How to Lose $30bn in Two Days

Group One
Tareq Bushnaq, Adam Chahine, Alberto Fedi, Alessia Gambato. Sindre Gisholt,
Alex Mastromarini, Hashem Nabulsi
Wednesday, March 1st, 2023
Table of Contents

I. Bill Hwang’s Early Life

II. Tiger Management
III. Tiger Asia Management
IV. Equity Swaps
V. Archegos Capital Management
VI. The Collapse of Archegos
VII. Family Offices vs Hedge Funds
VIII. Aftermath

x
Bill Hwang’s Early Life
Who was the man behind the Archegos scandal?

▪ Sung Kook Hwang, aka Bill Hwang, was an American investor and trader
▪ Hwang was born in South Korean in 1964, but studied in the US
– He earned an economics degree from UCLA, and an MBA from the
Tepper School of Business at Carnegie Mellon University
▪ Interestingly, Hwang was a deeply religious individual – his father was
even a pastor
▪ As a devout Christian, he was known to give millions to various non-
profit initiatives and even co-founded one of the nation’s largest Christian
charitable foundations, the Grace and Mercy Foundation, which has
nearly $500 million in assets

“I like God more than I like Money.”

- Bill Hwang

x
Tiger Management
How did Bill Hwang get his start?

▪ The Tiger Management hedge fund was founded in 1980 by Julian Robertson
▪ From its inception to its 1998 asset peak, the fund returned 31.7% per year
after fees – significantly higher than the 12.7% annual return from the S&P500
over the same period
▪ At 33, Hwang, met Robertson while working at Peregrine Investment Holdings
▪ He quickly stood out by introducing Robertson to the Korean markets
▪ After the fund closed in 2000, Hwang, now dubbed a “Tiger Cub,” started his
own hedge fund with support and financing from Julian himself

“[He’s] the Michael Jordan of Asian Investing”

- Julian Robertson on Bill Hwang

x
Tiger Asia Management
Where did Bill develop and hone his investment theses and techniques?

▪ Tiger Asia Management was one of the many Tiger-branded funds that was seeded and supported by Julian Robertson
▪ The Asia fund mainly invests in equities in China, Japan, and Korea, and was incredibly successful during its early years
▪ From its inception to 2007, it returned ~40% annually
▪ However, this successful was not without scandal
– Between December 2008 and January 2009, Tiger Asia Management and Hwang used insider information to earn
$30 million. Prior to the public announcement of a private placement of shares by China Construction Bank, the
fund shorted 93 million shares. Once the placement was announced, the share price reflected the new issuance
discount, and Tiger Asia covered the short
– Tiger Asia Management and Bill Hwang were found guilty in 2012, and were banned from trading in listed
securities and derivatives in Hong Kong for four years (maximum sentence is five years), banned from managing
public money for at least five years, and also paid ~$45 million in fines

x
Equity Swaps
How did Archegos use “total return swaps”?

Mechanics of an Equity Swaps Advantages of Total Return Swaps

▪ Synthetic exposure to a stock or index – avoids disclosure regulations

Pays another cash
Pays the returns of ▪ Avoids transaction costs
flow, usually a
an equity index or
reference rate + ▪ Can be used to hedge risk
specified stock
some spread
▪ Access to a great universe of securities – overseas equities and indices
(Ex: APPL)
(Ex: LIBOR + 2%) ▪ Flexible – you can receive equity return, pay fixed; receive equity return, pay
floating; or receive equity return, pay another equity return on theoretically any
Investor X Investor Y type of fixed/floating reference with any notional amount

Mechanics of a Total Return Swaps Disadvantages of Total Return Swaps

▪ OTC – largely unregulated, incredibly complex, and entirely tailored instruments

Pays another cash Pays the total
flow, usually a returns of an ▪ Finite contract – equity swaps have terminations dates and do not provide
reference rate + equity index or indefinite exposure to the specified cash flow
some spread specified stock ▪ Credit risk – swaps create a counterparty risk that is not present by simply owning
the underlying security
(Ex: LIBOR + 2%) (Ex: APPL + Div)

Investor X Investor Y

x
Archegos Capital Management
How did Bill run his family office?
Investment Strategy Holdings
▪ Archegos was founded in 2013 shortly after the shutting down
of Tiger Asia Management
▪ Bill could no longer manage public money so he constructed
Archegos to manage his own money and that of his family
▪ With an initial investment of $200mm, the fund grew to ~$20bn
prior to the collapse
▪ By leveraging total return swaps and borrowing $5 for every $1
of capital, he built massive concentrated positions that went
almost entirely unnoticed
▪ Bill knew that by holding massive swap positions, he would force
banks to hedge their own positions by buying the underlying
security, which would drive up the price of the stock and increase
Bill’s returns
▪ This strategy was immensely successfully as long as the stock
price consistently grew

