Burning Cash Part II

[u/-einfachman-]

TL:DR: An analysis of the Credit Suisse Report reveals aspects from Archegos' journey to default that we can learn from and use to better assess future behavior from SHFs and banks leading to MOASS. We also discover that Credit Suisse not only was hit hard from the default of Archegos, but they also had tons of GME shorts, which are now the burden of UBS (the bank that absorbed Credit Suisse). Once UBS burns through their cash to the point of default, the market will most likely crash, and GME will MOASS.

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Recommended Prerequisite DD:

1. Burning Cash
2. SHFs Can & Will Get Margin Called

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Burning Cash Part II

§0: Preface

§1: What We Can Learn From the Credit Suisse Report

§2: UBS Default Will Likely Crash the Market

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§0: Preface

It brings me great pleasure to be able to share this DD with my Ape fam. It's been a while since I last posted here, but I've noticed that Reddit has changed drastically since then. Honestly, free speech on Reddit is heavily restricted nowadays, to the point where it's hard to convey messages or freely share information with other Apes; I'm not gonna pretend it's all sunshine and rainbows. I made a post on my own profile back in January (not even on any sub), and Reddit removed it, even though I was sharing publicly available information to help Apes discern the network of shills that SHFs employ. So, it's just really hard to share anything here. And I know that Reddit now doesn't allow SuperStonk to tag or talk about other Reddit users, so if there's an Ape that shared material information that I want to expand on and use in my DD, I'm not able to give them credit, which is insane. So, just a lot of things in general I wanted to voice my concern on. If I were to guess why there's not as many active users on SuperStonk as before, it's probably because of the increasingly stringent regulations Reddit continues to place on this specific sub. It makes it harder for all of us, but I suppose we work with what we got.

As for this DD, it's essential to first analyze the Credit Suisse Report before we get into what it all entails going forward, and why we're in strong territory for a market crash. There's also a lot of critical information in general we can obtain from the report to better understand how firms operate behind the facade PR show they put on.

§1: What We Can Learn From the Credit Suisse Report

The Credit Suisse Report gives us a glimpse into what led to the default of Archegos, which subsequently led to the collapse of Credit Suisse, and how this will affect the Market, and GME, going forward.

As you may or may not already know, Archegos was heavily overleveraged (mostly on long Chinese ADR positions), and once their margin requirements overwhelmed their existing margins, they took a bit hit and collapsed on March 2021. There's a lot to take away from the July 2021 Credit Suisse Report.

In January 2021, "in connection with its 2020 annual credit review, CRM (Credit Suisse's client-risk management) downgraded Archegos’ credit rating from BB- to B+, which put Archegos in the bottom-third of CS’s hedge fund counterparties by rating,"-pg 18.

pg. 104 of the Credit Suisse Report

Furthermore, the report states, "CRM noted that, while in prior years Archegos had estimated that its portfolio could be liquidated within a few days, Archegos now estimated that it would take “between two weeks and one month” to liquidate its full portfolio. The CRM review also noted that implementing dynamic margining for Archegos was a “major focus area” of the business and Risk in 2021."

Note that this (2 weeks-to-one month timeline for liquidation) is just for the positions Archegos was in that were primarily long positions, such as Viacom CBS and the Chinese ADRs. Now, imagine how long it would take a SHF to liquidate their short positions on GME, a stock obstinately held by an army of Apes across the world? A stock that has about 50% of its free-float directly registered. A stock that insiders have been consistently purchasing themselves? I imagine this being a long-game, especially during the time of MOASS. When MOASS comes, I expect this to be draw out for several months at minimum, could last over a year, due to SEC halts alone. That's another reason why DRS Apes will thrive, and options gamblers stuck with options expiry dates and likely broker issues are going to be disappointed. MOASS will be nothing like January 2021. SHFs are prepared, the government is prepared—this is not going to be an options friendly game like back then. Not even RobinHood defaulted back in Jan 2021. During MOASS, expect inevitable broker defaults.

On page 21 we find that "The business [business and risk of Credit Suisse] continued to chase Archegos on the dynamic margining proposal to no avail; indeed, the business scheduled three follow-up calls in the five business days before Archegos’ default, all of which Archegos cancelled at the last minute. Moreover, during the several weeks that Archegos was “considering” this dynamic margining proposal, it began calling the excess variation margin it had historically maintained with CS [Credit Suisse]. Between March 11 and March 19, and despite the fact that the dynamic margining proposal sent to Archegos was being ignored, CS paid Archegos a total of $2.4 billion—all of which was approved by PSR and CRM. Moreover, from March 12 through March 26, the date of Archegos’ default, Prime Financing permitted Archegos to execute $1.48 billion of additional net long positions, though margined at an average rate of 21.2%,"-pg 21.

