The sudden implosion of Bill Hwang’s Archegos Capital Management is one of the most spectacular failures in modern financial history, says an article on NDTV.
Bill Hwang’s early career life
Starting in 2013, he parlayed more than $200 million leftovers from his shuttered hedge fund into a mind-boggling fortune by betting on stocks. He became the biggest of whales-financial slang for someone with a dominant presence in the market-without ever breaking the surface
How the destruction began
The sudden implosion of Hwang’s Archegos Capital Management in late March is one of the most spectacular failures in modern financial history.
Archegos never showed up in the regulatory filings that disclose major shareholders of public stocks. Hwang used swaps, a type of derivative that gives an investor exposure to the gains or losses in an underlying asset without owning it directly. This concealed both his identity and the size of his positions. Even the firms that financed his investments couldn’t see the big picture.
Invested in streaming
ViacomCBS, struggling to keep up with Apple TV, Disney+, Home Box Office, and Netflix, announced a $3 billion sale of stock and convertible debt. The company’s shares, propelled by Hwang’s buying, had tripled in four months. Raising money to invest in streaming made sense.
Instead, the stock tanked 9% on Tuesday and 23% on Wednesday. Hwang’s bets suddenly went haywire, jeopardizing his swap agreements. A few bankers pleaded with him to sell shares; he would take losses and survive, they reasoned, avoiding a default. Hwang refused, according to people with knowledge of those discussions, the long-ago lesson from Robertson evidently forgotten.
Hwang, say people with swaps experience, likely had borrowed roughly $85 million for every $20 million, investing $100 and setting aside $5 to post margin as needed. But the massive portfolio had cratered so quickly that its losses blew through that small buffer as well as his capital.
The dilemma for Hwang’s lenders was obvious. If the stocks in his swap accounts rebounded, everyone would be fine. But if even one bank flinched and started selling, they’d all be exposed to plummeting prices.
Archegos at loss
Morgan Stanley made a preemptive move. The firm quietly unloaded $5 billion of its Archegos holdings at a discount, mainly to a group of hedge funds. Goldman started liquidating $6.6 billion in blocks of Baidu, Tencent Music Entertainment Group, and Vipshop. It soon followed with $3.9 billion of ViacomCBS, Discovery, Farfetch, Iqiyi, and GSX Techedu.
When the smoke finally cleared, Goldman, Deutsche Bank AG, Morgan Stanley, and Wells Fargo had escaped the Archegos fire sale unscathed. There’s no question they moved faster to sell. It’s also possible they had extended less leverage or demanded more margin. As of now, Credit Suisse and Nomura appear to have sustained the greatest damage. Mitsubishi UFJ Financial Group Inc., another prime broker, has disclosed $300 million in likely losses.
It’s all eerily reminiscent of the subprime mortgage crisis 14 years ago. Then, as now, the trouble was a series of increasingly irresponsible loans. As long as housing prices kept rising, lenders ignored the growing risks. Only when homeowners stopped paying did reality bite: The banks all had financed so much borrowing that the fallout couldn’t be contained.
The best thing anyone can say about the Archegos collapse is that it didn’t spark a market meltdown. The worst thing is that it was an entirely preventable disaster made possible by Hwang’s lenders. In the U.S., whales such as Hwang can stay invisible.
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