Breakingviews - Archegos mess revisits Wall Street weak spots

A street sign, Wall Street, is seen outside New York Stock Exchange (NYSE) in New York City, New York, U.S., January 3, 2019. REUTERS/Shannon Stapleton - RC1C326C6140

MELBOURNE (Reuters Breakingviews) - The woes originating from Archegos Capital Management support the idea that there’s more to beware on Wall Street than leverage. Sun Kook “Bill” Hwang’s investment firm, forced into a $20 billion-plus fire-sale of stocks that started rippling across markets last week, did not borrow excessively, according to media reports. It’s just that plenty of other warning signs were missed.

Archegos looks positively conservative next to, say, Long Term Capital Management. The infamous hedge fund led by renowned traders and Nobel Prize-winning economists racked up around 25 times its almost $5 billion of capital in the months ahead of its collapse in 1998. Bear Stearns and Carlyle heaped at least that much onto mortgage-heavy credit funds that failed during the financial crisis a decade later. And investment banks routinely carried that kind of dangerous leverage.

By contrast, Archegos borrowed a mere five times its capital. Closely regulated Goldman Sachs, which sold at least $10 billion of the fund’s holdings on Friday, according to the Financial Times and other news outlets, is at nearly seven times on a risk-weighted basis.

Even so, Hwang’s family office appears to have been holding concentrated positions in companies such as Baidu, Discovery and GSX Techedu. That alone should have raised red flags at the banks serving as prime brokers considering that Archegos had, including debt, around $75 billion at its disposal.

Moreover, its penchant for using derivatives, another frequent tell-tale sign of trouble, might have masked the positions and thus exposure risks for the banks. Archegos, for example, doesn’t show up as a top-20 owner – if at all – at ViacomCBS or Tencent Music Entertainment. The brokerages at Goldman, Morgan Stanley, Credit Suisse and Nomura do, however. Nomura’s shares fell 16% on Monday after it unveiled a potential $2 billion loss from a “U.S. client” it wouldn’t name but which Bloomberg reported was Archegos. Credit Suisse stock dropped 13% in early trading after flagging a potential “highly significant and material” hit to its first-quarter results from a “U.S.-based hedge fund” that the Financial Times put as high as $4 billion.

Hwang himself was a walking risk factor. He admitted to wire fraud in 2012 and in 2014 was banned from trading in Hong Kong for four years. Financial rogues may deserve a second chance, but fee-hungry banks willing to overlook the blinking lights on their dashboards clearly remain a problem. It’s precisely why they need oodles of capital.

This story has been updated in the penultimate paragraph to reflect new information.


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