fell more than 14% in after-hours trading, as the online sharing platform said its monthly average users in the U.S. contracted during the quarter, a trend that accelerated this month.
The company reported 91 million monthly average users in the U.S. in the quarter, down 5% from a year earlier. Pinterest said that “engagement headwinds” continued this month, with monthly average users down 7% as of July 27. Globally, monthly average users increased 9% in the quarter.
“Our second quarter results reflect both the strength of our business and the recent shift in consumer behavior we’ve seen as people spend less time at home,” Chief Executive
said in prepared remarks.
Pinterest saw its user growth soar during the pandemic, as shut-in consumers turned to the website for masks and other products. The company has said the pandemic may have pulled forward some user growth.
The company also reported Thursday second-quarter net income of $69.4 million, compared with a loss of $100.7 million a year earlier.
Adjusted earnings were 25 cents a share. Analysts polled by FactSet were expecting adjusted earnings 13 cents a share.
Revenue totaled $613.2 million, compared with $272.5 million a year earlier. Analysts expected $562 million in revenue.
Pinterest shares closed Thursday at $72.04 apiece, down 6%. So far this year, the stock is up 9.32%.
to test a new story line. Even a lucky turn in videogames won’t free the streaming giant from the need to keep playing Hollywood’s game, though.
Netflix used its second-quarter report Tuesday afternoon to confirm previously reported plans to enter the videogame business. No timing was given, though the company said the offerings would be included in its current subscription plans at no additional cost. The company isn’t backing away from its work on movies and TV shows, but said in its letter to shareholders “since we are nearly a decade into our push into original programming, we think the time is right to learn more about how our members value games.”
That news comes as Netflix remains mired in somewhat of a post-pandemic slump. It added 1.5 million net new paying subscribers in the second quarter, which was a bit better than it had forecast but still its lowest level of growth in nearly a decade. It also projected 3.5 million net adds for the third quarter—about 29% less than what Wall Street was hoping for. That would bring the total number of new subscribers to about nine million for the first nine months of 2021. Netflix added more than 28 million paying subscribers in the same period last year.
A foray into games might make sense for a company with an intimate knowledge of the viewing habits of a user base that now numbers over 209 million. It is also a tough business to crack—even the mobile gaming market that Netflix says it expects to target initially. There are many participants, but most of the money is still made by long-established properties. Games like “Candy Crush” and “Clash of Clans” remain in the top-five grossing charts even after nearly a decade on the market.
Netflix will need to keep battling it out for video streaming eyeballs. The company expects its pace of new releases to pick up in the second half of this year; analysts from Wedbush count 42 original shows and movies expected for the third quarter alone. But the company still has its own track record to compete with: Last fall included popular shows such as “The Queen’s Gambit,” “The Crown” and “Bridgerton.” Netflix shares are down nearly 2% this year, lagging behind many internet and entertainment peers. Streaming investors hyper-focused on subscriber growth aren’t playing games.
Here’s what we’re watching ahead of the opening bell on Tuesday.
U.S. stock futures wavered, suggesting indexes would hover close to their record levels as investors awaited inflation data and earnings from the nation’s biggest banks.
Futures tied to the S&P 500 were relatively flat after the broad index climbed to its 39th record closing levels of the year. Dow Jones Industrial Average futures weakened 0.1%, while Nasdaq-100 futures were up 0.3%.
What’s Coming Up
U.S. inflation data for June is scheduled for 8:30 a.m. ET. Economists are forecasting a 5% increase in the consumer-price index from a year ago.
extended its fall back to earth, with its shares shedding more than 5% in premarket trading after Monday’s 17% drop. The company said it would sell up to $500 million of stock in a new share sale, a day after founder Richard Branson returned safely from a landmark trip to the edge of space.
slid 3.8% premarket. It has lost nearly 25% of its value this month so far.
The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite all hit record closes on Monday—and in the S&P 500’s case, it was the 39th record close this year, beating the Dow’s 27 records and the Nasdaq’s 24. The broad index is ahead of the others in terms of gains this year too, with a nearly 17% rise.
European stocks have also been on the rise, with both the Stoxx Europe 600 and Germany’s DAX index notching record highs on Monday.
On this day in 1852, Wells, Fargo opened for business in San Francisco and Sacramento. It was founded by Henry Wells and William G. Fargo to convert gold dust into cash for miners, transport and safeguard letters, gold nuggets and other valuable byproducts of the California Gold Rush.
Chart of the Day
Global coffee prices are climbing and threatening to drive up costs at the breakfast table as the world’s biggest coffee producer, Brazil, faces one of its worst droughts in almost a century.
and romance have long been a match made in heaven, but now the streaming giant is taking things to another level.
