Archegos’ woes again expose Wall Street’s weaknesses

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Brian Adam
Professional Blogger, V logger, traveler and explorer of new horizons.
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The company’s leverage was not excessive when compared to other firms on the US Stock Exchange.

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The problems caused by Archegos Capital Management support the idea that you have to be more careful with Wall Street than with leverage. Sun Kook’s investment firm Bill Hwang, forced to make a sale at a stock price of more than $ 20 billion that began to affect the markets last week, had not gone into excessive debt, according to news from the media. The only thing that happened is that many other red flags were ignored.

Archegos seems really conservative compared to, say, Long Term Capital Management. The infamous hedge fund run by renowned traders and Nobel Prize winners amassed roughly 25 times more than its $ 5 billion of equity in the months before it went under in 1998. Bear Stearns and Carlyle got at least that much. sum in mortgage loan funds that failed during the financial crisis a decade later. And investment banks typically had that dangerous leverage.

Archegos, on the other hand, borrowed only five times its capital. Goldman Sachs, which is tightly regulated and sold at least $ 10 billion of the fund’s portfolio on Friday, according to The Financial Times and other outlets, is almost seven times down on a risk-weighted basis.

Still, it appears that the Hwang family law firm has held concentrated positions in companies such as Baidu, Discovery and GSX Techedu. That alone should have set off alarms at the banks that serve hedge funds considering that Archegos had, including debt, some $ 75 billion at its disposal.

Furthermore, their propensity to use derivatives, another revealing and frequent sign of trouble, could have hidden the positions and thus the risks of exposure to banks. Archegos, for example, is nowhere near the top 20 owners of ViacomCBS or Tencent Music Entertainment. However, brokerages in Goldman, Morgan Stanley, Credit Suisse and Nomura do appear. Nomura shares fell 16% yesterday after it disclosed a potential loss of $ 2 billion from “an American client” it did not name, but Bloomberg reported that it was Archegos. Credit Suisse shares were down 13% at the start of the trading session after announcing that its first quarter results could be affected “materially and very significantly” due to “a US-based venture capital fund.” The Financial Times estimates that losses can reach $ 4 billion.

Hwang himself was a walking risk, having admitted to committing an electronic scam in 2012 and in 2014 he was banned from trading in Hong Kong for four years. Unscrupulous financiers may deserve a second chance, but banks that crave commissions and are willing to ignore the red lights on their dashboards remain a glaring problem. And that is precisely why they need lots of capital.

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