Archegos Meltdown Is Another Groundhog Day on Wall Street
(Bloomberg Opinion) -- Everything old is new again on Wall Street — including a volcanic market crack-up involving a heavily indebted, high-flying hedge fund that’s able to operate with enough anonymity and impunity that nobody seems to be aware of how bad it might get until the eruption occurs.
Today it’s Archegos Capital, a hedge fund that Bill Hwang ran out of his family office, which was forced to liquidate more than $20 billion worth of stocks on Friday because it had essentially gorged on more debt than it could handle. When markets moved against his bets on a cluster of Chinese equities and shares in at least two U.S. companies, ViacomCBS Inc. and Discovery Inc., the bottom fell out.
In 1998, it was Long-Term Capital Management, a hedge fund run by John Meriwether and a band of former Salomon Brothers bond traders, which was forced to liquidate — after receiving a cash infusion of $3.6 billion in a rescue orchestrated by federal regulators — because it had essentially gorged on more debt than it could handle. When Russia defaulted on its sovereign debt and markets moved against LTCM’s bets on interest rate spreads, the bottom fell out.
A lack of transparency, and lots of unknowns about what’s lurking in the shadows, is a familiar co-conspirator in headline-grabbing Wall Street meltdowns. Thus it was in 1998 and thus it is today.
More on the Meltdown at Archegos:
The complexities always reside in the details of how various meltdowns occur. The animating force behind a lot of them, though, isn’t rocket science. It’s just greed colliding with an undisciplined — and sometimes juvenile or illegal — approaches to debt management. If you’ve ever lost control of your credit card spending, you basically understand what’s happening here.
Archegos and LTCM’s travails differ in some of the specifics, but in terms of general takeaways, well, they’re almost exactly alike — with, perhaps, an important exception I’ll get to later.
Hwang is a Wall Street insider with a sketchy background whom blue-chip banks and trading shops such as Goldman Sachs Group Inc. once avoided despite his interesting pedigree. He’s an alumnus of Julian Robertson’s old hedge fund, Tiger Management, and Robertson staked him when he ventured off on his own. The reason some firms looked askance at Hwang was because he pleaded guilty in 2012 to U.S. wire-fraud charges stemming from an insider-trading investigation. The episode produced $60 million in payments from Hwang, his firm and others to settle various criminal and civil charges. In 2014, Hong Kong regulators banned him from trading there for four years because of insider-trading transgressions.
But Hwang was an earner, and some firms, such as Nomura Holdings Inc., Morgan Stanley and Credit Suisse Group AG, were happy to play in his world. Even Goldman eventually succumbed, reportedly lured by lucrative trading commissions that convinced it to remove Hwang from its blacklist. They all channeled billions of dollars to Hwang so he could keep his firehose pumping. When he couldn’t make good on his debts, he got a “margin call” — Wall Street parlance for “pay me my money.” Again, if you’ve had a sinking feeling when your credit card bill arrives, you get this.
Hwang was also able to mask some of his trading — and his debts as well, I would think — by engineering his moves using derivatives such as swaps. Market insiders may have known Hwang was behind some of this stuff he did. But did any firm or trader know Hwang was behind all of it? I doubt it.
When big banks and brokerage firms forked over $124.5 billion to LTCM more than two decades ago did all of them know what the other banks were doing? Did all of them know that LTCM might have been posting the same collateral to each of them? Nah. They found out when the game ended.
But LTCM had stars! Two economists, Nobel Prize winners no less, worked for the firm! You might get to meet them if you visited! Even Sandy Weill, the steward of Citigroup, one of the banks caught up in the mess, fell under their spell.
Regulators forced Wall Street to bail out LTCM because they were worried its collapse might have been contagious. Wall Street got past that one but didn’t fix some of its regulatory and transparency problems, leading to the 2008 financial crisis.
A battle over regulation and transparency followed that crisis, and it looks as if enough cushions and oversight have been put in place so that Archegos’s meltdown — like most Wall Street meltdowns — doesn’t appear to pose a systemic risk. That’s the one thing, perhaps, that makes this moment different from 1998.
But everything else? Yeah, greed and a ravenous appetite for debt.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Timothy L. O'Brien is a senior columnist for Bloomberg Opinion.
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