Perhaps emboldened by the success of recent shows like “The Circle” and “Love Is Blind,” Netflix is now doubling down on dystopian reality dating. According to the trailer, released this week, the new concept will feature “real life singles,” sporting “elaborate makeup and prosthetics” and putting blind date chemistry to the test.
As if dating weren’t already hard enough, contestants on “Sexy Beasts” are expected to find love while looking like a panda or a mouse. The trailer features a suave alien in a bowling alley chatting to his date, an apparent cross between a dolphin and a platypus, stating that “personality, for me, is everything.” Others—especially a beaver who candidly describes his favorite physical feature—are at least honest.
If nothing else, viewers will be in it for catfights.
It is a far cry from last year, when the so-called FAANG stocks took a commanding role in a market driven by the coronavirus pandemic.
This year, as the economy strengthens and vaccinations diminish the pandemic in the U.S., that synchronized march has broken down. Investors have broadened their sights beyond the familiar names whose technology businesses thrived as many Americans switched to working, shopping and socializing at home. With a re-energized economy creating opportunity across industries, money managers have options, as well as renewed scrutiny for stocks whose lofty valuations and widespread popularity could limit further upside.
While Alphabet Class A and Facebook shares are up 37% and 21%, respectively, other members of the group have weighed on the market. Amazon shares are up 7.1% in 2021, lagging behind the 11% rise in the benchmark S&P 500. Apple and Netflix have fared even worse, down 1.7% and 7.4% for the year.
Among the hundreds of S&P 500 stocks outpacing Apple—the U.S. benchmark’s largest company by market value—are many that were hit hard by the pandemic. Cruise company
With a healthier economy improving prospects for many stocks, investors have less reason to snap up ones that look expensive. That is particularly the case as a spurt of inflation focuses investors on the question of when the Federal Reserve will begin lifting interest rates from current, rock-bottom levels.
Fed officials last Wednesday indicated they anticipate raising rates by late 2023, sooner than previously expected. When rates rise, commonly used models show the far-off cash flows factored into many technology stock’s price tags are less valuable.
In recent months, investors haven’t been willing to pay as much for the profits of some of the megacap tech names with the richest valuations. Analyst estimates for Amazon’s per-share profit over the ensuing 12 months rose more than 40% from the end of December through last week, according to FactSet. But since Amazon’s share price rose only 7.1%, the stock’s forward price/earnings multiple contracted from nearly 73 times to about 55 times.
In the case of Netflix, expectations for forward earnings have risen while its share price has fallen. That has compressed the stock’s price/earnings ratio from almost 60 at the end of 2020 to about 43 last week.
Apple has seen its valuation fall since the start of the year, as projected earnings increased while its share price is nearly unchanged. It traded last week at about 25 times expected earnings—down from more than 32 times on Dec. 31.
After owning Apple shares for years,
chief investment officer of wealth-management firm The Bahnsen Group, said he sold them late last year because he thought they were too rich.
For much of 2020, a badly constricted economy pushed investors toward stocks—like the FAANG names—whose businesses were less affected and whose future growth became even more alluring with the drop in interest rates. The Russell 1000 Growth Index advanced 37% for the year, while the Russell 1000 Value Index eked out a 0.1% gain—the largest annual performance gap between the two style benchmarks in FactSet data going back to 1979.
Big tech stocks were among the leaders of that rally. Apple shares climbed 81% in 2020—last August becoming the first U.S. public company to surpass $2 trillion in market value—while Amazon rose 76% and Netflix gained 67%. Facebook added 33% for the year, and Alphabet 31%.
“Philosophically if you’re buying those very large-cap stocks—let’s say a trillion dollars and above—you’re doing so not because you think you’ve found some undiscovered gem,” said
who manages the Firsthand Technology Opportunities Fund. “You’re doing it more as an expression of a tech thesis, that people are going to be rotating to tech.”
That rotation began to unwind in November with news that a Covid-19 vaccine was emerging. Value stocks, which trade at low multiples of book value and tend to be more sensitive to the health of the economy, began a monthslong rally. In March, value stocks were beating growth stocks by the widest margin in two decades, although the gains have eroded recently.
Among big tech stocks, Alphabet and Facebook have served as a kind of reopening play, reporting a surge in advertising. Facebook’s profit in its latest quarter nearly doubled from a year earlier, while Alphabet’s earnings more than doubled.
“They’ve had this huge resurgence in online advertising and that’s really been driving the stocks,” said
senior portfolio manager at Synovus Trust Co. “All these businesses are reopening, coming back on, the economy’s accelerating. Where do they go to promote themselves? A lot of them go to Facebook.”
