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$20 Billion Lost in 7 Days

Nkosi Sibanda

18 Aug 2022

How a financial wizard turned out to be a financial fraud.

Photo Credit: Financial Times

Imagine building a fortune over the course of a decade and a half through experience, hard work and a natural understanding of financial markets, then losing it all over the course of a week. Your life’s work disappearing, and people will only remember you for the massive collapse and market failure you spearheaded including causing panic in the world’s largest financial markets. This is the story of Archegos Capital Management and its founder Bill Hwang.

Bill Hwang has an interesting history, he was the head of Tiger Asia Management where he pleaded guilty to insider trading of Chinese bank stocks in 2012, this revelation resulted in a $44 million fine and a four-year trading ban in Hong Kong. Hwang a former employee of Tiger Management, one of Americas most successful asset management funds.

Bill Hwang founded Archegos Capital Management in 2013. Archegos' holdings were primarily in the form of total return swaps, a financial instrument where the underlying securities (stocks) are held by banks. This meant that Archegos did not need to disclose its large holdings (this was done purposefully by Archegos executives to own exceedingly large positions in various companies without the company or public knowing, after a 5% purchase of a publicly list company’s shares the holder is legally required to disclose their holdings), while if it had transacted in regular stocks, it would have had to. The fund was also heavily leveraged and did business with multiple banks which were likely unaware of Archegos' large positions held by other banks.

On March 26, 2021, a failed margin call triggered banks offering prime brokerage services to Archegos started to liquidate billions of dollars' worth of various stocks. The stocks were tied to the total return swaps held by Archegos. This sale was reported to be the cause of a 27% plunge in share price of ViacomCBS (one of the largest mass media corporations in America) and a similar fall in the price of Discovery, Inc. Archegos failed to meet the margin calls, prompting a massive $20 billion fire stock sale as the banks, or at least some of them, rushed to sell off the fund’s positions to make cash so that Archegos could pay what was owed. The initial panic by the banks stunned the markets and almost caused multiple stock sell-off in non-related Archegos companies.

In the following days after the 26 March sell-off several major banks and financial institutions reported losses in the billions. On March 29, the share price of Credit Suisse was down by 14%, while Nomura Holdings shares declined by 16%

Credit Suisse lost - $5.50 billion

Nomura lost - $2.85 billion

Morgan Stanley - $911 million

UBS - $774 million

Mitsubishi UFJ Financial - $300 million

There are additional banks not listed above who did not disclose their full liability and losses.

Federal investigations started on the company to understand the true scope and scale of the collapse, Bill Hwang, and Patrick Halligan a former CFO at Archegos were arrested and charged with racketeering (the operation of a criminal enterprise or the criminal activity by an enterprise) and conspiracy, securities fraud, and wire fraud (requesting and receiving money from people or companies with the true purpose hidden and resulting in unethical or criminal activities).

Original Source: The Trade news - “The Collapse of Archegos Capital Management” by Hoyley McDowell

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