Bukowski and then the end of the world (again) type stuff!

 It seems like a long time since I unloaded my consciousness into a keyboard and onto the blog so I thought, maybe I should. I have been reading a lot more recently rather than writing. One thing I read was Bukowski's Hollywood. It was a bizarre and oddly easy read! I had heard many people over the years talk about Bukowski and an opportunity came to read a book and so I did. But what I found bizarre is the simple style, but then that also made it easy to read! Why should that be bizarre, well, possibly because I think I expected something deeper and more intense but Hollywood is just a first person retelling of his experience of getting his film made in Hollywood, much as he didn't really care whether it was or not although by the end he decidedly did, but also ticked it off as a done that, been there kind of moment never to be repeated. As he's dead, I guess he won't! But the simplistic style and straightforward dialogue was what made it a page turner hard to put down. That said, having finished it, I felt nothing very much for it. In fact, it was a done that been there never to be repeated kind of moment. Like his experience in Hollywood it was not unpleasant, it was interesting and entertaining but it is nor something to do again!

Far more interesting are some unheard of financiers trying very hard to cause another financial crisis by becoming heard of! Greensill collapsed and apart from a few hundred people they employed directly have caused a number of other business, such as the whole UK steel industry, to teeter on the edge of collapse with thousands of other people losing their jobs. Why would that cause a financial crisis? Well, it won't on it's own but it certainly caused some pretty massive banking losses at some very big banks. Again, that will not cause a financial crisis. It is only when such collapses are a harbinger of lots of other unheard of financial businesses also having problems paying their bills. To be fair, Greensill was presented with two issues at pretty much the same time. They had a part of the business put under investigation by a regulator but more tellingly one of the insurers that covered Greensills business refused to rollover cover against the business model. Presumably they felt the business model was about to hit their bottom line and felt it was better to get out now, although by doing that, they effectively caused the collapse which they would have been on the line for if they had not got out. It seemed a little chicken and egg in that respect as you might conclude that had the insurer just rolled over cover then Greensill would have survived and nobody would ever be any the wiser. But, I suspect their due diligence and risk management was getting a little nervous about the business model and, more importantly, the validity of the basis of the loans Greensill was making in the current climate. The basics of the business was to buy future receipts at a discounted price ie if your customers owe you $100 in the future then Greensill buys that $100 future payments for $80. Why? Well you could assume the business selling future receivables needed the money for cash flow purposes and was willing to accept such a high margin and you could also assume nobody else was going to lend them any money on any more favourable terms. Of course Greensill does not, or did not, have the money lying around down the back of a sofa, it had to borrow the money at market rates itself, and also buy insurance, apparently! I assume, and could be wrong, that the banks lending to Greensill, that presumably would not lend to Greensills customers directly, required the insurance and when that was withdrawn I guess the banks called in their loans. But Greensill could not pay and so that was that, administration. But Greensill appears to have gone one step beyond, Madness indeed, by buying, or lending, against forecast receipts ie receipts for business that has not been done yet which is like saying I want you buy/ lend against a deal that I am planning to do with a customer in a couple of months. On the face of it, it seems a little mad, although if you have a long history with a customer of good standing, say, a government, then possibly it has some merit but I would want a pretty handsome percentage. As for what the risk managers were all doing around these deals I can only guess, I mean, there are sooo many questions.

But that was nothing compared to the next one. 

After Greensill we bump into another unknown and unheard of character, outside financial circles that is. This one is Archegos which is a hedge fund, sorry, was a hedge fund run by Bill Hwang. At least the plot for this is simpler, although the financial industry does its best to obfuscate by introducing some new terms such as TRS for Total Return Swaps. But ignoring all the nuances of finance this is simple. Archegos goes to a bank, says, heh, I have a plan, I believe this company is going to rise considerably in value and I want to borrow money to sort of invest in it. But I want you, the bank, to own the shares and then give me any dividends of appreciation in the share price... ok, says the bank, what do we get? Well, I'll give you a fee but even better, if the share price goes down, which I guarantee it won't, then I'll cover those losses and you'll be in a win win situation. The thing about win win situations is that they generally have a third option, lose! There are a few problems, of course there are. Firstly, there is no register of Archegos owning any shares, although I think it did but not as much as it pseudo owned, and there is no way of the bank knowing f other banks were also lending money on the same terms, and it seems they probably did not ask, which is probably because they did not want to know the answer, a kind of fingers in ears I can't hear you style of banking very familiar from 2007/8. And sure enough, Archegos did do several deals with several banks for the same small portfolio of shares. The second problem, although only a problem when you peek behind the curtain, is that the share price is only increasing because of all the money being borrowed and used by banks to buy massive numbers of shares. Finally, sort of anyway, one of the companies that is being heavily invested in is so pleased that its share price has gone stratospheric that it decides everybody must love what its doing and so wants to cash in on the increase by issuing more shares  to cover a strategic business plan. That's all good. Or at least, that's all good until you ask your heaviest investors to stump up and find that one of them, spread across a number of major banks, cannot find the money to do so. That failure to invest more money sends a bad signal and that causes a wobble in the share price but not a collapse but also a question mark under the strategic plan. Mean time, the banks that are holding all these shares start to get that sweaty palm moment and so, one or more, asks Archegos if everything is ok? The answer is of course yes, everything is fine. But when the bank says, well, ok, but can you give us some more money as we have a concern and we need to some cash to reassure us you are still solvent. When no money is forthcoming, the bank did something a little odd, it asked other banks if they were also exposed. Others were. They had a meeting to determine what to do. Then one of the banks did what banks do but other banks pretend they don't. They took advantage of the paralysis and sold their holdings to anyone that would take them at a small loss. But the unloading caused a drop in the share price, as it would and that caused the other banks to also unload their positions which caused a massive drop in the share price. But the losses to the banks, other than the first mover, was measured in $billions! Strangely, it would make an excellent episode in the series of the same name other than its been done several times already because the writers of Billions know that this is what goes on all the time in the financial services industry (industry?)

On its own, this, will not, cause a financial crisis. What might is that having been burned and knowing that there a hundreds of other small hedge funds out there and a number will be dancing on the rim of a Caribbean volcano like Archegos, well, they'll be doing some due diligence (well due...) and risk management to see if they are exposed to potentially other big hits from unheard of boutique hedge funds. The fact is, they will be, they already know that if they lift up that particular rock they'll find no end of creepy crawlies. I suspect they will be looking, I think they have to (actually I think they should have long before but they didn't and they didn't because then that market area would dry up and with it some big bonuses, but heh, that is modern banking) but more importantly is what they will do when they find the creepy crawlies. If they start closing down the risks they will do two thins, both anathema to banks! First they will be turning down business, and lots of money. Second, by acting rashly, or simply too fast, they could cause the very thing they want to avoid, systemic collapse. If I were them, I would tread very carefully and see out the current deals they have in place and then not renew them, although that in itself could actually cause a collapse. They should also hope that there is not general market correction which almost started in the tech indices (or indexes) with (well overdue) heavy falls in some shares like Tesla. Only FOMO kicked back in a the indexes have recovered, and even excelled. So, the current cycle, or bubble, continues. 

Oh well, that was fun, what next, how about the wargames being played out by China, Russia and the US. Yes, I'll do that next, if I have time, before the bombs that is!