What can we learn from collapse of Archegos Capital Management?

What can we learn from collapse of Archegos Capital Management?

The Cast of Characters

Archegos Capital Management, a sort of private hedge fund company called “family office”, which acts (almost) outside of regulatory framework of SEC (USA’s Securities and Exchange Commission), because it only manages family money and not client’s money was run by Bill Hwang, ex trader with previous convictions for insider trading.

According to Bloomberg, Archegos started with $200 million of assets in 2013 and crested at almost $20 billion two weeks ago (March 2021) and most of the growth took place in the last 12 to 24 months.

The Principle:

System of making money out of nothing very little was not created by Bill Hwang, but the collapse of that system exposed the potential weakness in the money markets that makes some seasoned commentators very wary indeed.

The Method:

The system was as follows: Bill Hwang would instruct his brokers to purchase stock in a narrow group of companies, using little of his own money and a lot of money he borrowed from banks.

This is called leverage, and it is a proven way of making rich richer. Banks like it because they earn bank fees on it, and rich investors like it because a) money are cheap to borrow and b) stock market is has grown 38% in a pandemic, so after paying banks back, the total profits are made of 1. profits on stocks and shares bought with one’s own money plus 2. additional profit made on stocks and shares bought with banks money.

The Twist:

In case of Bill Hwang, he was buying the stock in only eight companies, give or take. Buying the shares increased the price of the shares, making him richer on paper, and giving, also on paper, more security to banks on which they based decisions to lend him more money.

The Cloak and the Dagger:

To muddle the waters, he would not officially transfer stocks and shares from his broker to his own name, making his trades anonymous, To muddle the waters further, he borrowed from number of banks, and due to issue of banking confidentiality, banks were not aware how much he borrowed from other banks.

He kept repeating the formula. The stocks he had interest in kept being traded (by him, anonymously), and raising, raising, raising in value. With his paper fortune growing, he kept borrowing more and more from the banks.

Rumping up of Suspense

His investment vehicle, Archegos, kept borrowing and plowing the borrowed money into the same eight stocks at the maximum leverage possible. To maintain itself it needed share prices to keep growing, to keep share prices growing it needed to keep buying shares, to keep buying shares it needed to borrow money, to borrow money it needed to show banks that shares keep growing……

The Reveal

Until they stopped growing. One of the eight was company called Viacomm.

Viacomm board, convinced by raising share prices of their brilliance in managing the company, issued new shares to raise capital and continue to lead the company to greatness. Alas, shares did not find enough buyers (Bill Hwang was too overextended to prop the price). With shares price dropping, brokers/banks asked Bill Hwang to put up more security for the loans they already gave him. But he had no money to do it. His precarious financial position, was suddenly exposed.

Banks started selling Bill Hwang’s holdings in those eight companies to recoup the money they lent to Archegos. Selling of shares resulted in sharp decline in share price. Archegos is dead. Banks have lost money - and we are talking billions of dollars. As the share prices of companies in question were artificially inflated and will never go back up, many other investors lost money.

The final twist:

Morgan Stanley and Goldman Sachs banks did fire sale of Archegos stocks before anybody had time to get their head around what is happening. While other banks searched for co-operative approach and tried to manage the situation and prevent deep dive in assets value, they were already in the clear. As a result, Morgan Stanley and Goldman Sachs walked with no losses. Everybody else’s losses rose exponentially.

Big Question:

How much of the stock market growth is due to such market manipulation, and how far are we from the sort of loss of confidence in financial system that paralysed the whole monetary structure in 2008-2009?


Nice post @Eva!!

What can we learn from the collapse of Archegos Capital???.

  1. That this was yet another financial implosion that could have been avoided.
  2. This should be obvious to them, but SEC and other regulators really need to go after financial practices that are not transparent and inherently complex. I understand that Hwang was using equity swaps, and for me it is unbeleivable that in practice there is no substantial supervision of derivative instruments. These should not only be closely monitored by regulators but also have compulsory public disclosure.
  3. The risk to the system could have been serious, and fortunately it seems that only Credit Suisse and Nomura got badly burnt. Big financial institutions are blind - still - to the risks they taking on.
  4. Lack of difersification can have serious consequences.
  5. Rules for minimum margin requirements need to be updated.

It’s interesting isn’t it?

This is just one that got caught out - I think it’s safe to assume there are many others that get away with such practices.

I get the feeling that the general attitude from national regulators must be something along the lines of ‘we like to allow leverage and such tools to those who can afford to lose money; we do know they can be abused; but it would be impractical to police them too hard, so we’ll have to focus on coming down hard on those who have made mistakes that have actually come to light’

What would you prefer to see…?

  1. Having the regulators spend much more time and money clamping down more to prevent anyone abusing derivatives, leverage and other such tools?
  2. Allowing a complete free for all, so literally anybody can have unrestricted access to this stuff and things like this are happening all the time?
  3. Or, pretty much what happens now - a mix of laissez-faire with punishment for those that get caught out?

Hey @seth!.. given that the main purpose of regulators is to mantain the stability, fairness and transparency of financial markets; option 1 - in some form - is the way to go.

As you mention, this time it was Archegos that overplayed its hand, but there are more players doing the same; and a few that might actually represent a systemic risk.

Regulators are always catching up to new innovations - not only in finance -, and in the case of derivatives & leverage, I think a more comprehensive approach from regulators is long overdue.

Following up on what I mentioned above, some form of public disclosure might even shift a bit of the burden from regulators to investors themselves, and would provide the markets with vital information to counter-balance extremely risky positions.


What have jumped at me from this whole sorry saga, is that very few of us have access to information that we need to become rational players on the stock market.
I am not even talking about incomplete information a la Joseph Stiglitz. As the financial instruments are getting more and more complicated and hidden under the more and more layers of derivatives, cloak and dagger accounting, swaps, and God knows what, the actual value of financial products becomes (again) increasingly obscure.

What caused the financial crash of 2008 was sudden realisation, that the value of mortgage backed securities were not calculated in a rational manner, and therefore they cannot be assessed as to their risk - and therefore they cannot be allocated a meaningful price.

As I read more how there are many ways that obscure financial products can be used to distort the price of stocks and shares, I am concerned that another loss of confidence of the markets in the markets is closer than we think.

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