The Kind Of Perverse Genius Only The Swiss Could Develop

Author:
Equity Private
Updated:
Jan 14, 2019
Original:
Dec 18, 2008

Bonus? Sure! How about some of this toxic paper?

The bank will use leveraged loans and commercial mortgage-backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said.
[...]
The securities will be placed into a so-called Partner Asset Facility, and affected employees at the bank, Switzerland's second biggest, will be given stakes in the facility as part of their pay. Bonuses will take the first hit should the securities decline further in value.

Oh, Credit Suisse, I think I love you.
Credit Suisse to Use $5 Billion of Illiquid Assets for Bonuses [Bloomberg]

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I don't really understand it but the TVIX thing is creepy fun. If you haven't followed it, Credit Suisse issued this exchange-traded note called TVIX that was a 2x levered bet on the VIX. They suspended new issuance about a month ago due to position limits, and people were just so damn excited to own the thing that its price crept up to 189% of its fair value, where "fair value" is a reasonably easily measurable thing based on the formula in the TVIX prospectus. Then last week Credit Suisse announced that they would be creating more units, and the price plummeted to and then through fair value, which is what you'd expect to happen. Except that it started plummeting a few hours before that announcement, which is Suspicious. So of course people are sad and so there's a Bloomberg Brief with sort of sad-funny quotes like: “When it started to fall, I bought more because I couldn’t believe how low it was going. I didn’t realize I was playing with a hand grenade.” – Michael Gamble [heh! - ed.], 67, who doubled down on his TVIX investment before the price collapsed. Investors “all think: ‘Oh, I’ll just buy these things, I’ll be hedged against volatility and everything will be wonderful.’ And now they’ve seen the market goes down and their volatility protection goes down too, and they’re going ‘Hmm, what happened here?’ These people are going to have to pay a really expensive lesson.” – Larry McMillan, who manages $30 million as president of McMillan Analysis Corp. So, yes, Larry, they are going to pay a really expensive lesson. But what is it? Stephen Lubben has a little thing in DealBook today where he frets:

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