SHARE YOUR THOUGHTS
Do you think the performance of the big tech stocks will continue to diverge? Join the conversation below.
Netflix, by contrast, disappointed investors when it reported that its subscriber growth had slowed as the economy reopened. The streaming giant got a boost from the pandemic as many consumers were forced or chose to stay home, and it ended 2020 with more than 200 million subscribers.
Those fundamentals matter more now for investors, who seem less inclined to view the market in the same broad terms as they did last year.
“These just are different companies that for a long time were highly correlated because they were popular, they were performing well,” Mr. Bahnsen said. “There really was never an investment logic to a streaming company that was first to market trading in tandem with a social media company.”
Before the pandemic, U.S. companies were borrowing heavily at low interest rates. When Covid-19 lockdowns triggered a recession, they didn’t pull back. They borrowed even more and soon paid even less.
After a brief spike, interest rates on corporate debt plummeted to their lowest level on record, bringing a surge in new bonds. Nonfinancial companies issued $1.7 trillion of bonds in the U.S. last year, nearly $600 billion more than the previous high, according to Dealogic. By the end of March, their total debt stood at $11.2 trillion, according to the Federal Reserve, about half the size of the U.S. economy.
That torrent of inexpensive money has benefited all types of businesses. It helped cruise operators, airlines and movie theaters weather the pandemic by replacing some lost revenue with cash raised from bond sales. It allowed thriving businesses to stock up on cash and to save money by refinancing older debt. And it permitted companies that were struggling before the pandemic to ease the threat of bankruptcy by issuing new long-term debt.
“It’s been surprising that the cost of debt has come down as much as it has,” said
, a cell tower owner that has been issuing bonds with progressively lower interest rates to fund capital projects and pay off debt. “We’ve enjoyed the period of time we’re in.”
The question now is whether companies have merely delayed a reckoning. Debt-laden companies withstood last year’s recession far better than many had feared. But it was in many ways a unique shock to the economy, more akin to a natural disaster than a typical recession. For all their current enthusiasm, many CFOs and investors acknowledge that businesses could still be punished in a normal downturn that raises borrowing costs for a longer period and does more serious damage to household finances.
In a May report, the Federal Reserve noted that, by one measure, investors had rarely been compensated any less for the risk of holding corporate bonds, even as stock valuations were in line with historical averages. The report concluded that “vulnerabilities arising from business debt remain elevated.”
Some of the biggest borrowers during the pandemic, according to figures from financial-data provider FactSet, have been those hurt most by it.
With cruises canceled around the world, raising money early last year wasn’t easy for Carnival. Chief Financial Officer
said he spent two weeks in March 2020 to try to put together a bond sale, only for debt investors to balk because the company wasn’t also planning to issue more stock.
It took him another 10 days working nearly around the clock to put together a deal that included a stock offering. In early April last year, Carnival issued $4 billion of secured bonds with an 11.5% interest rate—a level typically associated with businesses with rock-bottom credit ratings—along with $500 million of stock and about $2 billion of convertible bonds.
“Somehow I managed to raise $6.5 billion,” Mr. Bernstein said. “I was amazed.”
From then on, though, as investor demand for corporate debt rebounded, borrowing money got easier. Carnival sold bonds or obtained loans from investors five more times over the next 10 months, finally issuing $3.5 billion of unsecured bonds in February at a 5.75% rate. In April, Mr. Bernstein said Carnival had raised enough money to last until it resumes full operations.
Corporate Debt Boom
U.S. corporate bond issuance has surged to record levels during the pandemic, aided by low borrowing costs, pushing total corporate debt to the equivalent of half the size of the economy.
U.S. nonfinancial corporate bond issuance*
Average U.S. investment-grade corporate bond yield, monthly
U.S. corporate debt as percentage of GDP, quarterly
U.S. nonfinancial corporate bond issuance*
Average U.S. investment-grade corporate bond yield, monthly
U.S. corporate debt as percentage of GDP, quarterly
U.S. nonfinancial corporate bond issuance*
Average U.S. investment-grade corporate bond yield, monthly
U.S. corporate debt as percentage of GDP, quarterly
Interest rates on corporate debt have declined in fits and starts since the 1980s, generally tracking short-term rates set by the Fed and U.S. government bond yields.
Several factors account for the decline. Low inflation is one. Also, economic growth has trended lower over the decades, limiting how high the Fed can raise rates without tipping the economy into a recession.
During the 2008-09 financial crisis, the Fed cut its benchmark federal-funds rate to near zero for the first time and started buying large quantities of U.S. Treasurys and mortgage-backed securities in an effort to boost the economy.
