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How Bill Hwang got back into good bank books – then exploded

How Bill Hwang got back into good bank books – then exploded

In 2012, the New York-based Tiger Asia Management hedge fund pleaded guilty to using internal information to trade shares in Chinese banks, and as a result reached a massive deal with U.S. regulators.

It fell in love with founder Bill Hwang, one of the veterans of Julian Robertson’s Tiger Management fund called “Tiger Cub”.

In theory, Hwang would definitely find a blacklist of investment banks everywhere. But 12 months after investors were forced to return the money, Hwang was back in the game. He created a new secret family office called Archegos Capital Management. And soon many of the world’s largest investment banks were in fierce business competition.

Bank of Credit Suisse and Nomura warn investors and regulators on Monday billions of dollars in losses After prioritizing margin calls from his relationship with Archegos. Between them, banks extended $ 1 billion in loans to the family office to make large bets on U.S. and Chinese equities.

While markets around the world were digesting shock announcements, bankers and investors were struggling to respond to a a series of questions: Why did the banks bend over backwards to deal with a hedge fund manager? How did Archegos manage to stay under the radar despite largely achieving high positions in the name chips? And what will be the offense of disintegration?

“No one has ever seen anything like it,” said a Wall Street bank executive. “The scale, the consequences it can have on our business, and how so many banks can take their greed or that of another interesting investor.”

“Aggressive genius and money”

When he continued with the law, initially the risk departments of the banks had deep reservations about contacting Hwang.

When Hwang began directing Archegos, Goldman Sachs took the longest to remove him from his blacklist. The U.S. bank began working with him again last year, according to two people close to him, but after years of pressure from his bankers to persuade him to allow the risk department.

The first brokers considered Hwang a credible potential client, a potentially profitable but risky distribution of investment banks who borrowed money and securities to cover funds and processed their businesses.

According to Archegos ’two main brokers, concerns about his reputation and history brought him tremendous opportunities to get in touch with him. According to a note from an analyst, he is known as an “aggressive genius who makes money” when Archegos achieved nearly $ 10 billion in growth from $ 200 million in marketing in 2012 when he was just nine years old.

Investment-hungry banks were reluctant to trade in Hwang’s commissions and could increase their stakes in lending money. Among others, the Chinese technology company Baidu and Viacom have taken excessive positions in stocks such as the US media giant.

“It’s very difficult for me to defend why we’ve given him so many loans,” said a bank executive who risked billions of dollars in front of Archegos.

Nomura warned Monday morning that it was facing an estimated $ 2 billion deal, and Credit Suisse said at the time that the potential losses could be “very significant and significant for our first quarter results.” Three people close to the Swiss bank have suggested that this figure could be as high as $ 3 billion.

The man walks down the street next to the Nomura sign

Nomura warned on Monday that it will suffer losses of $ 2 billion as a result of exposure to Archegos © Kiyoshi Ota / Bloomberg

The rapid dissolution of Archegos has led to an analysis of his relations with his main intermediaries. Goldman and Morgan Stanley had a serious sale of nearly $ 20 billion worth of shares in Hwang’s investment on Friday. Credit Suisse, Nomura and UBS could try to download billions more this week.

The big imbalance was when Archegos preferred margin calls – orders to add money or collateral to their brokers ’accounts – after a fall in some of their securities. This prompted banks to liquidate their positions to reduce exposure to shares.

The sale has so far affected nine companies: Baidu, Tencent Music, Discovery, Farfetch, GSX Techedu, Shopify, Vipshop, iQIYI and ViacomCBS. Banks put up colossal blocks of securities For Sale – the largest collection in at least a decade, according to an analyst note.

Derivatives treatment

How was it in Hwang to build such big bets on companies and largely go unnoticed? The answer lies in a type of financial instrument called full-return swap.

Differences, also known as contract differences, are derivatives that allow swaps to allow investors to pay a fee and, at the same time, receive money based on the performance of an underlying asset. He is the owner of the guarantee under the bank and, in the event of any loss, they must be paid to the bank from the hedge fund.

Swaps have been very successful but have been criticized because they allow investors to accumulate stakes in companies without explaining how their stakes should be with stakes of a similar size. Activist funds often use them to disguise their positions while building positions in target companies.

Archegos has made almost full return exchanges, said several people familiar with the fund’s operations. And it further increased its footprint by maintaining multiple swap banks.

Prime mediators may not have been aware of how much of their own exposure to Archegos they were accumulating in banks that they were aware of or competing with several of the people involved.

“The reality is that the main broker still unites everything,” said one trader, a few hours after the block trade began to hit the market.

Others discussed it. “It’s unthinkable that we’ve given him so many loans or not been aware of other bank positions,” said an executive at a billion-dollar bank with Archegos.

Less than 10 banks raised more than $ 50 billion, according to Archegos, people who knew the subject.

A Hong Kong investor said, “Did a bank know how much that fund was and how it was actually used? If they knew, why would they lend on such aggressive terms?”

Some banks lent Archegos ratios like 8: 1, that is, for every share he bought the fund, the bank would give him another seven loans, according to people who knew the subject. In some trades, leverage ratios may reach 20: 1, said one person with knowledge of the fund.

This meant that Archegos could accumulate large debt-based positions without publicly disclosing the positions or possessing the underlying guarantee.

“If you have everything as a swap, the reality of what you have to declare to your banks is very small,” said one hedge fund executive in addition to trading the instruments.

Baidu signal

Archegos built excessive positions, such as Chinese technology company Baidu © Aly Song / Reuters

Although disclosure is limited, the Archegos affair raises questions about the risk management of banks, and is likely to attract the attention of regulators.

“It’s not so much the problem with the amount of the bank’s loan, but rather whether it covered the bank as it thinks it was and was comfortable with the collateral borrowed in a potential settlement scenario.” Wall Street merchant.

An executive at a major broker said: “That’s why big banks exploded themselves in 2008 – leverage over-the-counter derivatives through a primary broker. will turn them on again “.

A Tokyo banker who was familiar with the situation said: “You understand the general situation around Hwang quite well, and the types of calculations that these major brokers used to make about risk and compensation when analyzing Goldman’s behavior.

Over the years the hedge fund manager put the U.S. bank on the blacklist, which “considering Hwang’s reputation didn’t go unnoticed.” Then all of a sudden they are doing everything they can to get it as a customer and lend them money, ”the banker added.

“So greed is fear, until it stopped that last week.”

Additional report by Laura Noonan in Dublin

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