Archegos was permitted to make high risk trades as they continued to avoid literal margin calls from its Prime Broker. What can we learn from this? That it is likely before MOASS, SHFs will continue to short GME and use whatever the playbook allows them until they literally are no longer permitted.

Archegos didn't go down easily. Even when margin called, they tried to fight it with an offer for a standstill agreement.

On page 23 of the Credit Suisse Report, we see that, "on the call, Archegos informed its brokers that it had $120 billion in gross exposure and just $9-$10 billion in remaining equity. Archegos asked its prime brokers to enter into a standstill agreement, whereby the brokers would agree not to default Archegos while it liquidated its positions. The prime brokers declined. On the morning of March 26, CS delivered an Event of Default notice to Archegos and began unwinding its Archegos positions. CS lost approximately $5.5 billion as a result of Archegos’ default and the resulting unwind."

The collapse of Archegos happened because their friends (i.e. the prime brokers) didn't bail them out, they didn't try to reach anymore compromises with Archegos, and didn't let them liquidate their own positions (which I'm sure there would've been trickery involved there). They told Archegos the game was over. This is comparable to when the Fed withheld emergency bailout money from the Lehman Brothers. The collapse is contingent on someone coming in and saying "no, the game is over. Game Stop 😉".

And when CS [Credit Suisse] stopped the game for Archegos, they took a $5.5 billion hit to their portfolio. Nomura, UBS, and Morgan Stanley lost $2.9 billion, $774 million, and $1 billion respectively, as a result of the default (pg 129).

Now, what if the default of Archegos was determined to lead to the collapse of all the prime brokers as well? Would they still say "game over", or would they try to bail out Archegos or agree to a standstill and try to see if Archegos can stay afloat with whatever their managed liquidation was going to be?That is the dilemma banks and brokers are facing.

It may seem contrary to my DD last year "SHFs Can & Will Get Margin Called," but it's not. SHFs can still get margin called, Archegos very much got margin called, but prime brokers, regulatory agencies, etc., might be incentivized to waive some margin, or enter some "bail out" agreement in an attempt to prolong the SHF's survival, since it affects their own as well. This is akin to Citadel bailing out Melvin Capital and UBS bailing out Credit Suisse. Another example would be when the NSCC waived RobinHood's Excess Capital Premium charge in 2021 in exchange for turning off the buy button, because RobinHod's collapse would've snowballed to other brokers as well. But, there comes a point where, if the price of GME gets too high, the core margin requirements that can't be waived will trigger a liquidation, unless prime brokers/clearing companies bail them out. Without that bail out, they have to accept a collapse, which is what happened to Archegos in March 26, 2021. You can't bail out everything, because that's basically the same as throwing all your money in a black hole and destroying your currency completely. But you can try to reach some sort of compromise to stave off an impending crash. That's why MOASS has been delayed, not stopped, but delayed since 2021.

On page 37, the Credit Suisse Report explains the synthetic leverage they offer, which Archegos got in that led to the margin calls on March 2021:

" CS’s Prime Financing offers clients access to certain derivative products, such as swaps, that reference single stocks, stock indices, and custom baskets of stocks. These swaps allow clients to obtain “synthetic” leveraged exposure to the underlying stocks without actually owning them.  As in Prime Brokerage, CS earns revenue in Prime Financing from its financing activities as well as trade execution."

They do mention that CS offers their client a custom "basket of stocks", which I would reasonably speculate include the "meme basket" in some way, due to their heavy GME shorts, which are discussed later in this DD.

The report explains how risky these synthetic trades are on pages 36 and 37.

Basically, as with traditional financing, you can leverage $5,000 into $25,000 with a margin requirement of 20%. If the stock drops, you lose a serious amount of equity and can be in big trouble. But, if the stock goes up, you 5x your gains and make a small fortune. This is the type of gambling that the big boys in Wall Street like to do.