Investors seeking higher yields subsequently piled into riskier assets, ushering in an era of supersize debt sales.
The pandemic pushed the prevailing trends to extremes. The Fed again cut the federal-funds rate to zero and resumed purchasing Treasurys. It also broke new ground by buying corporate bonds, bolstering investor confidence.
After setting a record last year, overall corporate bond issuance remains robust this year, and higher-risk, speculative-grade bonds are now on pace to set their own record.
For many companies that weren’t thrown into crisis by the pandemic, the booming bond market has provided an opportunity to slash interest expenses.
At the start of 2020, the average investment-grade corporate bond yielded 2.84%, a rough indication of the interest rate companies with solid credit ratings would have to pay on new bonds. At the peak of pandemic fears, it rose to about 4.6%, but by the end of last year it had fallen to an all-time low of 1.74%. Companies rushed to try to lock in those low borrowing costs.
which as of March 31 had more outstanding debt than any other nonfinancial company, is one such company. In recent months, it announced deals to shed media and pay-TV assets that it said would reduce net debt by more than $50 billion.
It spent much of last year trying to take advantage of the bond boom to reduce interest expenses and push out debt maturities. In one deal, it issued $11 billion of bonds with maturities ranging from 7.5 years to 40.5 years to pay back bonds maturing over the next five years. In April, it said it had reduced its first-quarter interest expense by $150 million from the year-earlier period.
In June of 2020, Crown Castle, the cell tower operator, issued $2.5 billion of new bonds with maturities as long as 30 years, which enabled it to pay down bonds due in this year and next. And this year, it issued more bonds at its lowest ever interest rates.
Mr. Schlanger, the CFO, said the company can use interest savings to increase its profit margin, or it can pass them on to customers, which include the major U.S. wireless carriers. “Anytime we can take advantage of a market like this to either make more money or lower the cost to our customers, we’re more than happy to do so,” he said.
Share Your Thoughts
Do you think U.S. companies can handle their elevated debt levels? Share your thoughts below.
one of the country’s largest for-profit hospital operators, has been struggling with the challenges of serving patients outside major cities, and with the fallout from a problematic acquisition. At the end of last year, it was poised to burn through more than $600 million of cash in 2021, according to
Undeterred, investors have snapped up a series of secured bond offerings from the hospital chain since December, enabling it to both reduce its interest expense and extend its debt maturities.
Chief Financial Officer
said overall market conditions were a big help, enabling the company to take “a more aggressive approach in doing things quicker than we otherwise may have done.” He also attributed the successful offerings to improved earnings in the second half of last year and progress executing new strategies, which have involved selling underperforming hospitals.
Last month, Moody’s upgraded Community Health’s credit rating to just above its equivalent of a triple-C rating, citing the impact of its recent refinancing deals and improved operating performance.
Not everyone thinks it is good for the economy over the long term for struggling companies to have such an easy time refinancing debt.
the former chief economist for Deutsche Bank Securities who is now chief economist at the asset-management firm
Others are doubtful that even if the Fed announced that it would buy corporate bonds again, it would provide the same jolt to the market it did last year. They say that the normal risks of debt still apply, and that corporate bond investors could face significant losses in the next economic downturn.
Scott Kimball, a portfolio manager and co-head of U.S. fixed income at BMO Global Asset Management, said he doesn’t expect debt to be a problem in the near term, but that it could start causing headaches for businesses and investors in a few years when companies have to start thinking about refinancing some of the bonds they recently issued. Then, he said, “in the next recession, it’s going to be a major issue.”
One encouraging fact for investors is that many companies didn’t add debt over the past year to buy back stock, increase dividends or otherwise juice returns for shareholders. They borrowed money on an emergency basis, and could be in position to pay down debt once that emergency is over.
Mr. Bernstein, Carnival’s CFO, said the company will reduce its debt in coming years by paying off bonds and loans as they come due, using cash generated from operations. The goal, he said, is to reclaim the same investment-grade ratings that the company had before the pandemic.
Boeing has said it will make debt reduction a priority once its cash flow becomes more normal.
Some companies that borrowed money in the pandemic have already started to pay it back.
Delta has said it expects to return to its investment-grade profile within two years. It paid down a $1.5 billion loan in March and said in April that it would repay $850 million of additional debt by the end of this quarter.
issued $2.5 billion of bonds in March 2020 when state and local governments were issuing lockdown orders. Its earnings, though, actually improved during the pandemic, and in October, the company paid down roughly $1.8 billion of its bonds before their maturity dates.
issued $4 billion of bonds in March of last year to bolster its cash holdings. Since last September, it has reduced its debt by roughly $3 billion, including the early repayment of roughly $700 million of its bonds.
