Last week has been a very nervous week for the global banks like Credit Suisse (Swiss) and Nomura (Japanese), amongst others, bringing back the scars of the Lehman Crisis. This time the firm in news has been Archegos Capital Management (ACM) – a New York based family office founded by Mr. Bill Hwang in 2012. They primarily invest in stocks in the markets like USA, Japan, China and Korea. Mr. Hwang is the former employer of now defunct hedge fund – Tiger Management and he is apparently known as “Tiger Cub”
FinFact: Mr. Hwang has been caught in insider trading charges by the Securities and Exchange Commission (SEC) in 2012 (when he was part of Tiger Asia) and had to shut shop then. He and his firm had to pay ~ USD 44 million to settle the charges! The same year, he founded ACM.
Modus Operandi:
At ACM, Mr. Hwang ran the house with proprietary capital of ~ USD 10 billion
However, the real exposure was much larger (may be 4-5x of original capital)
How? The firm had high exposure by using Swaps
Swaps are a derivative instrument traded over the counter without any public reporting
This leads to huge position, without remitting any upfront monies
How? The deal with the Bank is that “if stock goes up, Bank pays the difference, and if it goes down, the family office pays the difference”. So stock is held by the Bank and not the family office.
In effect, the stock position is actually held by the Bank and not the family office.
In case the stock prices of the underlying shares fall below a certain limit, then the Banks will call for additional margin (i.e. margin calls)
What happened at ACM:
What did this lead to? Book Losses by Major Banks to the tune of ~ USD 6 billion
Credit Suisse – upwards of USD 2 billion. Though they have not explicitly mentioned it due to ACM. Their statement says “A US Hedge Fund defaulted on margin calls”
Nomura – again around USD 2 billion though we do not have a confirmed number
Goldman Sachs and Deutsche Bank – not known but they pulled off the trigger earlier and were able to contain their losses
Mitsubishi UFJ Financial Group – ~ USD 270 million (And the profits in 2019 were ~ USD 94 million!)
Mizuho Financial Group Inc – approx. USD 90 million
Apart from the book losses on unwinding the trades, some of these Banks have lost their market capitalization of ~ 20% over the last few trading sessions.
Any learnings?
The family office set-up is not regulated by the SEC and most of their information are not in public domain. (and hence, no one was able to catch the collapse before it happened)
The regulators will hopefully come out with some regulations regarding dealings by family offices before they pose any systemic risk.
Regulators might impose restrictions on overall position limits and leverage quantum for family offices
Though the impact of ACM seems to be very low at the moment, the world banks seem to have not learnt from their past mistakes be it the Long Term Capital Management case in the 1990’s or the Bear Sterns during the Global Financial Crisis, 2008.
Please do drop in your comments on the article in the link below
Second lastly, do not forget to share the article with your friends and family!
And lastly, do subscribe to FinFacts! :-)
Nice Apurva. Learnt something.
Good one apurva!
World banks seem to have not learnt from their past mistakes and events like these will only generate more interest in decentralised world of finance.