Some of the world's largest investment banks admitted on Monday that the risky bets of Archegos, a wealth management hedge fund, cost them billions of dollars. This new case which is shaking Wall Street illustrates the dangers of the taste for risk which has animated investors for more than a year. </p><div> <p>His name is a biblical reference. In ancient Greek, it means prince, ruler or ruler and can refer to Christ. But the Archegos investment fund is not a savior. This "family office", that is to say a wealth manager of several wealthy families, is at the origin of a new financial earthquake, which has caused the loss of billions to several leading banks since the March 26 and could cause even more damage in the days to come. After the GameStop affair, the setbacks accumulate.
The shock came at the end of last week, when financial institutions began to mass sell the assets of a dozen companies. In all, the Japanese bank Nomura, Credit Suisse or even Goldman Sachs and Morgan Stanley have sold for $ 20 billion in shares of companies, such as the American media giant ViacomCBS, the Chinese internet group Baidu, or the chain. Discovery, causing a stock market plunge in these values.
The extent of the debacle began to emerge on Monday, when Nomura, Japan’s largest investment bank, admitted it had lost $ 2 billion in the deal, while Credit Suisse said the losses would be probably “important”. They could reach between 3 and 5 billion dollars, according to the Financial Times. And it is not over: UBS bank and others should continue to shed shares whose price is plummeting.
US, Swiss and Japanese stock market regulators have started to look into the matter, the British daily The Guardian reported on Tuesday (March 30th). Their main task will be to understand how these financial giants got into such an uproar. But the common point is known: an obscure wealth manager, Archegos, led by Bill Hwang, an American financier with a troubled past. Incidentally, underlines the Wall Street Journal, stock market regulators will also seek to establish how this fund was able to bet $ 40 billion by going almost unnoticed.
Because that is what it is. Archegos, founded in 2013, had 10 billion dollars and has, however, invested four times more on the stock market in ten companies. To do this, Bill Hwang used a fairly classic financial mechanism: the leverage effect. By putting his own billions on the table, he convinced several banks to lend him the rest to carry out his investments.
But Bill Hwang did it in a low-key way. Instead of buying the shares of the targeted companies directly, Archegos has invested in derivatives, that is to say financial products backed by these listed securities. In this case, and to put it simply, the banks bought the stocks, and Archegos got part of the gains if their value rose, and had to pay to cover the losses if those stocks fell.
By the smell of tempting commissions
The advantage is that these derivatives “are subject to fewer declarative rules”, underlines Alexandre Baradez. A certain opacity which makes it possible, for example, to advance masked when trying to discreetly take control of a listed company. This is how, in particular, the French luxury giant LVMH had proceeded to acquire, little by little, shares in Hermès during its unsuccessful attempt to get hold of the famous brand in the early 2010s. a way of not publicly revealing the extent of the risks taken, since one does not appear to be the purchaser of the shares.
Hence the surprise when this veil of opacity tears. In the Archegos affair, the trigger was the fall of ViacomCBS stock, one of the main stocks in Bill Hwang’s fund portfolio. The banks asked Archegos to put back to the pot to make sure he was able to repay if the losses were to deepen. But the fund no longer had the means, which triggered the outburst of financial institutions which offloaded the securities acquired on behalf of Bill Hwang.
“It is clear that there are bankers who took a lot of risks in this affair”, recognizes Alexandre Baradez. Their generosity to Bill Hwang may seem all the more astonishing given that the financier was convicted of insider trading in 2012 while dealing with the financial markets for the famous hedge fund Tiger Management Fund. Theoretically, “this should have ostracized him from the investment community,” notes the Financial Times.
When the facts come out, my sense is the Bill Hwang blow up will be the most spectacular personal loss of wealth in history. If I was an investigative reporter, I’d be working 24-7 since this is cover story material. How he quietly got so rich and how fast it all disappeared.
– Mike Novogratz (@novogratz) March 29, 2021