Tag Archives: Archegos

And Now A Liquidity Crunch: Credit Suisse Halts Redemptions From Renaissance Feeder Fund, by Tyler Durden

Posted on May 29, 2021 | Leave a comment

It’s smart to keep your eyes on situations like this. Financial crashes often start with one institution’s problems, which are “contained” until they’re not. From Tyler Durden at zerohedge.com:

Once upon a time, we couldn’t go an hour without some dire news involving Deutsche Bank (and its tens of trillions of gross notional derivatives). Now, it’s Credit Suisse’s turn.

In what was at least the third flashing-red headline for the day referencing the scandal-plagued Swiss Bank, moments ago Bloomberg reported that Credit Suisse, still humiliated from the billions it lost on Archegos and Greensill and countless subsequent banker terminations and defections, has temporarily barred clients from pulling their cash from a feeder fund that that was sold as an investment option for rich clients at the bank’s wealth arm, and which invests with Renaissance Technologies “after the strategy tanked and investors rushed to exit.”

To be sure, Credit Suisse has every right to impose this gate: according to Bloomberg, the Swiss bank invoked a hold back clause, after assets in the CS Renaissance Alternative Access Fund slumped to about $250 million this month from approximately $700 million at the start of 2020. While investors are expected to receive 95% of their redemption requests after two months, the remaining 5% is expected to be paid out in January, after the fund’s year-end audit, the people said. Hold back clauses are a standard part of offer documents at some U.S. based hedge funds.

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Will “Goldman Penis Envy” Crash the Economy Again? by Matt Taibbi and Eric Salzman

Posted on May 3, 2021 | Leave a comment

There’s more to running a successful investment bank than borrowing a lot of money and putting it to speculative use. From Matt Tiabbi and Eric Salzman at taibbi.substack.com:

Nearly fifteen years ago, on December 10, 2006, the CEO of Senderra, a subprime mortgage lender owned by Goldman, Sachs, sent grim news to its parent company. “Credit quality has risen to become the major crisis in the non-prime industry,” Senderra CEO Brad Bradley wrote, adding that “we are seeing unprecedented defaults and fraud in the market.”

Within four days, senior executives at Goldman decided to “get closer to home” by unloading risky mortgage instruments. They didn’t alert regulators, of course, but did save their own hides, with Goldman CEO Lloyd Blankfein soon after ordering subordinates to sell off the ugly “cats and dogs” in their mortgage portfolio.

Around the same time that Goldman was having its come-to-Jesus moment, the heads of rival Lehman Brothers were going the other way. In one meeting, the bank’s head of fixed income, Mike Gelband, pounded a table, telling the firm’s infamous Vaderqsque CEO Richard “Dick” Fuld and hatchetman-president Joe Gregory there was a $15-18 trillion time bomb of lethal leverage hanging over the markets. Once it blew, it would be the “grandaddy of credit crunches,” and Lehman would be toast.

Fuld and Gregory scoffed. They didn’t understand mortgage deals well and thought Gelband lacked nerve. “Be creative,” they told him, adding, “What are you afraid of?”

“We called it ‘Goldman Penis Envy,’” says Lawrence McDonald, former Lehman trader and author of A Colossal Failure of Common Sense. In telling the Gelband story, he explains that Fuld and Gregory were so desperate to beat out Goldman and become the richest men on Wall Street, they chased every bad deal at the peak of the speculative bubble.

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Stock Market Leverage in La-La Land, Rises to Historic WTF High, by Wolf Richter

Posted on April 18, 2021 | 1 comment

Leverage is called leverage because borrowed money levers markets up . . . and down. From Wolf Richter at wolfstreet.com:

Archegos shows how leverage is the great accelerator of stock prices on the way up, and on the way down. One of its bets, ViacomCBS, after skyrocketing, collapsed by 60%.

Vast, unreported, and at the time unknown amounts of leverage blew up Archegos Capital Management, dishing out enormous losses to its investors, the banks that brokered the swaps, and holders of the targeted stocks. The amount of leverage became known only after it blew up as banks started picking through the debris. ViacomCBS [VIAC] was one of the handful of stocks on which Archegos placed huge and highly leveraged bets, thereby pushing the shares into the stratosphere until March 22, after which they collapsed by 60%.

Archegos is an example of how leverage operates: It creates enormous buying pressure and drives up prices as leverage builds, and then when prices decline, the leveraged bets blow up as forced selling sets in. Most of the leverage in the markets is unreported until it blows up. The only type of stock-market leverage that is reported is margin debt – the amount that individuals and institutions borrow against their stock holdings as tracked by FINRA at its member brokerage firms. Margin debt is an indicator for overall leverage, and it has reached the zoo-has-gone-nuts level.