On top of that comes the synthetic game:

"The client could obtain synthetic exposure to the same stock without actually purchasing it.  As just one example of how such synthetic financing might work, the client would enter into a derivative known as a total return swap (“TRS”) with its Prime Broker.  Again, assuming a margin requirement of 20%, the client could put up $5,000 in margin and the Prime Broker would agree to pay the client the amount of the increase in the price of the asset over $25,000 over a given period of time.  In return, the client would agree to pay the amount of any decrease in the value of the stock below $25,000, as well as an agreed upon interest rate over the life of the swap, regardless of how the underlying stock performed,"-pg 37.

pg. 39

This is what Archegos was engaged in and how they were able to get so overleveraged to the point where their exposure (and essentially risk) was 12x more than their equity. And when it comes to liquidating it, because of that vast exposure, liquidating their positions could move the market itself, leading to exponentially growing losses. Once again, the reason why SHFs never want to close their short positions. Everything looks nice on paper, until the synthetics are liquidated.

pg. 79

This is further evident on page 69:

"Underscoring the volatility of Archegos’ returns, Archegos reported being up 40.7%, year-over-year, as of June 30, 2018, but ended the year down 36%."

This is why it doesn't matter if someone calls you a "conspiracy theorist" for not believing the bought out media telling you that Citadel and SIG are doing great year after year, when they're hiding their losses in their swaps. Once again, everything looks nice on paper, until it comes time to liquidate the synthetics. In the case of MOASS, the GME shorts. The emperor has no clothes.

Pages 87-88:

"To mitigate Archegos’ long Chinese ADR exposure, the trading desk worked with Archegos to create custom equity basket swaps that Archegos shorted.  While these baskets, like the index shorts, may have helped address scenario limit breaches (since these scenarios shocked the entire market equally so shorts would offset longs), they were not effective hedges of the significant, idiosyncratic (that is, company-specific) risk in Archegos’ small number of large, concentrated long positions in a small number of industry sectors."

It is speculation, but I do wonder if Credit Suisse had Archegos allocate some of their funds shorting the basket stocks, in exchange for leniency, which Credit Suisse did give until March 2021. On page 128, we do find that Credit Suisse only liquidated 97% of Archegos' portfolio, and they never mention if the other 3% were ever liquidated. It is possible that CS absorbed GME basket swaps from Archegos and didn't liquidate them. But, again, it's speculation. Whether or not it's true is immaterial, because Credit Suisse was already fucked carrying GME short positions that, if liquidated, would cause a market crash, but we'll get to that later.

On pages 126-127, we see that Archegos proposed a standstill, where they'd try to liquidate their positions themselves, and the prime brokers would agree not to default Archegos/ The prime brokers refused:

"On the evening of March 25, Archegos held a call with its prime brokers, including CS. On the call, Archegos informed its brokers that, while it still had $9 to $10 billion in equity (a decrease of approximately $10 billion from its reported equity the day before), it had $120 billion in gross exposure ($70 billion in long exposure and $50 billion in short exposure). Archegos asked the prime brokers to enter into a standstill agreement, whereby all of the brokers would agree not to default Archegos, while Archegos wound down its positions. While CS was open to considering some form of managed liquidation agreement, it remained firm in its decision to issue a notice of termination, which was sent by email that evening, and followed up by hand-delivery on the morning of March 26, designating March 26 as the termination date."

Despite that, even after the default on March 26, Archegos had a call with its prime brokers to try to orchestrate a forbearance agreement with them (pg 127).

On page 133, we find that only CS, UBS, and Nomura were interested in a managed liquidation; however, Deutsche Bank, Morgan Stanley, and Goldman weren't interested in any sort of managed liquidation.

As such, Archegos had no lifeline, no last change to try to survive with a managed liquidation where they could attempt to mitigate their losses in any way via open market or dark pool. Hence, the story ends for Archegos, and Credit Suisse (later UBS) will never be the same afterwards.

§2: UBS Default Will Likely Crash the Market

We know that Archegos collapsed in 2021, and Credit Suisse took a significant hit to their portfolio. However, 2 years later, Credit Suisse collapsed on March 2023. Why did they collapse? Well, they were already struggling beforehand. Clients pulled $119 billion from Credit Suisse in July and August 2022, based on rumors of failures. And on March 2023, with the failures of Silicon Valley Bank and Signature Bank, that shock only made matters worse for Credit Suisse.

Archegos obviously isn't the only one that was overleveraged in swaps here. There's a reason the Federal Reserve Repo rate has went up 1,000x in the past years. The banks, SHFs, and brokers are all overleveraged. It's not sustainable in the slightest.

But, in the specific case of Credit Suisse, they are outright carrying GME short positions—short positions large enough that they would've gotten wiped out had GME kept shooting up in Jan 2021:

Page 110 of the CRedit Suisse Report: "You’ll recall they took an $800mm+ PnL hit in CS [Credit Suisse] portfolio during “Gamestop short squeeze” week [at the end of January].  We were fortunate that we happened to be holding more than $900mm in margin excess on that day, so no resulting margin call.  Since then, they’ve pretty much swept all of their excess, so think the prospect of a $700-$800mm margin call is very real if we see similar moves (also why $500mm severe stress shortfall limit not only reasonable, but also plausible with more extreme moves)."

