We’ve all been there, losing money on account of something or the other. Maybe you lost your wallet. Maybe you chose to whip out a few notes near an open window. Maybe you donated it to a lost cause, like that friend who promised to pay you back, but never has (and never will).
No matter what though, you’ll never get anywhere near the incredible implosion of Bill Hwang, whose company Archegos Capital Management lost a whopping USD 20 billion in 2 days. It is, without a doubt, one of the most spectacular financial missteps in modern history.
Who on earth is Bill Hwang?
Good question. Hwang, now 57, was once regarded on Wall Street as one of the greatest traders on the block, and you’ve probably never heard of him, just as you never heard of his nosedive into infamy.
Since 2013, Hwang grew a measly $200 million fortune into a mind-boggling pile of cash that would be the envy of Scrooge McDuck, and was worth $30 billion at his zenith. Had he cashed in his stocks, he would have joined the ranks of the world’s richest billionaires without blinking an eye. Remember; there are wealthier people than him, but their assets were largely illiquid: businesses, real estate, complex investments, sports teams, and artwork. Theoretically, Hwang had enough liquidity to be laughing all the way to the bank.
And then, in two short days, it was gone. Poof. Just like that.
How did this happen?
Hwang kept a low profile, and used swaps, a type of derivative that gives an investor exposure to the gains or losses in an underlying asset without owning it directly. He didn’t like to show his hand or be too high profile, which is why few knew of him outside a select circle. Think of him as an elusive whale, the Moby Dick of investing. By using swaps, the identity and size of the positions taken by this Moby Dick were hidden from Captain Ahab. Heck, even the firms that financed his investments couldn’t see the big picture.
And then, the cookie crumbled.
Hwang’s playbook saw him use borrowed money to leverage his positions, and when Archegos defaulted on the loans taken out to fuel the massive machinery powering a massive $100 billion portfolio, it sent shockwaves through the financial world. Banks dumped his holdings like a hot potato, stock prices were savaged like a babe left to the wolves. Investors were left licking their wounds: Credit Suisse Group AG lost $4.7 billion, and Nomura Holdings Inc. were staring at a loss of about $2 billion.
Having ploughed most of its borrowings into a handful of stocks – such as ViacomCBS, GSX Techedu, and Shopify – Archegos had a highly concentrated portfolio, and kept its banks in the dark by trading via swap agreements. Banks extended him leverage and cemented his position in the underlying asset (such as stocks), with Archegos gaining (or in this case, losing) from changes in the stock price. But critically, the bank shows up in filings as the registered holder of the shares.
Thus, lenders didn’t know the extent of his leverage, or that he had over-extended himself with these very stocks by jumping into bed with other banks. And so, when it all came crashing down, it did so spectacularly.
Memories of meltdowns past
While Archegos’ collapse does evoke memories of financial meltdowns of yore, it didn’t cause a ripple effect of market losses because of good fortune, and perhaps character on Hwang’s part. His lenders, though, should have lent more scrutiny into his dealings, and leverage, and not played Russian Roulette with a loaded Bazooka.
As long as transparency remains at issue at the top of the investing pyramid, whales such as Hwang will continue to roam free. But there’s a parable in there for us all; never bite off, or invest, more than you can afford to chew on. There’s some food for thought.