Little-known hedge funds caused widespread chaos on Wall Street

ViacomCBS ()VIACA), Search ()DISCA) And shares of other media titans crashed on Friday as Wall Street banks, which were lent to Archgos, forced the firm to place its bets. The epic fire wiped out more than half of Viacom’s value last week alone.
Big banks lost billions of dollars due to exposure to Archaeogus. Both credit Suisse ()Cs) And Nomura stumbled on Monday after warning of a critical hit to his earnings.

The most shocking part about ArcGos’ story is that it is a firm that some people had heard of before this weekend. And yet in this era of easy money, Archgos was able to borrow so much that its failure caused massive setbacks to create a wave in Wall Street – and affected the retirement accounts of Americans everyday.

Art Hogan, chief market strategist at National Securities Corporation, said, “It’s a wake-up call. With leverage, there comes risk.” “This is the second time we have learned a lesson about leverage this year.”

In January, another hedge fund, Melvin Capital Management, nearly collapsed after massive bets against it GameStop ()GME) Were Fly by an Army of Merchants on Reddit. Investors were surprised to learn of the size of the smaller positions due to fears of a fall in the share price of the video game retailer.
When GameStop shares went to the moon, Melvin Capital suffered heavy losses and was forced to reach one $ 2.8 billion bailout with big rivals.

“We saw it on the short side when the Gametop exploded. Now we’re looking at it on the long side,” Hogan said.

Opaque financial instruments

Archaeos Capital was using the borrowed money – apparently a ton of it – to make the excluded bets that held up media stocks. This type of excessive leverage is made possible by the Federal Reserve’s extremely low interest rates.

The full scale of these bets was not yet clear.

Perhaps in an attempt to avoid making public disclosure filings archeogues The allegedly used derivative is called the total return swap To get some of their big investment positions. Investors using these swaps receive the total return of a stock from a dealer and those returns are usually amplified by leverage.

Archaego could not be reached for comment on Monday.

Typically, investors who Owns more than 5% of the stock Reporting that stake with the SEC is required. This filings has not been made at this time.

“Anytime a derivative is involved, you don’t really know how deep the theory is,” said Joe Saluzzi, co-head at Themis Trading.

Stock sale that broke the camel’s back

This complex strategy backfired last week.

Viacom is trying to capitalize on its stock price, ViacomCBS Announced a $ 3 billion share sale plan. By that time, ViacomCBS shares had nearly tripled in the year. But the stock sales were too high to handle market share and the media gained momentum.

Archaeogus faced margin calls from its Wall Street lenders. If the value of an asset falls below a specified level, a margin call by the broker requires a customer to add money to their account. If the client cannot pay – and in this case the Archivos apparently cannot – the broker can and will dump the shares on behalf of the client.

One of the archaeologists’ lenders, Goldman Sachs, seized collateral and sold shares on Friday, a person familiar with the matter told BCCI Business. This so-called forced liquidation set up a bloodbase on Friday that hijacked shares of Viacombs and Discovery by more than 25.

Credit Suisse said a default by a “significant US-based hedge fund” would lead to a large drop in its earnings. A person familiar with the matter told CNN Business that Archigos was the cause of Credit Suisse’s loss.

Nomura said its loss could result in $ 2 billion in “transactions with an American customer”.

Founder of hedge fund involved in insider trading scam

This episode showcases Wall Street’s complex web linking firms – and the risk to banks to leverage large amounts.

Dennis Kellehar, CEO of Better Markets, said in a statement, “Systematic risk is overshadowed by secret and mutual leverage, trading and derivatives in astronomical undisclosed amounts.”

Hogan said investors should remember the risks inherent in banks’ business lines.

“They see the credit of the customers, but it’s always right now,” he said.

It definitely has qualities & # 39;  First Black Fed president says to reevaluate
The credibility of the Archgos is a central question here. Bill Hwang, founder of the firm and A. The hedge fund leader Julian Robertson’s protege, Previously involved in an insider trading scandal at Tiger Asia Management, a hedge fund he founded.
In 2012, SEC accused Tiger Asia Earned nearly $ 17 million in illegal profits One scheme includes Chinese bank stocks. Hwang pleaded guilty that year For an enumeration of wire fraud on behalf of Tiger Asia. Tiger Asia was sentenced to one year of probation and ordered to pay more than $ 16 million in bail.
In view of the insider trading scam, Goldman Sachs ()GS) Stopped trading with Hwang for some time, a person familiar with the matter told CNN Business. However, Goldman Sachs later resumed a relationship with Hwang as one of his company’s lenders.

Recurrence of long term capital management?

Archeogus Capital’s flight brings back bad memories Long-Term Capital Management. The massive hedge fund collapse in 1998 threatened the financial system, forcing the federal government to intervene.

“It’s probably not long-term capital,” Hogan said, citing reforms that mean banks are less risky before the 2008 crisis. “I don’t think it’s the tip of the iceberg.”

Salusi, executive of Themis Trading, is not yet certain, indicating how the market initially closed. Fall of Bear Stearns Hedge Fund In the summer of 2007.

“We don’t know how far the tentacles go,” Saluzzi said. “Early in the Bear Sterns crisis, the market was fine – until it wasn’t.”


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