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Into the Swarm #1: Archegos in the Coal Mine, by Romain Bocher

Posted on April 10, 2021 | 1 comment

Investors herd, driving prices up and then scattering, taking their liquidity with them, when the market heads the other way. From Romain Bocher at theswarmblog.com:

Down the Market Hole

 

While the S&P 500 keeps rallying and hitting new records, the spectacular collapse of Archegos family office brought a sharp reminder of the consequences of excessive leverage in the financial system.

As always, Warren Buffet had already warned us: “Having a large amount of leverage is like driving a car with a dagger on the steering wheel pointed at your heart. If you do that, you will be a better driver. There will be fewer accidents but when they happen, they will be fatal.”

I do not know what the worst part of that story is. Whether it is the fact that Bill Hwang had criminal record. Or that Archegos used the same collateral to enter contracts with up to seven banks boosting leverage as high as 500%. Or if it is Nomura’s reaction, saying basically that whatever happens central banks will rescue banks if needed. Nothing seems to matter anymore for a system accustomed to perpetual bailouts since the LTCM failure.

But beyond those ethical considerations, the Archegos collapse has taught a few interesting things about US capital markets.

The first lesson for investors is the fact that years of lose monetary policy have laid the ground for moral hazard and very risky bets, as evidenced by the  record of margin debt. And the higher the leverage ratio, the bigger the vulnerability to unexpected moves.

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Archegos & Credit Suisse – Tip of the Iceberg, by Egon von Greyerz

Posted on April 9, 2021 | Leave a comment

The old saying is that there’s never just one cockroach, and in a highly leveraged and interconnected global financial system, there’s never just one blowup. From Egon von Greyerz at goldswitzerland.com:

Bill Hwang, the founder of the hedge fund Archegos that just lost $30 billion, probably didn’t realise when he named his company that it was predestined for big things.

Archegos is a Greek word which means leader or one who leads so that others may follow.

ARCHEGOS THE FIRST OF MANY TO COME

This, until a few days ago, unknown hedge fund is a trailblazer for what will happen to the $1.5+ quadrillion derivatives market. I have warned about the derivatives bubble for years. Archegos has just lit the fuse and soon this whole market will explode.

I know that technically Archegos was a Family Office for favourable regulatory reasons. But for all intents and purposes I consider it a hedge fund.

Warren Buffett called derivatives financial weapons of mass destruction and he is absolutely right.

Greedy bankers have now built derivatives to a self-destructive nuclear weapon. Archegos shows the world that an unknown smaller hedge fund can get credit lines of $30 billion or more that quickly leads to contagion and uncontrollable losses.

And when the hedge fund’s bets go wrong, not only do the investors lose all their money, also the banks which have recklessly financed Archegos’ massively leveraged speculation will lose around $10 billion of their shareholders’ funds.

It obviously will not affect the bankers’ bonuses which will only be reduced when the bank  has gone bust. Remember the Lehman crisis in 2008. Without a massive rescue package by central banks, Morgan Stanley, Goldman Sachs, JP Morgan etc would have gone under. And still the bonuses that year in these banks were the same as the previous year.

Absolutely scandalous and the very worst side of capitalism. But as Gordon Gekko said in the film Wall Street – Greed is Good! Well when it all finishes, it might not be as good as they think.

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A Rising Dollar Sinks All Boats, by Tom Luongo

Posted on April 8, 2021 | Leave a comment

When somebody borrows dollars, they’re essentially short the dollar (they would like to pay back with dollars that are worth less in other currencies). Given the huge amount of dollar-denominated debt out there, the world is short dollars, which is a problem if it’s value against other currencies goes up. From Tom Luongo at tomluongo.me:

Every day I open up my web browser to see yet another example of the basic functions of society breaking down.  Last week it was the vaporization of Archegos capital. I told you what I thought of this in a post that I hope, got people thinking.

Previous to Archegos, over the past two months we’ve seen the electrical grid collapse in Texas, hedge funds blown up over a meme stock.  Bitcoin is screaming that the national fiat currencies are all hyperinflating at the same time.

In the case of the recently solved Suez Canal incident, it doesn’t matter if it was incompetence or malicious behavior which caused the Ever Given to stick in the mud, in a world this fragile the smallest mistake can have outsized consequences.

The few days the canal was blocked caused an enormous pile up and re-routing of basic supplies and fundamentally important goods to Europe and North America that, to me, is a harbinger of where we are headed.