x
The Collapse of Archegos
How did $30 billion vanish in 24 hours?
▪ Prior to the collapse, Bill Hwang’s net worth was estimated by Bloomberg to be ~$20 billion
▪ On Monday, March 22nd, ViacomCBS, one of the largest holdings, decided to raise $3 billion in stock and convertible debt to fight back against the heavy
competition created by Apple TV, Disney +, HBO, and Netflix
▪ The stock tanked nearly 25% by Wednesday, plunging the fund’s value. Bill had lost not only significant returns, but also his margin buffer and collateral
▪ By Thursday, the associated banks had an emergency meeting. But as long as no one sold their positions just yet, no one would trigger a sell-off…
▪ Morgan Stanley was the first to break the pact, dumping the underlying securities it purchased to hedge the massive swap positions

x
The Collapse of Archegos
How did $30 billion vanish in 24 hours?

$4.7bn $2.0bn

x
Family Offices vs Hedge Funds
What makes a family office different than other investment entities?
Family Offices
▪ Secretive family offices manage ~$6 trillion in assets
▪ Focuses only on the investment strategy of a single wealthy
family
▪ Under the Dodd-Frank Act following the 2008 financial
crisis – it is not regulated, does not have to register with the
SEC, and does not have to meet disclosure requirements
because it is prohibited from soliciting outside investors
Hedge Funds
▪ Collectively the world’s ~15,000 hedge funds manage ~$4.5
trillion in assets
▪ Serves the needs of accredited individual or large
institutional investors with complex investment strategies
▪ Must register with the SEC as an investment advisor because
it can solicit outside investors
x
Aftermath
What has happened since the collapse of the family office?
The Fallout
▪ The Archegos collapse impacted not only balance sheets, but
also the very structure of the involved banks
▪ At Credit Suisse, several executives were laid off following
this business disaster that came right after another billion
dollar failure with Greenshill Capital
▪ As well, Credit Suisse’s massive losses forced the investment
banking division to exit most of its Prime Services
operations
– Overall, the investment banking division of the bank
was scaled back ~25% or $3bn USD
– Most of Credit Suisse’s clientele were referred to BNP
Paribas in a referral agreement between the banks
Proposed Regulatory Changes
▪ The SEC responded to the Archegos scandal in December
2021 with proposed new rules that directly addressed
derivatives and security-based swaps
1. Prohibit fraudulent, deceptive or manipulative conduct in
connection with all transactions in security-based swaps
2. Prohibit different involved agents to take any action to
coerce, manipulate, mislead or fraudulently influence the
entities chief compliance officer in the performance of their
duties
3. Require any person with a security-based swap positions
that exceeds a specified reporting threshold to promptly file
a report disclosing the position
x
Archegos Capital Management:
How to Lose $30bn in Two Days
Group One
Tareq Bushnaq, Adam Chahine, Alberto Fedi, Alessia Gambato. Sindre Gisholt,
Alex Mastromarini, Hashem Nabulsi
Wednesday, March 1th, 2023
 GAME
STOP

risk management Pablo D., Ties, Tomas, Luciano, Lorraine,

Pablo B.
assignment #2
Introduction

BUSINESS MODEL

Physical retail stores`

Buy-sell-trade program
Digital sales
Rewards program
Esports and gaming culture
 Company
performance

February 24, 2023: stock price was $19.54.

January 2021: retail investors drove price up by buying
shares and increasing demand.

Overall, prices fluctuated significantly in recent years.

Short squeeze in 2021, caused prices to go increase.
Just entered the NFT and crypto market.

February 2022 analysis: company must improve its profit

margin to justify its current price
February 2022 analysis: company's stock price run-up
resulted from a pump-and-dump scheme
Short Selling - a basic introduction
Basic definition: An investment strategy used by institutional investors where the investor
profits off the declining value of a stock or security

Short seller borrows 10 Short seller sells 10 shares

of shares of ABC stock of ABC stock for $500

Stock
loses
value

Short seller returns 10 shares Short seller buys 10 shares

of ABC stock an keeps $100 of ABC stock for $400
How do investors find stocks to short?
Fundamental analysis

Overvalued?

Outdated?

Business Accounts

Trend/Technichal Analysis

Timing to short --> Bear Market > Bull Market

--> 2020 Pandemic

Short selling in the case
of game stop

How and why did the hedgefunds think

that it was a good opportunity ?

Market Weak High short

sentiment financials interest
 Short
Squeeze
Short squeezes occur when lots of large investors have to close their short positions, pushing the market further up
as they have to buy their shares back.

