Just a nasty episode... or canary in a coalmine?
DEJA VU, anyone? Reckless hedge funds. Banks hit by huge losses. Regulators asleep at the wheel. It all sounds horribly reminiscent of those queasy months leading up to the financial crisis a dozen years ago, only this time with a pandemic thrown in.
At the epicentre of the latest storm is an outfit called Archegos. Most people, if quizzed, might guess this to be the name of the charity foundation run by Prince Harry and Meghan.
In fact, it is an obscure Wall Street hedge fund run by Bill Hwang, a man who has had his share of run-ins with the regulators. Archegos’s woes have, in turn, exposed two of the world’s most important banks, Nomura and Credit Suisse, to multi-billion dollar losses.
The question for investors and pension fund savers in the UK is whether it is a nasty, but isolated, episode.
Or, far more worryingly, is it a canary down the coalmine, a sinister augury of a wider meltdown? Reaction on the world markets yesterday was muted, suggesting there is little panic.
The consensus is we are not faced with a financial crisis 2.0 – though it’s worth remembering that most were dismissive about the last one, right up until it actually happened. And its implosion comes at a nervy time for markets.
The valuations of US tech and media companies such as Tesla, Amazon and Facebook have been driven so high in the pandemic that some analysts worry they are riding for a fall. Many small investors in the UK have large chunks of their nest eggs invested in these stocks.
THEproblems at Archegos stem from the way it bought shares in US and Chinese media and tech firms ‘on margin’, in other words, with borrowed money. Buying on margin is a way to supercharge returns. It works wonderfully well just as long as shares go up, and investors make huge profits having staked very small amounts of their own money. But when shares plunge it can be catastrophic. Not only are investors sitting on large losses, they also have to pay back their loans.
Archegos was hit with ‘margin calls’ – demands for money or extra security – by Credit Suisse and Nomura after shares in Viacom and some of its other holdings fell last week.
The fund couldn’t pay, leaving the banks and others nursing large losses. To try to recoup some of the money owed to the banks, Archegos was forced into a fire-sale of billions of dollars of shares. The affair raises disturbing questions about regulation. The fund seems to have escaped any great scrutiny because it is run as a ‘family office,’ managing the money of Bill Hwang and his relatives. Hwang himself has a chequered past that should have rung alarm bells.
Just under a decade ago, he admitted to wire fraud relating to Chinese bank stocks. He also paid £32million in fines imposed over illegal trading charges.
As for Credit Suisse, the Archegos debacle is merely the latest embarrassment. Not least among these is its involvement with collapsed finance house Greensill, where former prime minister David Cameron faces questions over his role as an adviser.
Credit Suisse and Nomura have much stronger balance sheets than a decade ago and are in a far better position to withstand their losses.
Even so, this should be a wake-up call, as should the disintegration of Greensill, which basked in the bogus credibility bestowed by Mr Cameron. Where markets, greedy traders and inept regulators are concerned, it never does to be complacent. Remember, Archegos and Greensill are just the trainwrecks we know about.