An overly complex world is an inherently fragile one.  Global trade is dependent on a handful of chokepoints remaining clear, like the Suez or the Straits of Malacca.  Jam up one of them and watch our everyday life we take for granted collapse.

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From the Notebook: Archegos Bikini Atolls, by Tom Luongo

Posted on April 3, 2021 | Leave a comment

Is Archegos a Chinese financial shot across the American bow? From Tom Luongo at tomluongo.me:

Do you remember the end of Dr. Strangelove? When the Russian ambassador reveals the existence of the Doomsday device Strangelove makes the point that such weapons only have deterrent power if everyone knows about them.

Secret weapons have no ability to deter cataclysmic violence.

The reply from the Russian ambassador is one for the ages, “It was to be announced at the Party Congress on Monday.”

Remember this when we consider the curious question of the demise of Archegos Capital.

Becuse sometimes I watch something unfold and I have zero opinion on it whatsoever.  The Suez blockage was one of them.  I had to will myself to care beyond the obvious, “this is bad” reaction. The more I think about it, however, the more significant it becomes (more on that in future posts).

On the other hand, the minute I read a single article about the vaporization of Archegos capital on Moday morning I smelled a rat, or least something vaguely rat-like.  And what immediately popped into my head was this thing is important, but not for the reasons anyone will admit to on CNBC or in the financial press.

In fact, they would go out of their way to demonize Bill Hwang, the head of Archegos, who ‘acted irresponsibly,’ ‘ran a scam,’ et cetera while everyone goes into cover thine own ass mode.

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Rehypothecated Leverage: How Archegos Built A $100 Billion Portfolio Out Of Thin Air… And Then Blew Up, by Tyler Durden

Posted on April 2, 2021 | 1 comment

Don’t think that there aren’t more Archegos-like hedge funds out there. From Tyler Durden at zerohedge.com:

One week after the biggest, and most spectacular hedge fund collapse since LTCM, we now have an (almost) clear picture of how Bill Hwang’s Archegos family office managed to single-handedly make a boring media stock the best performing company of 2021, but then when its luck suddenly ended it was margin called into extinction, leading to billions in losses for the banks that enabled what Bloomberg has dubbed its “leveraged blowout.”

Thanks to detailed reports by the Financial Times and Bloomberg, we now have the missing pieces to complete the picture of the biggest hedge fund implosion of the 21st century.

As a reminder, and as we previously discussed, we already knew how Archegos was building up stakes in its various holdings: unlike most other investors, the fund never actually owned the underlying stock or even calls on the stock, but rather transacted by purchasing equity swaps known as Total Return Swaps (TRS) or Certificates For Difference (CFD). Similar to Credit Default Swaps, TRS exposed Archegos to the daily variation margin on the underlying stock, and as such while the fund would benefit economically from increases in the underlying stock price (and, inversely, would be hit by price drops forcing it to put up more cash as margin any day the stock price dropped) it would never be the actual owner of record of the underlying stock. Instead, the stock that Archegos was long would be “owned” by its prime broker, the same entity that allowed it to enter into TRS in the first place. As such Archegos also never had any disclosure requirements, allowing it to transact completely in the dark while being fully compliant with SEC disclosure requirements – since it didn’t own the underlying stock, Archegos did not have to disclose it. Simple and brilliant.

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Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks, by Wolf Richter

Posted on March 30, 2021 | Leave a comment

There are at least $1 quadrillion (1000 trillions) worth of derivatives out there, most designed to amplify leverage. Nobody on the planet has any idea what all the risks are, what all the exposures are, or what will happen to the financial system if they start blowing up. From Wolf Richter at wolfstreet.com:

Banks, as prime brokers and counterparties to the hedge fund, are eating multi-billion-dollar losses as they try to get out of these secretive stock derivative positions.

The implosion of an undisclosed hedge fund, now widely reported to be Archegos Capital Management, is hitting the stocks of banks that served as prime brokers to the fund. The highly leveraged derivative positions, based on stocks, had blown up spectacularly. Banks get into these risky leveraged deals because they generate enormous amounts of profit – until they blow up and banks get hit as counterparties.

Credit Suisse [CS] is down 13% at the moment in US trading after it warned this morning that “a significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” and that it and “a number of other banks are in the process of exiting these positions,” and that the loss resulting from this exit “could be highly significant and material to our first quarter results.” The bank deemed it “premature to quantify” the loss.

Nomura Holdings [NMR] is down 14% at the moment in US trading after it warned this morning that “an event occurred that could subject one of its US subsidiaries to a significant loss arising from transactions with a US client.” It estimated the loss from this one client at “approximately $2 billion, based on market prices as of March 26.”

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