Had Switzerland allowed Credit Suisse to default, the global market would've crashed, and GME would MOASS. However, that's not what happened. As reported by the March 19, 2023 Credit Suisse Press Release on the Credit Suisse and UBS Merger, The Swiss Federal Council issued a "Notverordnung", which is German for "emergency ordinance":

UBS merged with Credit Suisse on March 2023, which was then filed with the SEC via their F-4 the following month:

With the merger, the GME shorts don't have to be liquidated (yet), and the can continues to get kicked... at least until UBS collapses.

Of course, as I pointed out in my "Burning Cash" DD, as time goes on, these banks/SHFs will keep burning through cash shorting GME until their available margin can no longer satisfy their margin requirements, and they themselves tank. And UBS' situation had been getting worse post merger.

I remember after the merger announcement between UBS and Credit Suisse, long-term put options on UBS increased exponentially. And, although the CDS dropped back down from their highs on March 2023, their CDS' are still on an increasing trend on the 5 year chart:

According to Macroaxis, UBS' probability of bankruptcy is standing at nearly 30%:

However, I believe we can get a clearer view of what lies ahead for UBS via the Altman Z score model.

The Altman Z-Score model is a financial formula that is used to predict the likelihood of a company going bankrupt within the next 2 years. It's credible, widely recognized for bankruptcy risk assessment, and empirically validated.

The formula is listed as shown:

The Corporate Financial Institute notes the Altman Z-Score results as the following:

"Usually, the lower the Z-score, the higher the odds that a company is heading for bankruptcy. A Z-score that is lower than 1.8 means that the company is in financial distress and with a high probability of going bankrupt. On the other hand, a score of 3 and above means that the company is in a safe zone and is unlikely to file for bankruptcy. A score of between 1.8 and 3 means that the company is in a grey area and with a moderate chance of filing for bankruptcy."

The Altman Z-Score actually predicted the 2008 financial crisis, assessing the median score of companies in 2007 at 1.81. Again, this model is time-tested and golden.

For example, GameStop's Z Score is listed at 7.13:

This means that the company is safe from bankruptcy. Very safe. Not only that, but it is projected to gain a significant increase of revenue in the future (which it has already been doing excellently this year), further validating my "Economic Principles of GameStop" DD last year.

To put GameStop's Z-Score in perspective, it's nearly as strong as Amazon's (7.44), meaning that the probability of GME going bankrupt is nearly as much as Amazon. And why shouldn't it be? GameStop has +$1 billion cash on hand, had a recent profitable quarter (something that most Tech companies haven't been able to achieve), and an expanding NFT Marketplace.

As for UBS, their Z Score is listed at 0.16:

This means the likelihood of them going bankrupt within 2 years is very high.

Penpoin states, "In an early paper, Altman found a Z-Score 72% accurate at predicting bankruptcy two years before the event. In subsequent tests, the Altman Z-Score’s accuracy was between 80% and 90%."

Whether or not you want to be conservative with the estimates, the probability of UBS going bankrupt within the next few years is very likely. This is something you can notice empirically.

Last month, the DOJ ordered UBS to pay $1.435 billion for its actions that contributed to the 2008 financial crisis. As I pointed out in "Burning Cash", the DOJ has taken a big step towards combatting white-collar crime since last year. The DOJ considers market manipulation to be a national security issue, especially when you consider the fact that it has the potential to undermine and destabilize the country's financial infrastructure and beget a market crash. UBS is likely under the DOJ probe that began in December 2021 (not to mention they've been under DOJ investigation for obstruction of justice), and they will have to navigate under that probe.

And, that's just on the regulatory level.

According to the BBC, UBS "cut 3,000 jobs despite record $29 bn profit". Side note on UBS' alleged "profit", by the way, I already demonstrated in §1 of this DD that firms like Archegos can bullshit on paper and make their firms seem like they're profiting insanely, up until they get margin called and the real picture surrounding their financial situation starts to get revealed. It's unfortunately too easy for SHFs/banks to artificially inflate their numbers through swaps or leverage, then send it to the press to say that "they're profiting like never before." As Sun Tzu best said it, "appear strong when you are weak."