.
 Keith's
Ryan Cohen's
Ryan Cohen buys 10% of GameStop and gains 3
seats on the board
Analysis
Position Keith Gill sees opportunity for reinventing the
company

High Short The short interest of GameStop's stock is at 140%

Interest Keith speculates a potential short squeeze

His Reddit post gains traction increasing

GamStop's stock price
Media
Mainstream media reports on the situation
Attention The more GameStop's price increased, the more
the shorters got squeezed
 How Melvin managed to loose so much?
"I decided that the 'appropriate
next step' was to liquidate the
fund’s assets and return cash to
all investors." - Mr. Plotkin
Malvin Capital began 2021 with 12,5b AUM
Mr. Plotkin believed that the mall mainstays from
1990s would fall and that the industry would
shrink
Short positions on GameStop, AMC Entertainment
GameStop share skyrocketed 1500%
Melvin Capital lost 53% of its AUM to cover the
short positions
How big was
the loss?

Total Hedge Fund Loss as of February 2021

Melvin
Capital
7 Billion 20 Billion

D1 Capital
Partners
4 Billion
7 Billion Melvin capital

Street
Light 1 Billion
Capital
 DID THE SHORT SQUEEZE CONSTITUTE MARKET ABUSE?

The securities trading law considers: All these strategies were involved
Hard to prove if there was intentional conduct
- Driving up the price, selling at
maximum, and then letting it fall

- rumors (creating and spreading

false or misleading information)

- “ramping the market” (actions

designed to artificially raise the
market price by giving the impression
of large trading volume)

- “cornering the market” (buying

enough of a stock to control the
price) to be illegal
Daniela Ortega, Katia Ramirez,
Romina Rojo, Sofia Sanchez-Asiain,
Matt Prawidlo, Kesin Zimmerman and
Jackson Haw

Risk Management
Background
Context
Global economic repercussions from the
Russian invasion of Ukraine began days after
February 24th, 2022, when Putin launched a
"special military operation". It had a strong
negative impact on the world economic
recovery coming out of the COVID-19 recession.

With no end in sight, the war will likely

continue to have tremendous impacts on
global financial markets.

Risk Management

GPFN
On february 27, the government
Pension Fund of Norway (world´s
largest sovereign wealth fund)
announced that it would divest
itself from its Russian assets,
which owned around $2.83 billion
in Russian company shares and
government bonds
CBT
On february 25, the benchmark
Chicago Board of Trade March:
wheat futures contracts reached
their highest price since 2012
Keypoints (World)
COMPANIES
On february 28, Shell also
announced that it would be
pulling its investments in Russia
On march 1, Eni (Italy) announced
that it would cancel its
investments into the Blue Stream
Pipeline (pipeline carrying natural
gas to turkey from Russia)
ENERGY &
OIL
Rising energy prices pushed
agricultural costs higher,
contributing to increasing food
prices globally since energy is
used for various purposes in the
food industry
UKRAINE
The National Bank of Ukraine
suspended currency markets and
the central bank limited cash
withdrawals to 100,000 per day
and prohibited the general public
withdrawal in foreign currencies
BOYCOTTS
150 companies halted their
engagement in the Russian market.
VISA and Mastercard block on March
1 Russian financial institutions from
its payment network
Binance: block Russian individuals
who have been sactioned
(cryptocurrency exchange)
COMMODITIES
Russia: World´s largest exporter of
grains, natural gas and fertilizers
The invasion threatened the energy
supply from Russia to Europe since
natural gas prices in Europe reached an
all time-high of $3,700 per thousand
cubic meters and oil prices rising above
$130 a barrel for the first time since 2008
Causing European countries to seek to
diversify their energy supply routes
ECONOMIC
RECESSION
The world bank predicted that the
Ukrainian economy will contract
by 45% in 2022, and the Russian
economy by 11.2% due to the
Russian invasion of Ukraine
 Operational Risk

Cyber Issues
Banks and financial institutions have seen a dramatic
escalation in hacking attempts and cyber threats after
the imposing of sanctions by Western nations (ex:
many lenders kicked off the global payments
messaging system Swift)

Risk Management
IMPACT ON THE
FINANCIAL MARKET

GLOBAL OIL AND GEOPOLITICAL

GAS PRICES RISKS

UKRAINIAN/ STOCK MARKET

RUSSIAN &
ECONOMIES
& EUROPEAN CURRENCY
BANKS MARKET
 MARKET RISK
What instruments were affected and why?

