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Archegos Capital Management defaulted on what could be the biggest margin call in history. The news has shaken much of Wall Street and is eerily reminiscent of the 2008 market crash.
It’s not every day that something of this magnitude happens. Investors should be concerned because it shows how reckless Wall Street has become.
But hey, it’s easy for banksters to ignore risk when the Federal Reserve is pumping the markets full of liquidity.
The owner of Archegos Capital, Bill Hwang, used to own a hedge fund called Tiger Asia. He converted the fund to a family office after being charged with insider trading and market manipulation in 2012.
That’s right, Archegos is not a substantial public hedge fund. It’s a private wealth management firm or “family office.” On top of that, the owner was charged with insider trading. Yet they still somehow managed to get a $30 billion margin call.
How much leverage are the big boys taking on if a family office can get into something this deep?
Archegos reportedly had around $10 billion of family capital in management. For reference, BlackRock has nearly 9 trillion AUM. Still, Hwang’s family office had enough for high finance banks to let them take on an insane amount of leverage.
Banks like Goldman Sachs, Credit Suisse, Morgan Stanley, and Nomura were all involved with Archegos. The commissions were too good for these banks to pass up despite the risk and Hwang’s track record. It ended up costing global financial institutions an estimated $6 billion (so far), with Credit Suisse and Nomura taking the biggest hits.
How Did It Happen?
Total return swaps are behind the collapse of Archegos. These equity swaps are a derivative instrument brokered by banks that allow investors to bet on share prices without owning the underlying stock. This is known as a naked position using margin (loan). Equity swaps are similar to CFDs (contract-for-difference) and futures contracts.
Despite the complexity of the financial instruments used, the concept is easy to understand. Banks loaned an ungodly amount of money to Archegos, which was used to bet on stock prices. The share prices went against the firm and the bank’s “margin called” Hwang for more collateral.
Unfortunately, Archegos couldn’t meet the call, and the banks were left taking the hit. They were then forced to liquidate shares of the stocks to recoup their funds. Company shares from ViacomCBS, Discovery, Baidu, and GSX all took a nosedive from the selling.
The SEC has launched a probe of Archegos trades. It will probably end with a slap on the wrist and further regulations on high-risk derivatives. Probably. Regardless of the SEC investigation, this event shows that banks and firms lack common risk control.
It’s obvious now that retail traders are not the only ones taking on too much risk.
Suppose a non-professional trader losses money, no one but them is affected. But when banks take on too much risk and lose money, we all pay for it. The Archegos melt-down could be the canary in the coal mine.
March 2021 US Market Performance
March 2021 Market News Highlights
Another day another stimulus package. This time around, President Biden is pushing for a $4 trillion, no $2 trillion, wait $3 trillion, (something trillion) stimulus package. The money is aimed at infrastructure, manufacturing, public transit, and hidden things no one knows about. With the plan, President Biden vowed to increase corporate taxes to pay for all the money printing.
WTF is an NFT? A Non-Fungible Token is the latest craze that involves a linked crypto to a digital piece of art, tweet, music, gif, etc. People are paying millions of dollars for what essentially is a glorified JPEG. Jack Dorsey was able to cash in by selling his first tweet for $2.9 million.
A ship got stuck. A massive cargo ship named the “Ever Given” somehow turned sideways and blocked a very crucial waterway; the Suez Canal. The canal is an important shipping route that accounts for roughly 12 percent of global trade. The media had a heyday while it took 144 hours to dislodge the ship. There were plenty of great memes as well.
Rising yields. The 10-year Treasury yield went as high at 1.77% earlier this week and continues to worry investors. The more inflation fears grow, the more treasury bonds get dumped, which increases the yield. The Fed is printing themselves into a tough spot.
Apes won’t stop with GameStop. The GameStop Stonk investors have turned into a cult. They frequent the Wall Street Bets subreddit and call themselves apes. During mid-march, the group decided to adopt 3,500 Gorillas and other animals, raising over $300k for charity. Oh, and they’re still holding GameStop shares.
US Economic Indicators Recap
US Unemployment Rate dropped down to 6.2% month-over-month in February 2021, marking the lowest rate since April 2020’s record high of 14.8%.
Core Inflation Rate rose .01% month-over-month in February 2021, missing analyst expectations of 0.2%.
PPI – Producer prices increased 0.2% month-over-month in February 2021, meeting market expectations.
Housing Starts dropped 10.3% month-over-month in February 2021, marking the lowest reading in six months and deeply missing expectations.
Consumer Confidence jumped to 109.7 vs. the previous month’s reading of 90.4 and beating the 96.5 forecasts.
The Federal Reserve announced the pandemic regulatory relief granted in April 2020 to allow banks to count Fed deposits and treasury securities as assets (eSLR or enhanced Supplementary Leverage Ratio) would end as planned on March 31, 2021.