Dumbest financial story of 2021.

If, like me, you’re an occasional consumer of financial news, many of the biggest stories of 2021 have struck you as silly, even due to our rising standards of making things feel silly.

GameStop’s stock exploded for reasons unrelated to its underlying business, then crashed when a stock trading app decided to stop its dedicated clients from trading this hugely popular stock, then rose. again later. Something called PSPC has become all the rage in mergers and acquisitions. What is a SPAC? Well, it’s nothing – a blank check inside a shell, more or less. But then Alex Rodriguez or Paul Ryan (they are the same) get involved and whoosh[…]there is a special purpose acquisition company with a supposed value of $ 300 million. Something called a non-fungible token has helped unremarkable parts of the internet sell for huge sums of money – anything from a LeBron dunk anyone could watch on YouTube ($ 208,000) to a capture. from a newspaper column ($ 560,000) to an art JPG file ($ 69) million). In addition, a large boat got stuck in a canal causing billions and billions of dollars in navigation problems.

It was all weird, but in retrospect it wasn’t exactly idiot. These tales have a certain simplicity. GameStop exploded because many people realized that if they bought something over and over again, the price would go up. NFTs have capitalized on a timeless human desire to own something “exclusive,” even though it sounds like countless other versions of the same. Even PSPCs just follow an American tradition that people get thrown at money for being rich, cool, or well connected. And the saga of shipping on the Suez Canal has immediate meaning, even for our young people. A big problem got stuck and the money stopped flowing.

In fact, the dumbest money story of the year only happened in the last few days, when something most of us had never heard of collapsed and resulted in mud some of the world’s most esteemed financial institutions. The rapid downfall of Archegos Capital Management has been one of the most embarrassing financial intrigues in years, not just for a handful of banks, but for an entire financial and governance system that really shouldn’t have let this happen. . It takes a lot of embezzlement to giant banks do something in 2021 that would make a neutral observer think, Wow, it’s legitimately shocking that they did that. But life is full of surprises.

To understand how absurd this story is, we could start in 2012. At the time, Bill Hwang was the portfolio manager of Tiger Asia Management, a hedge fund he founded. That year, Hwang pleaded guilty to insider trading and agreed to a $ 44 million fine from the Securities and Exchange Commission. The SEC said Hwang and his company short sold three Chinese bank stocks on the basis of inside information – borrowing the shares, selling them for a high price and aiming to buy them back at a low price and pocket the difference.

But it wasn’t just insider trading. According to the SEC, Hwang also obtained private shares of the stock at a price significantly below the market price, which allowed him to profit even more illegally. The SEC also said that Hwang “attempted to manipulate the prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions by placing losing trades in an attempt to reduce the price of shares and increase the value of short positions. ” All of this enabled Hwang and his fund to collect more management fees from their investors. There are a lot of white-collar crooks playing at a high level, but based on the SEC’s description of Hwang’s actions, he was less a garden variety scammer than a three-time financial cheat winner: an insider trader who got unfair market discounts. and tried to manipulate prices in other ways. This is the kind of bulk quantity that would prevent someone for life from trading if we lived in a more functional and just society.

Of course, we don’t live in this society. Hwang closed his hedge fund and opened a family office, which operates like a hedge fund but manages the assets of one or a few wealthy families. In theory, a family office gives a problematic trader less chance of harming others because they don’t gamble with strangers’ money.

In the case of Hwang’s Archegos Capital Management, it didn’t work out that way. Hwang’s office managed enough money and had enough assets that it turned out could move markets and could ruining things for a lot of other people. Part of that was because Hwang is (was?) Very wealthy, but the bulk of the problem seems to be that some giant banks looked at his global summary of financial wrongdoing, then looked at his deep pockets and decided, “Yes. , we would like to do business with this guy. “

Among the banks that extended Hwang’s credit lines were Japan’s Nomura, Switzerland’s Credit Suisse, and Wall Street’s Goldman Sachs and Morgan Stanley. As recently as 2018, Goldman had Hwang on a blacklist and would not be doing business with him, according to Bloomberg News. But at one point, Goldman lifted that ban. Perhaps it was because Hwang has demonstrated that he is a reformed man who poses no risk to the markets or Goldman’s business. Or maybe it was because the bank cared about charging a management fee to fill its coffers, regardless of the risk to its own interests or to other investors. We may never know.

