A few months after paying the fine in New York, Hwang began to act again – with the fund, now renamed Archegos, and as a “family office”. This refers to asset managers who have a family income of at least $ 100 million. According to media reports, Hwang had assets valued at ten billion dollars. The advantage for the owners is that they have practically sole control, are subject to less stringent financial market supervision requirements and have fewer disclosure requirements than other asset managers.
“Greed Greater Than Fear”
Despite his past and the much less transparent company structure, numerous investment banks – from Goldman Sachs to JPMorgan, Nomura, Credite Suisse, UBS to Deutsche Bank – broke his door to advance him money for high-risk financial bets. They made money by handling the financial transactions for Archegos, but above all – as long as things went well – through the financial bets themselves.
A banker from Tokyo put it in a nutshell to the “Financial Times”: Goldman Sachs shows well how banks acted in the Hwang case. For years, doing business with Hwang was banned after its insider trading turmoil in 2012. That “is actually a matter of course, considering Hwang’s reputation. But suddenly they do everything they can to win him over as a customer and lend him money. ”“ In short: it is greed that was greater than fear – until they pressed the stop button last week. ”
Hwang is one of the “Tiger Cubs” – a group of speculators who learned their trade from the legendary founder of the Tiger Management hedge fund, Julian Robertson.
Billions in losses threaten
Some of the world’s largest investment banks could lose more than six billion dollars in the crash of the Archegos Capital hedge fund, which sparked panicked sales on Wall Street on Friday, according to Reuters news agency.
On Monday, the Japanese bank Nomura and Credit Suisse warned of large losses in the first quarter. Nomura, for example, warned of a loss of two billion in the first quarter, at Credit Suisse the losses could add up to one billion according to unconfirmed information. Monday’s warnings triggered a global crash in bank stocks, with Nomura being the worst at 16.3 percent, followed by Credit Suisse at minus 14 percent.
Nomura and Credit Suisse cited the exit from positions at Archegos as the reason – large amounts of money given to the hedge fund to make financial bets. Previously, Archegos was unable to meet banks’ demands for additional collateral against possible losses last week.
When it became clear to the banks that Hwang had apparently speculated on stock betting, some of them began selling large chunks of stocks to minimize the damage. This exacerbated the losses in the stocks Archegos had bet on and added to the problems for the hedge fund. The shares of ViacomCBS and Discovery were affected.
It is unclear whether the banks involved did not know that Hwang also had billions in outstanding debts with the other banks, or whether they deliberately ignored this – additional – warning. A “Financial Times” report on Tuesday suggests the latter. Hwang’s largest donors apparently tried a common way out last week, but an agreement was not reached. Then it came to the billion dollar sales on Wall Street.
Memories of LTCM crash 1998
According to the Financial Times, it could be the biggest collapse of a hedge fund in more than 20 years. The newspaper compared it to the legendary end of the Long-Term Capital Management (LTCM) hedge fund in 1998, which was intercepted by the state to prevent even worse upheavals in the financial markets.
It is unclear what further consequences the Archegos debacle will have on the financial markets – whether it will result in investors’ investments in hedge funds being scaled back significantly and these funds coming under pressure. In any case, the banks involved have been demonstrated in public.
Industry fears stricter rules
There are fears in the financial industry that the Archegos case will result in regulators tightening their scrutiny and possibly more stringent rules. In 2008, after the Lehman Brothers fiasco, the rules were tightened. The US regulatory authority SEC released it to “family offices” whether they submit to the reporting requirements or not. According to “FT”, there is not a single meaningful information about Archegos in the corresponding database.
The cause happened in the middle of a stock market rally that has been going on for about a year, especially in the USA. Due to the extreme stock market profits, there are already concerns about a forming bubble. This is all the more relevant as a run on the stock exchanges is already expected because of the direct payments that the huge aid package from US President Joe Biden contains.