“What we’re seeing is corporations make an active attempt to improve their balance sheets,” said
senior portfolio manager and head of North American investment grade at the asset manager
said in a Facebook post that he would be leaving the company later this year.
These exits have led some to worry about the impact on Facebook’s advertiser relationships. Last year, for example, Ms. Everson played a big role keeping major advertisers on Facebook’s platform, despite civil rights-related boycotts of the social network, The Wall Street Journal reported.
Such relationships may be irreplaceable at a smaller company, but are perhaps less important to a platform as large as Facebook. Its legacy Blue app alone is used by roughly 36% of the world’s population monthly, while its broader family of apps are used by nearly 44%. That number of eyes has no equal.
SHARE YOUR THOUGHTS
Which company do you think is better positioned in the long term, Facebook or Apple? Join the conversation below.
The departures come at a particularly delicate time, though. Apple’s recent iOS operating system changes require developers to request users’ permission to track their online activity, a key way Facebook and other ad-based platforms were able to collect information about users in order to target them with ads. Facebook has been outspoken about its concern that tracking changes will disproportionately affect small businesses. That makes sense: As of the third quarter of last year, Facebook said it had over 10 million active advertisers on its platform, most of which were small businesses. Chief Executive
has also said that as a business, he believes Facebook can manage through the changes and that it may emerge even stronger if it becomes harder for small businesses to navigate data targeting without Facebook’s help.
Facebook doesn’t regularly disclose the percentage of revenue that comes from small businesses, but investors got a hint of the proportion last year, when boycotts from large, well-known brands like
had little effect on its top-line performance. Because Facebook has historically offered small businesses a virtually unmatched return on their investment, these companies have little choice but to advertise on its platforms.
But the recent iOS changes could threaten some of that loyalty. Caitlin Tormey Mongiardini, chief commercial officer of cashmere clothing company NAADAM, said her company recently reallocated some of its marketing budget to focus on brand partnerships and other strategic marketing areas outside Facebook after hearing that the iOS update had been negatively affecting its peers. In some cases, she said fellow direct-to-consumer brands have seen their return on investment on Facebook cut in half.
Will Matalene, paid platform expert and digital marketing consultant, points out that in addition to diminished ad targeting abilities, Facebook is also now getting less data from Apple, making it more difficult for the platform to demonstrate returns to clients.
Ultimately, brands that have historically allocated large, set portions of their budgets to Facebook are becoming more nimble in terms of advertising channels, he said. While he doesn’t expect any brand can afford to pull all their money out from Facebook’s reach, he does see brands diversifying away from the company until it can come up with new ways to bolster its value proposition amid heightened focus on user privacy.
Facebook has said it expects iOS changes to begin to have an impact on its business in the current quarter. It is forecasting second-quarter year over year revenue growth to remain stable or modestly accelerate from the monster 48% growth it put up in the first quarter, but for growth rates to “significantly decelerate” sequentially in the third and fourth quarters.
Despite some advertisers reporting lower returns on their investments, pricing on Facebook’s ads has been rising. The company said on its first-quarter conference call that its average price per ad in the first quarter increased 30% year-on-year, even as impression growth has eased lately as last year’s homebound consumers are stepping back out. It expects ad revenue growth to be primarily driven by price for the remainder of the year.
To continue justifying rising prices in the face of a potentially lowered value proposition, Facebook will likely need a new game plan. The departure of two key ad executives only underscores that big changes could be afoot.
To Facebook’s advertisers and investors, the only faces that really matter are Benjamin Franklin’s rolling in.
to make wagers on a handful of stocks, including the entertainment companies.
As is standard practice, Archegos had handed over cash to Credit Suisse to secure its bets. With the stocks more than doubling since the start of the year, Archegos asked for some of that money back, and it was credited, according to people familiar with the matter.
The transfer essentially meant Archegos had even less cash on the line backing up its positions. Some of Credit Suisse’s rivals, meanwhile, moved in the opposite direction. They noticed an increasing risk in the concentration of the firm’s positions and demanded it back up its investments with additional cash, according to executives at the banks.
Days later, ViacomCBS plunged, Archegos collapsed and the Swiss bank was stuck with a colossal loss.
Now Credit Suisse is picking over what went so badly wrong. The central questions include, why did it give the money back to Archegos? And more broadly, why did it back risky bets to a level that went wildly beyond all its stated norms and projections? Bank executives had even received a stark warning a year earlier on how the bank was handling risk—but the recommended changes hadn’t been made.
A preliminary conclusion is emerging: Credit Suisse’s creaky risk-management systems didn’t do their job as the bank’s guardrails and left it highly exposed to human errors in judgment, according to current and former people at the bank.
