One For The Books

Short_Vol_Blowup_SA
Source: Seeking Alpha

It gets worse. The indicative values for SVXY and XIV had fallen over 90% when they finally printed for 2/5. Word on the street is that the collapse of XIV may have blown a $500 million hole in Credit Suisse’s balance sheet (at pixel time Credit Suisse was the largest holder of XIV, owning about 4.8 million shares).

No one who lost money in this trade has anyone to blame but themselves. The risks were well known. And any time you see stories like this, you know you’re looking at a disaster in the making.

UPDATE: News reports indicate Credit Suisse is fully hedged for their XIV exposure.

UPDATE #2: Credit Suisse is calling (a.k.a “accelerating”) the XIV ETN.

UPDATE #3: Marketwatch relates one retail XIV trader’s tale of woe:

“I started with 50k from my time in the army and a small inheritance, grew it to 4 mill in 3 years of which 1.5 mill was capital I raised from investors who believed in me,” Lilkanna explained, adding that those “investors” were friends and family.

“The amount of money I was making was ludicrous, could take out my folks and even extended family to nice dinners and stuff,” he wrote. “Was planning to get a nice apartment and car or take my parents on a holiday, but now that’s all gone.”

UPDATE #5: The FT has some details on Credit Suisse’s positioning:

Credit Suisse said the closure of the VelocityShares product, whose valued peaked at $2.2bn on January 11, had “no material impact” on the group and a Credit Suisse insider said its exposure was “fully hedged”. The Swiss lender was listed as the biggest holder of the note, but the insider stressed that the bank did not hold any of the product’s notes on its own behalf, rather they were held in custody for clients. He also stressed that the notes were not sold through Credit Suisse’s private bank.

Still, there could be some repercussions for the bank, which is midway through a restructuring plan designed to make it less dependent on risky investment bank activities. “The reputational issue is more tricky and it can’t be comfortable having put clients into a product that has imploded like this,” said Piers Brown, an analyst at Macquarie. “They’ve indicated it was mainly sold to hedge funds so I guess you’d say they are sophisticated investors who knew the risks. However, they’ve also talked of the opportunity they see in selling more structured products to their private banking clients. This might raise a few question marks over that idea.”

UPDATE #6: The vol shorting ex-Target manager turned day trader apparently survived the blowup. If this is true, I have to give the guy credit for managing risk in his book.

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