Commodities:
Futures/Derivative Markets

Equity/Bond Markets

Ukrainian government
Bonds/Russian Stocks and Bonds

Forex Markets: Spots, Futures,

Derivatives

Risk Management
MARKET RISK
[Commodities]

Commodities prices spiked:

raised expectations for short-
term inflation

Agricultural: wheat, corn, soybeans

Steel and fertilizer -> impact on
manufacturing and farming industries

Energy: Oil/Natural Gas

Precious metals: Gold/Silver;

Rising gold prices and falling
speculative asset prices indicate
that investors want safe-haven
assets
Risk Management
MARKET RISK
[Equity/Bond Markets]

Initial drop in equity markets and a rise

in bond yields amid global uncertainty
and supply chain disruptions

Credit spreads increased as a

result of investors' risk aversion

Equity prices have rebounded, but

volatility remains high

Risk Management
MARKET RISK
[Ukrainian/Russian Financial
Instruments]
Ukrainian bonds dropped in
value as economic and political
instability rose

Stock market fell nearly

50%

On February 28th, the price of

Russia´s credit default swaps
signaled about a 56% chance of
default

Risk Management
MARKET RISK
[Forex]

The ruble fell to record lows, as The Ukrainian hryvnia also

Russians rushed to exchange depreciated along with the
currency, but has since currencies of many of Ukraine's
rebounded before cooling off nearby trading partners

Risk Management
 CREDIT RISK
What entities were most affected?

Insurance companies

Banks

Ukraine/Russian
Governments

Investment Firms

Risk Management
CREDIT RISK
[Insurance Companies]

Corporate policy holders around the world have

withdrawn operations with Russia (property, assets,
inventory, corporate buildings, factories)

Look to insurers to offset the losses. Insurance &

reinsurance companies face losses at nearly 20
billion

Influx of claims -> increase in premiums in certain

industries (aviation, marine, energy...) “We are seeing a sustained high level of claims activity
in insurance”

-Allianz Global Corporate & Specialty Chief, Thomas Sepp

CREDIT RISK
[Banks]

Over US$100 billion of Russian debt held by foreign

banks, these banks face major risks, and the
potential for a default to trigger a liquidity crisis

Italian and French banks have the highest Russian

exposure ($25 bn each) followed by Austria ($17.5 bn)
and the US ($14.7 bn)

Many banks wish to exit Russia, but they cannot

simply walk away from lending commitments and
other types of financial claims. Sanctions have
effectively ended any realistic chance of global banks
selling Russian assets. Risk of being sued by Russian
clients if they walk away.
CREDIT RISK
[Ukrainian/Russian
Governments]

Ukranian bond yields rise as

economic/political stability put them at
higher risk of default

Russian gov has created list of unfriendly

countries. Many investors likely won't receive
payments on Russian risk assets. Default in one
instrument can trigger default in another

February 26th: S&P Global Ratings downgraded

the Russian government credit rating to "junk"
(funds that require investment grade bonds
dumped Russian debt, making further
borrowing difficult for Russia)
CREDIT RISK
[Investment Firms]

Firms with exposure in the region of the

conflict have seen heightened credit risk;
exposure to Ukrainian banks, operational
disruptions

Significant currency fluctuations make it

very difficult for investors to evaluate
investments.

Large scale divestment of business

operations in Russia, both due to
opposition of the war and the increased
risk.
Conclusion
Negative Impact on global financial markets: energy prices, major
companies divesting from Russia & 150 companies halting
engagement in the Russian Market

Ukranian Economy predicted to contract by 45% vs the Russian

Economy by 11.2%

Cybersecurity and credit risk escalated. Insurance and reinsuarnce

companies facing losses of $20 billion

Foreign banks holding over $100 billion of Russian Debt at Risk

Risk Management
 Managing Uncertainty

The UK’s Liability-Driven Investment Crisis

Risk Management
Assignment 2
March 1, 2023

Members
Alvaro Borrego
Adrian D’Souza
Tad Duteil
Victoria Medvene
Nicholas Terryn
Ellie Zhang
 Outline

1. Introduction to pension funds

2. Explanation of LDI investment strategies and uses
3. Discussion of the UK political and economic atmosphere leading up to the
LDI crisis
4. Analysis of the LDI crisis in the UK and immediate effects
5. Takeaways for future steps to prevent LDI and similar debt crises
6. Alternative strategy considerations
7. Conclusion
 Overview of Pension Funds

Q#1 Pension Funds

❏ Pension Fund: type of investment vehicle used to save money for retirement
❏ Sum of flow of the employer and employee’s contributions, investment income, and
eventual benefits paid
❏ Defined-Benefit Pension Plan
❏ Guarantees a set of monthly payment for life (or lump sum payment on retiring)
regardless of underlying investment pool
❏ Employer is liable for flow of pension payments to retiree
❏ Defined-Contribution Pension Plan
❏ Creates an investment account where both employee and employer contribute specified
amounts to the plan
❏ Amount received at retirement is unknown
❏ Final benefit received by the employee depends on the plan’s investment performance
 What is an LDI Strategy?

