Analysis Of The Week: Archegos Capital Management​

By Alison Catchpole​
The Story
Last week on the back of a damning report on the biggest loss in its 165-year history, Credit Suisse (CS) was “rushing to overhaul its risk department, including rehiring on inflated salaries staff who have recently left” (Financial Times).

A $5.5 billion loss for the bank followed the implosion of hedge fund Archegos Capital, with CS still reeling from heavy losses just weeks after the collapse of supply chain finance group Greensill Capital.

Switzerland’s second largest banking giant had some explaining to do. A 165-page independent report by Paul, Weiss, Rifkind, Wharton & Garrison LLP seems to have started the ball rolling.

By publishing the report on its website, firing nine members of staff and clawing back $70 million in staff penalties and bonuses, Credit Suisse appears to be showing transparency. Chief Risk Officer (CRO), Lara Warner and investment banking chief, Brian Chin both left the bank in April (BBC). Current CRO Ralf Hafner, identified in the report as “having missed crucial opportunities to prevent the huge losses incurred from the family office’s soured trades” (Financial Times), will leave in August. Goldman Sachs Partner David Wildermuth will join the firm as the new CRO.

The Background
When Archegos Capital, the hedge fund of billionaire Bill Hwang collapsed, it looked like the biggest loss of personal wealth in history, with reported losses of $20 billion.

But the 57-year-old should have raised some red flags for the lenders. In 2012, when he ran hedge fund Tiger Asia Management, Hwang was charged with insider trading and wire fraud in the US. A $44 million settlement (Reuters) and two years later, Tiger Asia was rebranded as Archegos, though Hwang was banned from trading in Hong Kong (BBC).

‘Family offices’ are required to report stock and derivative positions on the US Securities Exchange Commission (SEC) website in a ‘13f’ filing, but ‘swaps’ are excluded from 13f filings (Forbes). By buying total return swaps – a form of derivative – Archegos took large positions on Chinese tech stocks and US media companies, using money borrowed from investment banks, and went unchecked.

The swap agreement involved Archegos paying a fixed rate, while the lenders made payments based on the return (dividends and capital gains) of the share assets. According to CNBC, Archegos had multiple swap agreements with multiple banks for the same stocks, without their knowledge.

The WSJ reported that Archegos was putting up only $15 of capital and borrowing $85 against it. When the companies fell on the stock market, Archegos’ lenders called in the capital and the overextended hedge fund defaulted on these margin calls. Forced into a ‘fire sale’ of the stocks in an attempt to recoup some investment, Nomura, Deutsche Bank, Morgan Stanley and CS were left nursing losses of more than $10 billion between them (Reuters).

What It Means For Businesses And Law Firms
The crisis highlights the difficulty of regulating complex markets such as asset management and investment banking. Hedge funds are notoriously unrestricted so it should be no surprise that the collapse of Archegos reportedly triggered inquiries by the US SEC and the UK Financial Conduct Authority (FCA) (The Guardian). US Treasury Secretary Janet Yellen has since announced a working group to study the risks and vulnerabilities of hedge funds in particular. On 29 July 2021, a US congressional panel advanced a bill to regulate ‘family offices’ (Reuters).

The primary victims here seem to have been the shareholders. In late May, law firm Frank R Cruz announced it was joining a class action lawsuit against CS led by a pension fund, The City of St. Clair Shores Police & Fire Retirement System (Reuters).

The Paul, Weiss investigation into CS did not find fraudulent or illegal conduct, nor did it find the personnel acted with ill intent. It did find that: "The business was focused on maximizing short-term profits and failed to rein in and, indeed, enabled Archegos' voracious risk-taking." The bank said in a response that it would "put risk management at the heart of our decision-making processes" (Reuters), begging the question, what was it putting there before?

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