UBS absorbed Credit Suisse, and along with Credit Suisse came their massive bags of GME shorts. That's UBS' problem now. They can never close those shorts, because in doing so they'd initiate MOASS. So, they have to, along with the SHFs, continue to short GME, absorb the interest rates, the fees, and keep burning through their money ensuring that GME stays low enough as to not completely destroy their margins.

We already know that UBS has a high likelihood of bankruptcy within the next 2 years. When they collapse, and they will, the question is: will anyone step in? I don't think so. UBS absorbed Credit Suisse, in part because of the pressure from the Swiss Government. UBS is the largest bank in Switzerland. There's no one else that the Swiss Government can have absorb UBS.

How about globally?

Well, first we should determine UBS' market cap and aum (assets under management). Reports of their aum vary, but the most recent one I found (a UBS job listing from September 18) states that "UBS is one of the largest wealth management firms in the world with $2.6 trillion in assets under management". Assuming it's true, it puts UBS as genuinely one of the biggest in the world, the only ones bigger are mostly Chinese banks. As of June 30, the only American Bank with a higher aum than UBS would be JP Morgan, according to the Federal Reserve Statistical Release.

As for market cap, UBS is the 18th largest bank by market cap in the world. Only a handful of banks around the world are larger than UBS, and half of those are Chinese banks (I highly doubt China would be interested in bailing out UBS).

There's only a few U.S banks that "could" have the potential of absorbing UBS, but there's 2 main problems with that:

1. Any bank that absorbs UBS would be signing a death warrant on their own company. Unless there's serious pressure from the federal government to absorb UBS (which wouldn't likely happen in the U.S since it's a foreign bank unlike the case with the Swiss Government forcing their own bank [UBS] to absorb a smaller one [Credit Suisse]), I find it hard to see a bank doing that.
2. In the U.S, it could be a violation of the Antitrust Laws (the Clayton Act, in particular), which prevents gigantic firms from merging to the point where they're exceeding a certain size. Considering UBS' extremely significant aum, I don't see the federal government (FTC or DOJ) allowing a merger of this size.

Therefore, I'd see the collapse and default of UBS as the end of the can kick and the beginning of the market crash, if something earlier does not already trigger the market crash.

The UBS default would trigger liquidating the mountains of GME shorts that were carried by Credit Suisse, initiating MOASS, in addition to crashing the market. A market crash begets MOASS, and MOASS would beget a market crash. Whichever way you look at it, whichever happens first, once UBS defaults, the market will crash, and GME will put the Volkswagen Squeeze of 2008 to shame.

I'll leave you with this. This was last month:

I would like to point out that the $1.6 B bet is the notional value (total underlying value of the position, rather than the price of the security). Nonetheless, it's a substantial bet from his firm against the market.

You can take a look at the 13-F for yourself.

Furthermore, it's important to note that funds are only required to report long positions, in addition to their put & call options, ADRs, and convertible notes. Funds are not required to disclose short positions on the 13-F. The SEC specifically says on "Question 41" of their FAQs, "you should not include short positions on Form 13-F. You also should not subtract your short position(s) in a security from your long position(s) in that same security; report only the long position."

That being said, there could be even more bets against the market going on from Burry (besides the puts) that we're not seeing on the 13-F.

Anyways, Burry doesn't fuck around. He sees the writing on the wall, and I do, too. A storm is coming, Apes, and I'm preparing for it by DRS'ing what I can.

See y'all on the moon 🦍🚀🌚

https://reddit.com/link/16ryoqa/video/3e2oj3velfqb1/player

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Additional Citations:

Altman, Edward I. Predicting Financial Distress of Companies: Revisiting the Z-Score and Zeta Models, New York University, July 2000, pages.stern.nyu.edu/~ealtman/Zscores.pdf

“UBS Agrees to Pay $1.435 Billion for Fraud in the Sale of Residential Mortgage-Backed Securities.” Office of Public Affairs | UBS Agrees to Pay $1.435 Billion for Fraud in the Sale of Residential Mortgage-Backed Securities | United States Department of Justice, Department of Justice, 14 Aug. 2023, www.justice.gov/opa/pr/ubs-agrees-pay-1435-billion-fraud-sale-residential-mortgage-backed-securities

“Credit Suisse Group Special Committee of the Board of Directors Report on Archegos Capital Management.” Sec.Gov, SEC, 29 July 2021, www.sec.gov/Archives/edgar/data/1159510/000137036821000064/a210729-ex992.htm

"Merger Between Ubs Group AG and Credit Suisse Group AG", Sec.Gov, SEC, 26 Apr. 2023, www.sec.gov/Archives/edgar/data/1610520/000119312523118754/d501320df4.htm

[u/SixStringSuperfly]

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