Q#2 LDIs

q LDI (Liability Driven Investment) is an investment strategy that aims to manage risks
associated with meeting future financial obligations
q Goals of LDI:
q Reduce risk of being unable to meet future financial obligations due to market volatility
or unexpected events
q Gain enough assets to cover all current and future liabilities
q Common uses:
q Individual client investments
q Pension funds/defined-benefit pension plans
 LDI Uses
Q#2 LDIs
LDI for Individual Clients
❏ Estimate amount of income individual
will need for each future year
❏ Determine amount of money the retiree
must withdraw from their retirement
portfolio to meet annual needs
❏ Yearly withdrawals are liabilities that LDI
focuses on
❏ Retiree’s portfolio must invest to
provide necessary cash flows to meet
yearly withdrawals
LDI for Pension Funds
❏ Focuses on assurances made to
pensioners/employees
❏ Assurances become the liabilities
the LDI targets
❏ Goals:
❏ minimize/manage risk from
liabilities (changing interest rates,
currency inflation, etc.)
❏ Generate returns from assets
❏ LDI oftentimes focuses on swaps/other
derivatives to hedge risk
LDI Crisis in the UK
–
Sept. 2022
 UK Context Leading to LDI Crisis
Q#3 UK Context
Political Uncertainty
❏ Boris Johnson’s recent
scandals in Parliament
❏ Liz Truss’ unfavorable opinion
among many lawmakers
❏ Existing cost-of-living crisis
formed by inflation, Ukraine
conflict, and the pandemic
UK “Mini Budget”
❏ Announced on September 23,
2022
❏ Included plans to achieve an
annual growth rate of 2.5%
❏ Incorporated $116 billion of
tax cuts and spending despite
a 9.9 percent inflation rate
❏ Lack of independent analysis
Investor Concern
❏ Concerns of increased
government borrowing
❏ Beliefs that the Bank of
England would raise interest
rates to control inflation
❏ Pound value deteriorated
(1£:$1.038)
❏ 10 year bond rate increased to
4.58 from 3.84 % within 5 days
of the budget announcement
 Analysis of the LDI Crisis in the UK and Immediate Effects

Q#4 LDI Crisis

- LDIs are heavily exposed to bonds

LDI portfolios lose
01 tremendous value
-
-
Hedge through derivatives (interest rate swaps)
Mass-selling of bonds to provide more collateral
(dropped price even further)

- Pension funds invest heavily into LDIs

Pension funds have
02 no more liquidity
- So pensioners could not receive their payments
consistently

- Reversing BoE’s plan of:

Bank of England spent £65
03 billion to re-purchase gilts
-
-
shrinking its balance sheet
quantitative tightening
 Key Takeaways & Regulatory Response

Q#5 Future Steps

❏ Adaptations to liquidity requirements for pensions using LDI strategy

❏ Issues with paying collateral calls caused major problems

❏ Tighter regulations by the Bank of England on LDI funds

❏ The BoE Financial Policy Committee is set to release a new rules describing liquidity and
leverage requirements

❏ Will ensure that in case of similar spikes in rates, LDI’s will be able to replenish liquidity
quickly and smoothly, meaning higher cash buffers, etc.

❏ Will also require LDI funds to be more transparent on position in terms of leverage, fund
size, and asset allocation

❏ Changes to pension fund asset allocation and structure

❏ More flexible investment approaches, provide quicker reaction to markets
 Alternative Strategies for Risk Averse Investors

Q#6 Alternatives

Investment in LDI funds, is typical of investors with low risk appetites (e.g. pension funds). However, in volatile
markets with large swings, investors could consider alternative strategies / cash management.

For pensioners/individuals: For fund managers:

❏ Dividend growth stocks ❏ Maintaining larger liquidity buffers

❏ ETF funds ❏ Real Estate Investment Trusts (REITs)
❏ Index Funds ❏ Equity-Market-Neutral (Higher Risk but
❏ Permanent life insurance protects against volatility)
❏ Money market funds
❏ Income investing
❏ Bond laddering
Conclusion & Takeaways
Woodford & H2o: The
Perils of Illiquid Funds
Klara Njaa, Brynn Ziemke, Erin Singleton,
Grace Maloney, Sofia Spilling
 Background of Woodford
Meet Neil Woodford
● “The Man who can’t stop
making money”
● Britain’s Warren Buffett
Before Woodford
● Once the UK’s biggest star fund
manager
● Managed £25bn of money on behalf
of pension funds and investors at
Invesco Perpetual
● In 2013, he decides to open up an
independent firm, many clients
following him
Life at Woodford
● He names the company after
himself to help bring along
previous clients
● This makes other fund managers
reluctant to join- A culture is
created where employees can’t
contradict Woodford
 Background of Woodford
Initially, Woodford was known Then he transitions to an interest
for picking large domestic blue in smaller unlisted companies in
chip equities the science sector
● A Blue chip is a ● A much riskier strategy
nationally recognized, that leads to problems
well-established, later on
financially sound ● Setting up his own firm
company, traded on a granted more leniency in
major stock exchange investing in these
companies

Contributes to a 2 year
He did a poor job of picking strong The implosion of his business
down-turn and the
companies and holding onto them sparked the biggest British
Sunday Times carrying
investment scandal for a decade
out an investigation
 Scandal Origins
Kent County Council decided to terminate a £263mn mandate that Woodford managed

Liquidity problems arise: Woodford doesn’t have cash to pay Kent County back because
he had invested in assets that were hard to sell

Had to suspend the fund, which means investors cannot withdraw the capital they’ve
invested in the fund. Suspension is rare for retail equity funds where the sources of capital
are primarily from individual investors.

