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The incredible thing about Bill Hwang is that he made enormous levered bets on risky stocks, and those bets worked out perfectly and made him immensely wealthy in the course of a year or two, and he seems to have plowed every cent of it back into increasing those levered bets. So Viacom fell from $100.34 at its peak on Monday, March 22, to $48.23 by that Friday, March 26. That’s still higher than it was trading for most of January. If Hwang was 85% levered in January, and then left those positions alone, he would still be about 85% levered now — meaning that he would not have gotten any margin calls, his prime brokers wouldn’t have had to sell any stock, he’d still be worth many billions of dollars and his brokers would still be clipping fat fees without any losses. But that’s evidently not what happened. Instead Hwang kept borrowing more; indeed, it seems that the reason his stocks went up so much in recent months is that he kept buying all of them. Here’s a nice detail from Bloomberg’s reporting: Underscoring the chaos of an escalating situation, representatives from Credit Suisse Group AG floated a suggestion as they met last week to confront the reality of such an exceptional margin call and consider ways to mitigate the damage: Maybe wait to see if his stocks recover? Viacom, some noted, seemed artificially low after its run-up past $100 just two days earlier. Yet it was Hwang’s own orders that had helped make Viacom the year’s best performer in the S&P 500, forcing benchmark-tracking investors and exchange-traded funds to buy as well. Without him creating that momentum, Viacom and his other positions had little hope of rebounding. There is a simple schematic trade here: Start with a lot of money. Borrow a lot more money. Use all that money to buy a ton of a small handful of stocks, cornering the market in those stocks and pushing up their prices. As their prices go up, you have more equity — your positions automatically deleverage. You use that equity to borrow even more money and plow it back into those stocks, pushing them up more. Repeat forever? A couple of points about this trade. One is, for Archegos, it can’t really go on forever, can it? You are operating with no margin for error; every time your stocks go up, you borrow more money to increase your bets. If your stocks ever go down, you lose it all. And they will go down eventually. For one thing, the odds are that something will go wrong, that one of your companies will have disappointing earnings news. But also, if you pick a handful of companies and push all their stocks up a lot, eventually one of them is going to take advantage of its new high stock price and issue stock, as Viacom did last week. A big stock issuance adds supply and tends to push down the stock price; if you are running this strategy, you will need to buy more stock to keep up. But if you’ve already borrowed every penny you can get, how can you buy more stock? That actually seems to have been part of Hwang’s problem, the New York Times reported: On Monday, March 22, ViacomCBS announced plans to sell new shares to the public, a deal it hoped would generate $3 billion in new cash to fund its strategic plans. Morgan Stanley was running the deal. As bankers canvassed the investor community, they were counting on Mr. Hwang to be the anchor investor who would buy at least $300 million of the shares, four people involved with the offering said. But sometime between the deal’s announcement and its completion that Wednesday morning, Mr. Hwang changed plans. The reasons aren’t entirely clear, but RLX, the Chinese e-cigarette company, and GSX, the education company, had both spiraled in Asian markets around the same time. His decision caused the ViacomCBS fund-raising effort to end with $2.65 billion in new capital, significantly short of the original target. ViacomCBS executives hadn’t known of Mr. Hwang’s enormous influence on the company’s share price, nor that he had canceled plans to invest in the share offering, until after it was completed, two people close to ViacomCBS said. They were frustrated to hear of it, the people said. At the same time, investors who had received larger-than-expected stakes in the new share offering and had seen it fall short, were selling the stock, driving its price down even further. “The reasons aren’t entirely clear,” but the implication seems to be that Hwang — with a $20 billion net worth and perhaps $100 billion of gross positions — couldn’t find $300 million to put into the Viacom offering. 