The collapse of billionaire Bill Hwang's personal hedge fund Archegos Capital Management has triggered a $20 billion stock fire sale that led to massive losses at global banking giants. Banking majors are likely to lose a combined $6 billion due to the unravelling of Archegos, reports said on Tuesday.
Here's a look at Archegos, the man behind it, how the crisis unfolded, the banks affected and the implications of the crisis:
How the Crisis Unfolded
The fire sale of about $20 billion of Archegos assets was necessitated when the fund defaulted on a margin call by Credit Suisse and others. With the value of securities in the margin account of Archegos dropping substantially due to bets that failed, the fund was forced to sell assets in a fire sale, which then created a wave of panic that resembled the Lehman Brothers crisis in 2008. The fire sale saw assets worth about $20 billion, mainly US and Chinese stocks, being sold.
Here's who Credit Suisse explained the downfall. "A significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks. Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions."
What Triggered Margin Call?
Archegos had huge exposures to Viacom CBS, whose stock dropped in the middle of last week. Shares in Viacom CBS and Discovery dropped as much as 27 percent. Meanwhile, the US-listed shares of China-based Baidu dropped 33.5 percent and and Tencent Music fell 48.5 percent. This led to a huge decline in the value of assets in Archegos' margin account, triggering the margin call.
Which Banks are Affected?
Major investment banks like Nomura, Deutsche Bank, Credit Suisse, UBS, Morgan Stanley, Goldman Sachs etc have been hit by the liquidation of Archegos. It is estimated that Credit Suisse has lost as much as $4 billion. Nomura said its estimated losses would amount to about $2 billion. These wealth banking giants are among the prime brokers of Archegos.
While Nomura and Credit Suisse were the hardest hit, Goldman Sachs and Morgan Stanley avoided huge impact as they offloaded shares as early as on Friday last week. Though Deutsche Bank had heavy exposure to Archegos, it said it had 'significantly de-risked its Archegos exposure'.
While shares in Japanese bank Nomura plunged 16 percent, Credit Suisse fell 14 percent.
Who is Bill Hwang?
Archegos was founded by former equity analyst Bill Hwang, who started his Wall Street career in the 1990s. After having worked with hedge fund manager Julian Robertson's Tiger Management, he then launched his own fund Tiger Asia Management in the early 2000s. In 2012 he renamed Tiger Asia as Archegos Capital and made it a family office. The fund went on to become of the largest investors in Asian financial markets.
Family Office and Regulatory Questions
The liquidation of Archegos has already triggered calls for stricter regulation of family offices. Being a family office, Archegos was not mandated to provide quarterly financial reports to the US Securities and Exchange Commission (SEC).
Analysts at J.P. Morgan said the Archegos fallout could also force the regulators to pit in place tighter scrutiny and financing for smaller hedge funds.