How many TFTers have heard of
Bill Hwang or his personal investment fund,
Archegos Capital Management? The gigantic collapse of Archegos occurred just weeks after the merriment in Gamestop stock but, I think, passed almost unnoticed at Google News or TFT. Wikipedia has only a terse outline of this amazing story, which I will try to summarize.
IANAL and will not claim that Hwang committed any crime. But the story shows that billionaires do not need to play by the same rules as the rest of us. Credit Suisse alone lost about $5 billion in the debacle, and other banks were also affected. In the long run, the money that banks lose through such gambles may have to be made up with raised rates on small customers or taxpayer bailouts. And the misinformation and fluctuations caused by activities like Hwang's do make it harder for little guys to play the stock market successfully.
Hwang was apparently a brilliant fund manager, but was found guilty of insider trading about a decade ago. He paid a smallish fine and was barred from managing publicly available investment funds. Already we see iniquity: The proven insider trading was probably just the tip of the iceberg. U.S. Justice makes a big deal out of sending Martha Stewart to prison but thousands of bigger offenders walk around free.
And the ban on managing funds did not apply to "family funds." He could still do what he wanted with his own money, money of his wife and other relatives, and presumably money of friends who didn't need SEC approval of his fund. (The money controlled by secretive family funds dwarfs the total money of hedge funds.) Hwang had clawed his way to billionaire status before the insider trading, and with the success of his personal fund, Archegos Capital, he became richer than ever, worth tens of billions on paper. Despite this, he continued to drive an inexpensive car. Believe it or don't, he says he was making money as a "service to God."
His big returns were coming from big leverage: he was using techniques unavailable to the boys who click on Robinhood. IANAL and have no idea whether anything he did was illegal or even should be regulated against — adding new specific regulations after the fact is like playing Whack-a-mole. Maybe regulations should contain a clause like "Obey the spirit of this law, not just the letter. When in doubt, apply to regulators for specific permission." There is a U.S. law that margined purchases of stock must have collateral of at least 50%, but Archegos was putting up only 20%. This was accomplished with two tricks intended to hide his activities.
First of all, instead of buying stocks, he was buying "total return swaps." These are pieces of paper issued by banks that behave exactly like the underlying stock. If the underlying Viacom stock went up (or down) $1 billion, the piece of paper would go up (or down) $1 billion in value. Owning the piece of paper instead of the stock had two advantages: (1) Regulators and others would not know that Hwang/Archegos owned the stock. The banks would own the underlying stock (otherwise they'd be selling "naked options") and would appear as the stockholders of record. (2) These "total return swaps" were not subject to the 50% minimum margin rule. The banks weren't doing this for free, but I'm not sure Google knows what fees and interest they collected. Certainly it was hugely dwarfed by their eventual losses.
To further bolster his leverage, Hwang had six giant banks issuing these "total return swaps." IIUC he was in effect using the same assets as collateral for six separate loans — the banks didn't know, at least initially, of the other banks' involvements. I think you or I would be charged with bank fraud for that, but multi-billionaires do not play by the same set of rules.
Anyway, Viacom stock peaked at $100 on March 22, 2021 and had less than half that value a week later. With 50% margin, Archegos Capital's Viacom holding would have zeroed out, but Archegos had put up only 20% so the banks were left with the tab. (Viacom was not Hwang's only investment, but he wasn't diversified: his other stocks, like Baidu, also plunged.)
As Archegos' stocks plunged, the banks needed to do what any margin lender would do:
Sell. But the sizes of the holdings were huge and would (and did) accentuate the plunge of Viacom's stock price. The banks met together, hoping to plan an orderly withdrawal. But instead — and I wonder if there was corruption involved here — his two American financiers, Goldman Sachs and Morgan Stanley, sold their shares ASAP and suffered only modest losses in the fiasco. The foreign banks, especially Credit Suisse and Nomura Holding, weren't so lucky. Credit Suisse had to raise fresh capital.
Hwang's losses were obviously huge, but I don't think he was completely wiped out. IIUC he plans on yet another come-back, hoping to become a billionaire once again, in the "service of God."
Perhaps this story is off-topic. Hwang may have committed no crime and, anyway, lacks the money to make any restitution. But the amazing story seems fun. And it illustrates an American theme:
- Steal a billion dollars and become a celebrity.
- Steal a million dollars and go to country-club prison.
- Steal a thousand dollars and become Billy Bob's playtoy in the state lock-up.
- Steal ten dollars and be murdered on the sidewalk by the boys in blue.