Trading data reviewed by risk managers in the lead-up to Archegos’s March failure was out of date. Credit Suisse’s staff didn’t quickly analyze its growing exposure to single stocks.
An internal audit in April 2020—made after the bank earlier had a loss of about $200 million from a hedge fund’s collapse—identified key problems that would come into play in the Archegos failure. But the bank was slow to roll out the planned improvements.
When employees flagged risks, they didn’t communicate them to higher ups. Contributing to the breakdown in risk controls was a key personnel change in the bank’s prime brokerage unit, which handled the Archegos account, after the death of an experienced manager in a ski-lift accident, people familiar with the matter said.
“The events that led to the losses in the Archegos case which we disclosed in our Q1 results are the subject of a Board level investigation which is looking into all these issues thoroughly,” a Credit Suisse spokesman said in an emailed statement. “We are committed to report the conclusions of that investigation (including the lessons learned).”
A spokesman for Archegos and Mr. Hwang declined to comment.
Taking on such a huge risk appears to have been for only a modest reward. Archegos, which managed the fortune Mr. Hwang made as a hedge-fund manager, produced for Credit Suisse revenue only in the tens of millions of dollars over several years, according to people familiar with the matter.
The collapse of Archegos, piled on top of the insolvency of another key Credit Suisse client, Greensill Capital, has plunged the bank into crisis. Credit Suisse took a $5.5 billion loss on Archegos, the largest related to that firm’s collapse on Wall Street.
It ousted its chief risk officer, investment bank head and others, and turned to investors for $2 billion in fresh capital to shore up the bank’s balance sheet. The Swiss regulator, Finma, said it opened civil enforcement proceedings against Credit Suisse. Regulators in the U.S. and the U.K. are probing the losses from Archegos at multiple banks, the Journal previously reported.
Just over a year before Archegos’s collapse, Credit Suisse Chief Executive
presented the bank’s best results in nine years, then said farewell to colleagues at its Zurich headquarters. The bank’s board had ousted him after a lieutenant ordered a spying operation on a Credit Suisse executive leaving for a rival. Mr. Thiam has denied knowledge of the spying.
In the overhaul, Mr. Thiam kept the bank’s prime brokerage business, which lends money to hedge funds and other big investors, because it supported a bigger equities business. That was seen as crucial, because rich clients needed access to stock markets for investments and to raise money for their own companies via Credit Suisse.
But Mr. Thiam said the unit should be more disciplined on risk-taking and focus on fewer clients. His team scaled back other parts of Credit Suisse’s investment bank, and dozens of senior people left. Less experienced colleagues frequently took their places, in a “juniorization” that former executives and investors who worked with Credit Suisse said left it more vulnerable to mishaps.
On the same February 2020 day that Mr. Thiam left the bank, Jason Varnish, a top risk manager in Credit Suisse’s prime brokerage, boarded a ski lift at Vail Ski Resort in Colorado. His coat became entangled, and the 46-year-old father of three was killed.
In a memo to staff at the time, the bank said Mr. Varnish “successfully struck the right balance between being commercially minded with clients while maintaining risk discipline for the bank.”
As at other banks, risk management had grown into an extensive operation inside Credit Suisse in recent years. The function gained stature and power after banks took large losses from complex trades during the financial crisis.
Risk management monitors the bank’s operations, seeking to avoid financial and reputational problems. Computer programs abide by rules and processes that are wired into the bank’s technology and must be followed by staff. In addition, at every level, the bank relies on human judgment.
Credit and reputational risk committees vet clients and transactions, and the bank puts limits on how much could be lost from a single client or counterparty. Bank executives, the board and board committees are in charge of the system and making sure it works, with assistance from internal-audit and credit-risk-review departments.
Regulators also play a role in assessing banks’ risk models, which draw on data, assumptions and scenarios to calculate expected outcomes. In 2019, the Federal Reserve said it found weaknesses in how Credit Suisse projected trading losses in an annual stress test and gave it four months to fix them.
The systems were tested when the spreading coronavirus pandemic spooked financial markets. In the volatility, Credit Suisse’s prime brokerage had a loss of about $200 million closing out investments for a flailing hedge fund, Malachite Capital, in March 2020, people familiar with the matter said.
then head of Credit Suisse’s markets business, oversaw the prime brokerage. An internal audit probed the loss, the size of which shocked some bank executives, the people said.
The audit flagged two failures, according to people familiar with the matter. The first was a lack of drilling down by the bank on Malachite’s trading strategy and how it would fare in volatile markets. The second was the use of an outdated margining system, which didn’t effectively monitor in real time how much risk a position created for the bank as the prices of the underlying securities changed.