Many individuals are left without their money and are engaged in a lawsuit for damages of
over 18 million euros
 Takeaways and Aftermath
Not enough has been done in fixing the shortcomings that led to the scandal, even though the scandal showed
the danger “in allowing illiquid assets to be held in open ended funds that permit daily dealing” (Lord Myners,
former city minister)

Incident showed the problems with “star managers” and the risk of fund liquidity mismatches (a fund not
being able to sell assets quickly enough to meet the redemption requests of the investors)

The UK’s financial conduct authority said it was going to look into funds where both institutional investors
and retail investors could have holdings, similar to Woodford’s structure

The threat of liquidity mismatch is still relevant today (was especially a problem during COVID due to market
stress)
 Background of H2O

Mission statement: “providing
clients with the opportunity to
achieve high, risk-adjusted returns
with daily liquidity.”
Founded in 2010 by French fund Venture was 50% backed by largest
manager Bruno Crastes, who French fund manager, leading to great
specialized in absolute return and investor confidence
global bond strategies

De-correlated Alpha: a combination of assets that perform under any regime, with results that in no way correlate
to each other or the rest of the portfolio.
 Liquidity Crunch 2019
Company was fined a
record 95 million euros
after being investigated and
03 found that the decision was
“deliberate” to invest in
June 18, 2019
illiquid bonds, breaching
The Financial Times many contracts
exposed the scale of the
1.6B unauthorized Investors Panic
investments in Tennor
Try to withdrawal money
Holdings, a company 01 02
owned by a controversial from H2O after learning
financier about the scale of the
illiquid and difficult to value
bonds, couldn't meet
demand
How and Why Were Illiquid Positions Held?
Woodford
● Woodford went against conventional
market wisdom, investing in riskier, illiquid
investments
● Part of the fund was tied up in hard-to-sell
private companies
○ BenevolentAI
○ Atom Bank
○ Rutherford Health
● Did not anticipate the lasting negative
economic impact of Brexit
● The fund continued to be promoted up
until the day of its collapse
H2o
● The downfall of H2o is predominantly
linked to financier, Lars Windhorst
● About one third of the fund was held in
illiquid assets backed by thinly traded bonds
○ Trade at a low volume
○ Limited number of willing buyers
● Misleading investors and did not provide
accurate updates on company performance
● Misrepresentation of La Perla bond success
● Failure to fulfill debt payments on Latitude
Finance
The problem with illiquid positions
—Context
Woodford Asset Management
Woodford Equity Income Fund → heavily
exposed to small cap and unlisted
companies with no proven track record
→ fewer buyers, thin liquidity
Historically high returns, but when returns
dwindled, large investors began to withdraw
their money from the fund quickly.
H2o
2019: FT reveals that H2O funds held more than
€1.4bn in private bonds issued by companies
controlled by German entrepreneur Lars
Windhorst.
→ Morningstar suspends its rating on one of
H2O’s flagship funds
→ The illiquidity of the bonds became a
problem as investors started to question the
valuations of the fund’s assets, and began
requesting withdrawals.
The problem with illiquid positions
—Mechanics

Woodford Asset Management H2o

Woodford had to sell its liquid holdings to meet the H2O was pressured to sell the bonds, but the
redemptions. volume was thin.

→ The balance between liquid and illiquid assets became → As a result, H2O had to sell them at a discount,
which led to significant losses for some of its funds.
→ Woodford bypassed the rule of having max 10% of
the the fund comprising of unlisted securities by listing
→ Level of exposure to illiquid investments was
the illiquid assets on the Guernsey Exchange
three times the regulatory 10% cap

In both cases, illiquid positions caused liquidity issues and made it difficult for the firms to meet investor
redemptions, leading to significant losses for investors and reputational damage for the firms.

Main takeaway: During a liquidity crisis, the liquidity of the fund reduces to the liquidity of its least liquid asset.
Main Takeaways

The situations with Woodford and H2o highlight the

importance of carefully managing liquidity risks when
investing in illiquid assets, especially when these assets
are a significant portion of a fund's portfolio.

