Archegos meltdown: What happened at Bill Hwang's firm and how it is affecting global markets. Archegos, set up by Bill Hwang, had its meltdown triggered after some of its portfolio stocks witnessed a significant price fall
NEW YORK (BLOOMBERG) - Alarms were blaring inside Wall Street's corridors of power in the middle of last week, as executives realised they might be facing the biggest hedge fund blowup since Long-Term Capital Management in the 1990s.
Global investment banks, gathering in a hastily arranged call, needed a swift truce to deal with Bill Hwang's Archegos Capital Management if they were to head off billions of dollars in losses for banks and a potential chain reaction across markets. Yet by Friday (March 26), it was everyone for themselves.
The forced liquidation that sent bellwether stocks tumbling last week and continues to send shock waves across capital markets, was preceded by bickering in the highest rungs of international finance that quickly devolved into finger-pointing and now fury, according to people with knowledge of situation. Banks are just starting to tally the carnage.
So far, Credit Suisse Group and Nomura Holdings have told shareholders their businesses face "significant" losses. Goldman Sachs Group, ahead of the pack on unloading positions, is telling investors the impact on its financial results will probably be immaterial. Deutsche Bank said it escaped too. Morgan Stanley, another big player that was still shopping blocks of stock as late as Sunday night, has yet to specify any toll.
Emissaries from several of the world's biggest prime brokerages tried to head off the chaos by holding a call with MR Hwang before the drama spilled into public view Friday morning. The idea, pushed by Credit Suisse, was to reach some sort of temporary standstill to figure out how to untie positions without sparking panic, the people said.
But any agreement was elusive, and by Thursday night, some banks had shot off notices of default to Archegos to seize collateral and potentially shop it to buyers to contain the banks' potential losses, the people said. Yet even then, it wasn't clear when terms with Archegos would allow sales to proceed, one of the people said.
Soon came the finger-pointing over who was breaking ranks, the people said. Some emerged from the talks suspicious that Credit Suisse wasn't fully committing to freezing sales. By early Friday, rival banks were taking umbrage after hearing that Goldman planned to sell some positions, ostensibly to assist Archegos. Morgan Stanley began drawing public attention with block trades. <\br><\br> Representatives for the banks declined to comment.
The worries over Archegos had begun mounting earlier in the week after a series of wrong-way bets exposed its fragility. The firm, little known outside finance circles, had amassed tens of billions of dollars in stock bets, much of it using opaque derivatives and borrowed funds, the people said. It included some giant bets on a small group of stocks. Then came ViacomCBS's announcement this month of a US$3 billion (S$4 billion) stock sale, which prompted a share slide that hurt Archegos.
While block trades are common, the size of Archegos's positions and their disposals rocked the market, as a US$20 billion selling spree gained momentum on Friday. Goldman Sachs and Morgan Stanley led the way, the people said. Other banks were left to follow, selling positions at a potential disadvantage.
Given Archegos's size, unwinding its positions could generate losses of around US$2.5 billion to US$5 billion for the industry, depending on how hard it is to liquidate holdings, JPMorgan Chase & Co analyst Kian Abouhossein wrote in a note to clients.
SINGAPORE - Banks are facing billions of dollars in losses after a little-known US investment firm, Archegos Capital Management, defaulted last week on margin calls, forcing a brutal near US$30 billion (S$40.4 billion) stock fire sale.Global investment banks, gathering in a hastily arranged call, needed a swift truce to deal with Bill Hwang's Archegos Capital Management if they were to head off billions of dollars in losses for banks and a potential chain reaction across markets. Yet by Friday (March 26), it was everyone for themselves.
The forced liquidation that sent bellwether stocks tumbling last week and continues to send shock waves across capital markets, was preceded by bickering in the highest rungs of international finance that quickly devolved into finger-pointing and now fury, according to people with knowledge of situation. Banks are just starting to tally the carnage.
So far, Credit Suisse Group and Nomura Holdings have told shareholders their businesses face "significant" losses. Goldman Sachs Group, ahead of the pack on unloading positions, is telling investors the impact on its financial results will probably be immaterial. Deutsche Bank said it escaped too. Morgan Stanley, another big player that was still shopping blocks of stock as late as Sunday night, has yet to specify any toll.