3 Everything he had was mortgaged to the hilt; there was just no spare cash lying around. “Archegos shocked its lenders when it told them the size of its portfolio and how little cash it was holding,” reported the Wall Street Journal. Another point about this trade is that it has some obvious risks for the banks. If you are lending Archegos 85% of the value of its stocks — or more, I’ve seen reports of 8-to-1 and even 20-to-1 leverage — then if the stocks go down by more than 15% you lose money, and if the prices of the stocks have been inflated and supported by Archegos’s own buying then, yes, when it all ends, they’re going to go down by more than 15%. And so Bloomberg News reports that “banks roiled by the Archegos Capital fallout may see total losses in the range of $5 billion to $10 billion, according to JPMorgan.” “Credit Suisse Group AG leaders are discussing replacing chief risk officer Lara Warner while sparing Chief Executive Officer Thomas Gottstein as they tally losses that could reach into the billions from the collapse of Archegos Capital Management,” Bloomberg News also reports. “‘It’s pretty hard for me to defend why we loaned him so much,’ said an executive at a bank with billions of dollars of exposure to Archegos” to the Financial Times. One possibility here is that the banks did not entirely understand what was going on. They knew their own trades with Archegos but — reasonably! — they did not know what Archegos was doing with other banks; they knew that Archegos was a big client but not just how big it was, and how concentrated it was in a small handful of stocks: Archegos’s lenders say they were unaware of the extent of trades he was making with other banks, information that would have encouraged them to curb their lending. Banks can ask clients for information on their loans from other banks but clients don’t necessarily have to disclose it or their positions. But one thing I want to say about the banks is that if you were one of Hwang’s prime brokers and you had perfect information — about how big he was and how concentrated, about how many banks were financing him, about his effect on stock prices, about Viacom’s stock offering, etc. — you might still rationally do this trade, if you were confident you could get out first. The basic dynamic of Archegos’s margin liquidation is that Goldman Sachs Group Inc. and Morgan Stanley blew out Hwang’s position in a series of big block trades on Friday, March 26. Those trades got a lot of attention, spooked the market, brought down the prices of Archegos’s holdings, put pressure on its other banks, and ultimately led everyone to blow Archegos out. But Goldman and perhaps Morgan Stanley were fine. The blocks were done at discounted prices, but prices that seem to have been above (or at least near) the amounts that Goldman and Morgan Stanley had advanced to Archegos. Goldman has said that the Archegos unwind “will likely have an immaterial impact on its financial results.” 4 The other banks sold later and got worse prices. Part of their problem seems to be that they were too nice and tried to cooperate with each other. Bloomberg reports: Emissaries from several of the world’s biggest prime brokerages tried to head off the chaos by holding a call with Hwang before the drama spilled into public view Friday morning. The idea, pushed by Credit Suisse, was to reach some sort of temporary standstill to figure out how to untie positions without sparking panic, the people said. But any agreement was elusive, and by Thursday night, some banks had shot off notices of default to Archegos to seize collateral and potentially shop it to buyers to contain the banks’ potential losses, the people said. Yet even then, it wasn’t clear when terms with Archegos would allow sales to proceed, one of the people said. Soon came the finger-pointing over who was breaking ranks, the people said. Some emerged from the talks suspicious that Credit Suisse wasn’t fully committing to freezing sales. By early Friday, rival banks were taking umbrage after hearing that Goldman planned to sell some positions, ostensibly to assist Archegos. Morgan Stanley began drawing public attention with block trades. As is so often — not always! — the case, the market rewarded absolute unsentimental ruthlessness here. A bunch of prime brokers got in a room to give speeches about working together and preserving value and not artificially depressing prices, and the Goldman representative was texting colleagues under the table “SELL EVERYTHING!” Goldman was right. A couple more points. One is that this whole situation is extra awkward for the banks — again, Goldman and Morgan Stanley — that both (1) were Archegos prime brokers and (2) led the ViacomCBS stock sale. CNBC reports: While certain bankers at Morgan Stanley and Goldman Sachs were pitching that deal to investors, some of their peers in the prime brokerage division were growing increasingly concerned about the risk profile of one of their clients, a family office called Archegos, which had large, leveraged exposure to ViacomCBS.