It also emphasizes the need for transparency and

communication with investors, particularly in times of
market stress, to manage expectations and prevent
panic-driven redemptions that can exacerbate liquidity
CREDITS: This presentation template was created
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 Sources
https://www.cnbc.com/2021/02/15/uk-fund-manager-neil-woodford-says-sorry-as-he-announces-comeback.html
https://www.investopedia.com/terms/r/redemptionsuspension.asp
https://www.ft.com/content/e5edd151-4c14-405d-b23b-c70d45e2f194
https://www.ft.com/content/dcc04950-f680-4210-af4e-669413501951
https://www.ft.com/content/684cce3d-faf2-3179-a93c-4591f4603988
https://www.ft.com/content/51b425fc-94b6-3cc5-a4ea-47d72dca5e75
https://www.wtwco.com/en-CA/Insights/2022/12/woodford-long-tail-claims-and-liquidity-crises
https://thehedgefundjournal.com/h2o-asset-management/
https://www.moneymarketing.co.uk/features/december-cover-story-p6-to-11-from-hero-to-villain-when-will-the-saga-end-for-ne
il-woodfords-investors/#:~:text=Woodford%20is%20sacked%20as%20manager,investment%20scandals%20for%20a%20decade.
https://www.ft.com/content/45e13fde-8ccf-4d5c-a460-f2f40872a9b7
TABLE OF
CONTENTS
Background information

Cause for the collapse

Key People

Leverage ratio

Comparison to Current Levels

Impact of Regulatory Changes

 BACKGROUND INFORMATION

1977
1858 2008
Become a major Become the 4th
commodities largest investment In March, their
trading company, bank in the US stock declines by
specializing in the post merger with 50%.
cotton market Kuhn, Loeb & Co.
2008
On September 15,
they declare
bankruptcy, making
it the biggest in US
history.
1844 1906 2000s
Lehman Brothers Buy five mortgage
was founded in Shift into lenders and become
Alabama as a dry- investment heavily invested in MBS
goods and general banking
store.
 Lehman Brothers was Lehman filed for bankruptcy on
the largest holder of September 15, 2008, with $639
MBSs, accumulating billion in assets and $619 billion
an $85 billion portfolio, in debt.
or four times its
shareholders' equity.
In the fiscal third-quarter
report released on
MBSs September 10, they were

Created by bundling (Mortgage facing a $3.9 billion loss

which included a $5.6
together pools of backed billion write down
mortgages
securities)
This led to a significant
Lenders relaxed their reduction in the value
lending standards and of Lehman Brothers'
began offering loans assets, which caused
The housing market began to decline
to borrowers with poor the bank to suffer
and homeowners began defaulting on
credit histories, known massive losses and
their mortgages, the value of these
as subprime loans. become insolvent.
securities plummeted.
KEY
PEOPLE
Joseph M. Gregory Bart McDade
President and COO of
President and COO of Lehman Lehman Brothers from June
Brothers until 2008. He was 2008 until its collapse in
responsible for the firm's risk September 2008. He was
management and was seen as responsible for the firm's day-
one of the most significant
to-day operations during the
reasons in Lehman's collapse
crisis.

Erin Callan
Richard S. Fuld Jr. Chief Financial Officer of
Lehman Brothers from
Chairman and CEO of
December 2007 to June 2008.
Lehman Brothers from 1993
She was one of the highest-
until its collapse in 2008. He
ranking women on Wall Street
was widely criticized for his
at the time and has been
leadership during the
criticized for her role in
financial crisis.
Lehman's collapse.
LEHMAN BROTHER'S LEVERAGE

?
 D/E Quick Ratio D/A

668,573/22,490 50563/668573 $639B/$671B

= =
=
liabilities exceed
29.73
7.5%
assets by 5%

https://www.sec.gov/Archives/edgar/data/806085/000110465908005476/a0
8-3530_110k.htm#ConsolidatedStatementOfFinancialC_211818
 CAR
89,106
Millions In
Mortgage
and asset 2007 CAR=
back
M&AB/TE securities (22,491 TIER I +
7,645 TIER II) /
89,106/22490
414,638
5,276 Millions
in Subprime
= mortgages

3.92x
WEIGHTED =
7.268%

Source:
https://www.researchgate.net/publication/50934455_Could_Lehman_Brothers'_Collapse_Be_Anticipated_An_Examination_Using_CAMELS_Rating_System
 COMPARISON TO CURRENT
LEVELS
Lehman Brothers was over leveraged. Leverage ratio of 30-to-1 in 2008, while
commercial banks couldn't leverage their equity more than 15 to 1.

After its collapse, banks were subject to compulsory recapitalisation. New

regulations have impacted banks' leverage.

As an example, Basel III requires banks to maintain a Tier 1 leverage ratio of at least
3%.