Hwang used these banks to place leveraged bets on a handful of stocks in particular. They included ViacomCBS (because who wouldn’t want a piece of Paramount +?), Discovery, and Chinese tech company Baidu, among others. A significant portion of Hwang’s holdings were in swaps, The New York Times and others reported, which could have obscured both Hwang’s identity and the size of his holdings in certain stocks. (In an exchange, as Forbes explained, parties can tailor transactions to each other and avoid certain federal disclosure obligations.) The Times believes banks were doing business with Hwang without knowing that other banks were doing business. the same transactions.

Lo and behold, the leeway these banks gave to Hwang turned out to be a problem. ViacomCBS’s share price was doing well, so the company attempted to issue $ 3 billion in new shares. But an influential market researcher released a report that found ViacomCBS stock was actually worth a lot less than what the company was issuing at: $ 55 instead of $ 85. This report scared off investors, triggered a sell off and lowered the stock price. This was bad news for anyone who owned a ton of ViacomCBS shares – someone like Archegos Capital.

When someone trades on margin – with borrowed money – they may need to keep a certain amount of collateral to satisfy their lenders. If the value of a shareholding goes down, the investor needs more collateral. Failure to have it triggers a margin call, where the lender can force a sell of the stock to bring the investor back into compliance with the margin requirements. The Wall Street Journal reported that Archegos’ various banks – including Credit Suisse, Nomura, Goldman Sachs and Morgan Stanley – had a meeting to discuss how to effectively reduce family office positions. But the two US banks seem to have had little interest in moving slowly. Goldman and Morgan Stanley limited their losses by quickly selling Archegos shares, before the scale of the sale caused share prices to fall further.

Thousands of people, as well as several companies, have suffered huge losses not because they did something wrong, but because a handful of huge banks decided to bet on a single dubious security. Trader.

Nomura and Credit Suisse have found themselves hand in hand. Nomura said he could lose up to $ 2 billion from “transactions with a US customer.” Credit Suisse’s losses are unclear, but the bank said its losses could be “very large and important to our first quarter results.” Both banks’ share prices fell on Monday, after news collapsed over the weekend. The fact that this happens a few days before the end of the trimester, which is very important, makes it all the more absurd.

Archegos was reportedly exposed to at least eight stocks which lost a combined market value of $ 35 billion on Friday alone, based on Business Insider tracking. When the family office’s margin call led to a liquidation of around $ 30 billion in assets – of which just $ 10 billion was his own money – those actions were caught in the crossfire. Some have since recovered a bit, although the ViacomCBS stock chart looks like a cliff. Anyone who owns any of these stocks – and many of them are common, high-profile stocks that could be owned by anyone – has taken a bath because of Archegos’ margin call. Countless people could have felt the effect of the ripple.

Which brings me back to my thesis: the collapse of Archegos is the dumbest financial thing that has happened all year. It features thousands of people, as well as several companies, taking huge losses not because they did something wrong, but because a handful of huge banks decided to bet on a trader. in questionable values ​​with a demonstrable history of being a con artist. Two of these banks then exacerbated the crisis when, to cover their asses, they quickly sold their own parts of the deal and abandoned any pretense of a more orderly liquidation.

This is all much more outrageous than a bunch of people on the internet deciding to squeeze the price of a given stock, or someone spending $ 10,000 on a video of a layup in an NBA game in season. regular, or whatever else 2021 has made it into. . If there is anything positive to take from this story, it is that if a group of bankers can be so badly burned by someone within a decade of blowing themselves up for insider trading – no one should ever be mistaken for a reliable partner! – then the rest of us can do whatever we want. We might even be able to make lending decisions for investment banks.