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Archegos Capital's charismatic Bill Hwang unsettles NY bourse

Nomura and Credit Suisse take hit from Korean American fund manager's misstep

Since retreating from the vanguard of investment to focus on his personal assets, Bill Hwang, shown in 2012, has claimed that he invests to "serve God."   © Getty Images

TOKYO -- Jitters have spread on the New York stock market since last week due to a series of block trades by investment banks worth tens of billions of dollars after Bill Hwang's Archegos Capital Management defaulted on margin calls. Facts about the trades came to light on Monday.

Major American, European and Japanese investment banks -- Goldman Sachs, Morgan Stanley, Credit Suisse, Deutsche Bank and Nomura Holdings -- face huge losses after having extended billions of dollars worth of credit to Archegos and Hwang, a charismatic Korean American fund manager who was found to have committed insider trading in 2012.

Archegos used the funds to make big bets on U.S. and Chinese companies.

While the two American investment banks resorted to stop-loss sales late last week in order to mitigate their exposure to the stocks, Japan's Nomura and Switzerland's Credit Suisse missed opportunities to do so. Deutsche Bank of Germany said its loss was minor.

The series of block trades involved swaps known as contracts for differences. With an adequate margin, they can be leveraged and settled based on the difference in a financial product's value between the time the contract opens and closes.

The anonymous nature of CFDs is one of their appeals to professional investors, enabling them to engage in big number trades without revealing their names.

The leverage ratio in the latest case was reported to be eight times. Big investment banks increased their trades with Archegos to a total of just over $27 billion, according to people familiar with the matter.

With a big personality that meant Hwang was well known among professional investors, the marketing sections of major investment banks reportedly competed to win orders from him and Archegos.

It is plausible to imagine that Archegos could draw the banks into the trades, in spite of any opposition from their compliance departments regarding his history. Commissions from the trading would be no less than $100 million.

Outside No 888, 7th Avenue in Manhattan, New York -- the building that is reportedly home to Archegos Capital.   © Reuters

But as risks of loss accelerate, investors tend to jump on the selling bandwagon once one investor has done so. Big investment banks resorted to clearing sales as Hwang began to sell shares in major American and Chinese online companies over the past week whose prices had started to drop against the backdrop of concern about their high prices and announcements of new share issues.

Hwang had been marked by major investment banks because of his past insider trading. But since retreating from the vanguard of investment and focusing on the management of his personal assets, he has repeatedly claimed that, as a devout Christian, he invests to "serve God." Declaring that he loves God more than money, he has donated investment returns to Christian churches.

The U.S. Securities and Exchange Commission is keeping close watch on the case. As Archegos Capital is not officially a hedge fund but a family office, it is also known as a "shadow hedge fund". The company is thus not required to disclose information and can readily slip through the regulatory net.

Family offices traditionally protect wealthy people's assets through conservative investment policies. Recently, however, they are expanding to aggressive investment.

SEC officials believe that deregulation under the administration of former U.S. President Donald Trump effectively removed the commission's teeth. In a television interview, a former SEC official lamented the fact that the commission had only been able to investigate 10% of companies targeted for further inspection due to a shortage of staff.

The latest case is expected to prompt new SEC chairman Gary Gensler, under the administration of new U.S. President Joe Biden administration, to toughen regulations. The issue has become a matter of concern to Wall Street.

Chances of the case developing to a systemic risk is small, according to market participants. But the extent of the regulatory loopholes created during the Trump administration is unknown. Investors are bracing for the discovery of more potential risks.

Itsuo Toshima is an independent investment adviser based in Tokyo and the former Japan representative of the World Gold Council.

Click here to see the Japanese version of the article.

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