Debt-to-equity = Total Liabilities / Total Equity

 CURRENT LEVERAGE RATIOS
4

0
Credit Suisse Bank of America HSBC Deutsche Bank JPMorgan Citigroup

Select banks, Q2 2022 (%)

DATA SOURCE: Macrotrends
 REGULATIONS IMPLEMENTED
AFTER THE COLLAPSE
VOLCKER RULE DODD-FRANK
prohibits banks makes banks follow
from making stricter regulations,
speculative increasing transparency,
investments with and preventing abusive
their own money financial practices

STRESS TESTING INCREASED

BASEL III
use to figure out SUPERVISION
makes it mandatory for regulators closely monitor
banks to keep leverage whether banks have
enough capital to financial institutions to
ratios and specific ensure responsible
levels of reserve capital withstand a negative
economic shock management of risks and
on hand operations
 IMPACT OF THE REGULATORY CHANGES

1 MORE CONSERV AT I V E
BANKS' RI SK P RO FI L ES

Higher levels of capi tal

and liquidity

Greater transparency
and accountability

Introducing stress tests

 IMPACT OF THE
REGULATORY CHANGES
2 LES S PROFI T ABI L I T Y 3 CONSOLIDATION OF THE INDUSTRY

Due to

More asset in
lower-risk,
lower-return
securities

Increased
compliance
costs
THANK
YOU
 REFERENCES
https://www.library.hbs.edu/hc/lehman/exhibition/lehman-brothers-timeline

https://corporatefinanceinstitute.com/resources/capital-markets/lehman-brothers/

https://www.investopedia.com/terms/l/lehman-brothers.asp

https://hbr.org/2009/09/lessons-from-lehman

Claessens, S. and van Horen, N. (2015) “The impact of the global financial crisis on
Banking Globalization,” SSRN Electronic Journal. Available at:
https://doi.org/10.2139/ssrn.2564001.

Structural changes in banking after the crisis (2018) The Bank for International
Settlements. Available at: https://www.bis.org/publ/cgfs60.htm

https://www.reuters.com/article/us-financial-regulation-idUSBRE98G0V720130917
 RISK MANAGEMENT

Group 7

Francisco Beltrán
Irina Cavero
Joshua Chajón
Noah Gallo
Serhii Kovalchuk
Santiago Luna
Cara Miller
TABLE OF CONTENTS
Introduction
I. What did Jerome Kerviel do?
II. How is it possible he was not caught?
III. Why was the holiday policy relevant?
IV. Consequences of the fraud?
Conclusion
JEROME KERVIEL
January 11, 1977, 46 years old.
Joined Société Générale in 2000.
French Trader
Fraud → Unfair Trading
Unauthorized trades with money of
the bank, good knowledge of Front
and Back Office.
 SocGen Business Lines

Retail Banking in France

International Retail Banking, Insurance,
and Financial Services
Global Banking and Investor Solutions

SOCGEN
French Financial Services Company founded on May 4, 1864
Business Planning

±1,5 Trillion USD in Total Assets

21,6 Billion USD Market Cap
+25 Million Clients
+117,000 Employees in 66 Countries.
3rd French, 6th European & 18th Worldwide Largest Bank.
 DETAILS OF TRADES
Kerviel made trades worth 50 billion euros over several years
(much more than the authorized trade limit)
Created fictitious transactions
Business Planning

Hacked into the bank's computer service

Kerviel took positions that were not in line with the bank's
overall strategy

FINACIAL IMPACT ON SOCIETE GENERALE

Kerviel trades resulted in over 4.9 billion euros in losses
Largest loss in banking history at that time
Had to write down the loss. Meaning that they had less capital
to lend and ability to take new business.
Banks share plummeted 50% when the scandal was announced
Societe Generale's holiday policy encouraged traders to take
extended periods of leave, particularly during the summer months

When his colleagues were on vacation, Kerviel was able to take on

larger positions and engage in unauthorized trades without being
detected

Kerviel had an advantage of being the only available worker and

was more trusted by the superiors.
CONSEQUENCES OF THE FRAUD

Loss of €4.9 billion

Secured Bank's survival by closing out positions.

Fined €4 million for failure of risk control system

Under the French Labour Law - the bank paid €450,000 to Kerviel for
unlawful dismissal
Jerome Kerviel
Sentenced to 3 years in prison but
only served 5 months
Had to pay back €4.9 billion to
Societe Generale but was reduced to
€1 million
He works at a computer services
company
CHANGES
Societe General have implemented a plan “Fighting Back” to control
their systems
They are now monitoring nominal amounts, deletions, and holidays
taken.
They have implemented cross-functional supervision and included
an operational security department.
Invested €200 million since 2008 in strengthening the security of
its market activities and improving operational efficiency.
Risk management is now intergrated into the invesment process
Conclusion Desire / Motives

Risk Management

Mismanagement

Improved security / policy

THANK
YOU.