Emissaries from several of the world's biggest prime brokerages tried to head off the chaos by holding a call with MR Hwang before the drama spilled into public view Friday morning. The idea, pushed by Credit Suisse, was to reach some sort of temporary standstill to figure out how to untie positions without sparking panic, the people said.
But any agreement was elusive, and by Thursday night, some banks had shot off notices of default to Archegos to seize collateral and potentially shop it to buyers to contain the banks' potential losses, the people said. Yet even then, it wasn't clear when terms with Archegos would allow sales to proceed, one of the people said.
Soon came the finger-pointing over who was breaking ranks, the people said. Some emerged from the talks suspicious that Credit Suisse wasn't fully committing to freezing sales. By early Friday, rival banks were taking umbrage after hearing that Goldman planned to sell some positions, ostensibly to assist Archegos. Morgan Stanley began drawing public attention with block trades. <\br><\br> Representatives for the banks declined to comment.
The worries over Archegos had begun mounting earlier in the week after a series of wrong-way bets exposed its fragility. The firm, little known outside finance circles, had amassed tens of billions of dollars in stock bets, much of it using opaque derivatives and borrowed funds, the people said. It included some giant bets on a small group of stocks. Then came ViacomCBS's announcement this month of a US$3 billion (S$4 billion) stock sale, which prompted a share slide that hurt Archegos.
While block trades are common, the size of Archegos's positions and their disposals rocked the market, as a US$20 billion selling spree gained momentum on Friday. Goldman Sachs and Morgan Stanley led the way, the people said. Other banks were left to follow, selling positions at a potential disadvantage.
Given Archegos's size, unwinding its positions could generate losses of around US$2.5 billion to US$5 billion for the industry, depending on how hard it is to liquidate holdings, JPMorgan Chase & Co analyst Kian Abouhossein wrote in a note to clients.
In an era of easy money, Archegos was able to borrow so much that its failure created shockwaves large enough to ripple across global financial markets. Here's how it happened: Bill Hwang and the family office New York-based Archegos was set up by Mr Bill Hwang, formerly a stock analyst with storied hedge fund Tiger Management, founded by legendary fund manager and US billionaire Julian Robertson. Mr Robertson closed his fund in 2000, but handed Mr Hwang, one of his proteges or "Tiger cubs", about US$25 million to launch his own fund, Tiger Asia Management, in 2001.
Mr Hwang grew his firm's assets to over US$5 billion at its peak. But Mr Hwang shut the fund in 2012 after pleading guilty to US insider trading, paying US$60 million to settle charges of manipulating Chinese stocks. He was also banned from trading securities in Hong Kong for four years in 2014. So Mr Hwang went private. He converted Tiger Asia into a single-family office, Archegos, in 2013 to manage his personal wealth. These firms that manage the money of wealthy families are generally outside regulatory scrutiny in the US and most of their information is not in the public domain. Secret swaps Archegos had assets of around US$10 billion but its real exposure to stocks was much more, with some reports putting it at US$50 billion.
What Mr Hwang did was that he did not buy stocks directly - he bought complex "derivative" instruments or swaps from banks called contracts-for-difference or CFDs. CFDs allow traders to place a directional bet on the price of a security without actually buying or selling the underlying instrument. If the price went up, the seller pays the buyer the difference, and vice versa. Under US rules, investors who own a stake of more than 5 per cent in a US-listed company usually have to disclose their holdings and subsequent transactions. But using CFDs, Mr Hwang did not have to declare his holdings.
CFDs are also "leveraged" bets, where investors can use borrowed money at a fraction of the cost of the underlying asset, typically around 10-20 per cent. So you can get a position worth US$1 million on a stock and only need US$200,000 in margin. Using the swaps, Mr Hwang built huge and highly leveraged positions in listed companies like Viacom CBS Corporation, Discovery Communications, along with Chinese giants Baidu and Tencent.
When margin calls Archegos' meltdown was triggered last week after some of its portfolio stocks witnessed a significant price fall. This in turn triggered margin loan calls from the banks. Archegos' failure to meet those calls forced big banks, including Nomura, Credit Suisse, UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley, to liquidate its stock positions. Shares of Archegos' portfolio stocks were battered by the banks' giant block trades in the selling spree. The banks' losses have been estimated at US$6 billion to US$10 billion from the fire sale, while billions were also wiped from their market value with their own shares hammered. What now? The collapse of Archegos is another strike against the lightly regulated non-bank or "shadow banking" sector and has renewed calls for tighter regulation.
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