Its recommendations included focusing on similar weak points with other clients, including those with high gross exposures through equity derivatives, which are based on the stock-price movements of the underlying asset, the people said. Plans were made to work on “process improvements” over two years, they said.
One effort was to move such trades to a more sophisticated “dynamic margining” system that would draw on additional real-time factors beyond price, such as volatility and concentration risk, according to the people. But changes weren’t in place for Archegos by the time it collapsed.
To fill Mr. Varnish’s senior risk-manager role in the turbulent markets, the bank turned to
a New York-based salesman in the prime brokerage unit. He had two decades of experience at the bank, carving a niche in financial derivatives that let hedge funds amp up stock bets with borrowed money.
His clients included Archegos, a heavy user of a derivative called a total-return swap, according to people familiar with the matter. The swaps let Archegos post a small amount of collateral to take large stock positions without owning the underlying securities.
Mr. Shah referred a request for comment to Credit Suisse, which declined to comment on his role. He didn’t respond to another request for comment.
Even with the Malachite stumble, Credit Suisse reported its best first-half net profit in a decade last July, mainly from resurgent markets and investment banking.
The new CEO,
who took over from Mr. Thiam in February 2020, said it was the right time to “capture growth opportunities.” His words were seen as a signal for the bank to capitalize on the market’s dizzying rally coming out of the pandemic, according to Credit Suisse executives. The Credit Suisse spokesman said Mr. Gottstein declined to comment.
Mr. Gottstein, who had previously headed Credit Suisse’s domestic unit catering to the rich, promoted Mr. Chin to run the investment bank and gave
Credit Suisse’s chief risk officer, a bigger role overseeing risk and compliance.
The Archegos portfolio rode hot markets, too. The fund’s positions at Credit Suisse dramatically multiplied from summer last year until March 2021, according to people familiar with the matter.
In September, Mr. Shah, who had been on the job for about six months, flagged the growing Archegos exposure to the investment bank’s counterparty-credit-risk team, one of the people familiar with the matter said. It couldn’t be determined if the specialist team, meant to monitor the health of Credit Suisse’s clients, reacted. The matter wasn’t escalated further by Mr. Shah or the counterparty-credit-risk team within the investment bank or to group-level managers, people familiar with the matter said.
Mr. Shah received regular reports indicating growing risks in the Archegos positions, the people said. The executive didn’t adequately flag these reports to senior personnel, they said.
In a total-return swap, a bank receives fees and owns the stock. Credit Suisse became one of the largest holders in some of Archegos’s stocks, according to the bank’s filings to the Securities and Exchange Commission. By the end of 2020, it owned about 6.5% of ViacomCBS’s Class B shares, according to FactSet.
But the bank’s tracking of the shareholdings had a lag, people familiar with the matter said, and the significance of the growing positions wasn’t picked up on, the Journal previously reported.
By mid-March, Credit Suisse’s notional exposure, or the value of the stocks underpinning the Archegos positions, was above $20 billion. Some inside the bank thought the exposure was only a fraction of that figure, in part because of the lagging tracking system, the Journal previously reported.
Mr. Gottstein and Ms. Warner, the chief risk officer, became aware of the bank’s exposure to Archegos in the days leading up to the forced liquidation of the fund, and neither had been aware of the fund as a major client before that, the Journal previously reported.
Days before Archegos blew up, ViacomCBS and Discovery stocks hit new highs. Around the middle of March, Credit Suisse released margin payments back to the fund, the people said.
Returning collateral might be a normal thing to do for a client with a diverse portfolio of holdings that had risen in value. But in the Archegos case, it was a problem because most of what it held was in a handful of stocks. This created special risks since any one stock falling could torpedo the firm.
Archegos also was making highly leveraged bets on some of the same stocks with other investment banks. Credit Suisse wasn’t aware of those moves, according to Credit Suisse executives.
The bank wasn’t fully assessing its risks in the stocks being so concentrated by single name and sector, according to the current and former people at the bank.
On March 22, a Monday, ViacomCBS shares fell when the company said it would issue new stock to invest in streaming services. Archegos got caught in a downward spiral as the stock fell and it couldn’t make margin calls. Other stocks tied to the fund’s trading positions also had been dropping.
In Zurich, Mr. Gottstein and Ms. Warner were entrenched in another crisis. Greensill Capital, a financing partner for a $10 billion set of Credit Suisse investment funds, filed for bankruptcy, putting billions in fund assets in doubt. Greensill ran into trouble because it couldn’t renew credit insurance on supply-chain finance loans it made to companies, exposing holes in Credit Suisse’s oversight of the funds. (The company’s founder, Lex Greensill, in May told a U.K. parliament committee he bears responsibility for Greensill’s collapse and that it relied too much on one insurer.)
