When I visited Seoul in the late 1990s in the wake of South Korea’s financial crisis, a veteran banker explained to me how the institution he was trying to save had incurred such heavy loan losses. It had not added up all its loans to the increasingly indebted chaebol, or family-owned business.

Concentration risk, large exposures, ineffective internal controls and lax regulation – all of these have been repeated in the Archegos Capital Management scandal, in which a family office was lent tens of billions of dollars by several global banks. When the equity bets placed by the office’s leader, Bill Hwang, went wrong, lenders’ losses totalled more than US$10bn, with Credit Suisse alone taking a hit of $5.4bn.

More than a decade after the Dodd-Frank Act, rules governing disclosure of derivatives trades and payment of margin had yet to be implemented for smaller firms like Archegos. The opacity of family office finances and an inability to aggregate trading positions across several banks left each in the dark about the total exposure.

Those most desperate to gain market share in prime brokerage took the most risk – Credit Suisse was chasing the US ‘bulge bracket’. Yet, according to the Financial Times, it made only US$17.5m out of its relationship with Archegos last year. This sounds like the winner’s curse: ‘The good news is that we won the order; the bad news is that we won the order’.


Jane Fuller is a fellow of the CFA Society of the UK and co-director of the Centre for the Study of Financial Innovation

Greensill took to extremes the established practice of using invoices as assets to back credit arrangements

Business was similarly chased with Greensill Capital, which took to extremes the established practice of using invoices as assets to back credit arrangements. In this case, the gap between face value and the discount for prompt payment was – implausibly – supposed to provide decent returns to both the financial intermediary and to fixed-income investors in the packaged assets, and to pay an insurance premium to make the assets ‘safe’. The withdrawal of that last layer caused Credit Suisse to freeze its supply-chain finance funds. Layers and complexity – another déjà vu from previous scandals.

New twists

But there are a couple of new twists. Both relate to regulation squeezing the balloon in one place only for excessive risk-taking to pop up somewhere else.

The ban on proprietary trading by banks, via the Volcker rule, may have increased incentives to pursue other sources of hyperactive trading, earning fees for prime brokers. Hedge funds would be the traditional port of call, but family offices, too? They are supposed to be more bothered about preserving capital. Whatever the name, large pots of money, heavy activity and lax regulation are a dangerous mixture.

The clampdown on late payment of suppliers has created an incentive to use a financial intermediary. Users of accounts have complained that the debt does not show up clearly on the original company’s balance sheet as either a trade payable or a financial liability. The IFRS Interpretations Committee has said existing standards are adequate, but reminded companies that disclosures are supposed to meet users’ needs.

The clue lies in the word ‘other’, either in the payables line or in financial liabilities. You have to read the notes and the payment policy carefully. In other words, there is enough fudge and confusion for companies to exploit if they are hard pressed.

Plus ça change.