In that March week, Credit Suisse was being pelted by questions from regulators, shareholders and fund investors over Greensill.
That Thursday, Archegos summoned its half-dozen lenders to try to hash out a survival plan.
Credit Suisse suggested the banks work together to unwind Archegos’s trades over a month. Some considered it, according to people familiar with the discussions. But no deal was reached and some swiftly unloaded their positions to other investors.
The next Monday, March 29, Credit Suisse warned of a significant loss. In April, it said exiting the positions cost $5.5 billion, and it raised $2 billion in fresh equity. Messrs. Chin and Shah and Ms. Warner were among the staff pushed out.
The Journal previously reported the bank has plans to roll out dynamic margining across client positions. In recent weeks, that system still wasn’t being applied to some positions, people familiar with the matter said.
Credit Suisse recently hired McKinsey & Co. to help identify and fix weak spots in its risk management, people familiar with the bank said.
Anchorage is among a group of hedge funds that has been waiting a decade or more for a sale or public offering of the studio on the strength of its content library. They were rewarded with the deal by Amazon to buy MGM for about $8.5 billion, including about $2 billion in debt.
New York hedge fund Anchorage began telling investors about its paper profit Wednesday. Anchorage invested less than $500 million in 2010, making for an IRR, a return metric that takes into account the length of an investment, of about 16%.
The deal took the return of Anchorage’s flagship hedge fund from 8% to 18% this year, said a person briefed on Anchorage’s performance. Anchorage co-founder
chairs MGM’s board and had been negotiating with Amazon.
The $6.5 billion equity value of the deal is around what MGM’s then-chief executive,
in early deal talks for the studio in 2018. Those talks were cut short when MGM’s board ousted Mr. Barber for having the unsanctioned talks. Some MGM shareholders said Wednesday it was possible those talks could have resulted in a similar deal, years earlier, had they continued.
Still, longtime MGM investors on Wednesday, and even newer shareholders, can claim strong returns on the deal if they realize their profits.
initially thrilled the investors of both companies. Discovery’s share price opened the day up 10% on the prospect of the niche cable-content provider suddenly becoming one of the largest Hollywood players. Meanwhile, AT&T’s share price jumped nearly 4% on the notion that the telecommunications giant could focus better on its core business without having to also pour capital into a media venture that was never popular with its own investors anyway.
The warm feelings didn’t last. Both stocks soon turned south and closed in the red that day. And Discovery kept falling—losing nearly 12% by the end of the week. The potential merits of the deal haven’t changed, but the risks have grown clearer. The complicated transaction will result in a much bigger and much more indebted Discovery, run by its current management but majority owned by AT&T shareholders. And the combined company faces a rapidly changing media landscape with a growing list of competitors. For example, last week brought several reports that
Discovery’s stock had already been on a wild ride due to its part in the Archegos Capital selloff earlier this year. The pending merger will add some fresh drama. Both Discovery and AT&T have to preserve the value of the WarnerMedia business during a highly uncertain period while awaiting regulatory approvals, which could take a year or more. The New York Times reported that WarnerMedia Chief Executive Officer Jason Kilar already has hired a legal team to negotiate his departure.
of Cowen noted in a report last week that Twentieth Century Fox saw “pretty serious degradation in performance” while Disney was working to complete its acquisition of the studio in 2019. “We’re not sure that the announcement of $3B in synergies will be well-received by WarnerMedia employees, either, particularly having just survived a synergy-driven purge associated with the AT&T acquisition,” he wrote.
How to integrate the two operations is also a major question hanging over the deal. As the home for the old Warner Bros. studio along with HBO and the Turner media properties, WarnerMedia specializes in broad offerings designed for mass appeal. Discovery has made its name with more niche offerings such as Animal Planet, TLC and the recently acquired Food Network and HGTV. An investor poll by Bernstein Research found a large split on whether the company should combine the HBO Max and Discovery+ services into one offering. Investors in the poll were also the “least confident” in the combined company’s ability to achieve the stated goal of $15 billion in direct-to-consumer revenue by 2023.
The first word on what Wall Street is talking about.
In a note to clients Monday, MoffettNathanson analysts wrote that Discovery has “a nice call option on transforming HBO Max into a global juggernaut that trades at a deep discount to Netflix and Disney.” But the firm still downgraded the stock to a “neutral“ rating, noting that the reward was “outweighed by near-term risks ahead of the deal closing.”
Discovery’s most hair-raising reality show might be the one the company has now cast itself in.