China Daily Global Edition (USA)


Losses huge as Bill Hwang’s ‘family office’ defaults on margin calls

- By HENG WEILI in New York hengweili@chinadaily­

Like the stocks he’s invested in, Bill Hwang’s Wall Street career has had its ups and downs. Most recently, there was a down — a big one.

Last month, Archegos Capital Management in New York, the “family office” run by Hwang, defaulted on margin calls that led to billions of dollars of losses for Japanese bank Nomura and other companies including Credit Suisse, along with an estimated $20 billion loss for Archegos.

Wall Street banks such as Goldman Sachs and Morgan Stanley managed to bail out in time, limiting losses.

Hwang, the son of a Christian minister and a naturalize­d immigrant from South Korea, imbues his financial activities with his faith. He borrowed from Wall Street banks to build enormous holdings in a handful of United States stocks and US-listed Chinese stocks, including Baidu and Tencent Music.

By mid-March, he was the heavyweigh­t behind $20 billion of shares in ViacomCBS, effectivel­y making him the media company’s largest institutio­nal shareholde­r, The New York Times reported.

However, the newspaper said few knew about his total risk exposure, because the shares were mostly held through complex financial instrument­s called derivative­s, created by banks.

The derivative­s included so-called total return swaps, a financial product that allows traders to make massive bets with relatively little underlying collateral. Derivative­s allow investors to bet on movements of stock prices without owning the underlying securities.

Jim Collins, CEO of Excelsior Capital Partners, said: “At the close of every trading day, Archegos would settle its swap accounts. If the total value of all positions in the account rose, the bank in question would pay Archegos cash. If the value fell, Archegos would have to put up more collateral or, in industry parlance, post margin.”

After ViacomCBS shares plunged late last month, Hwang’s lenders demanded their money, known as a margin call — when a bank asks a client to put up more collateral if a trade partly funded with borrowed money has fallen sharply in value. If the client cannot afford to do that, the lender sells the securities to try to recoup the funds it is owed.

When Archegos could not pay, the lenders seized the assets (the stocks) and sold them, leading to one of the biggest implosions of an investment company since the 2008 financial crisis. Hwang’s personal wealth largely disappeare­d.

On Wednesday, CNBC reported that Morgan Stanley sold about $5 billion of Archegos’ stocks on March 25, the night before a “fire sale” hit rivals.

Goldman Sachs unloaded $10 billion in Archegos holdings the next day. The New York investment bank sold three blocks of shares on March 29, a source familiar with the sale process said. It sold $6.6 billion of shares in Baidu, Tencent Music Entertainm­ent Group and Vipshop Holdings before the US market opened.

This was followed by the sale of $1.7 billion of shares in ViacomCBS and $2.3 billion of shares in Discovery, Farfetch, iQIYI and GSX Techedu later that day.

On April 6, Credit Suisse said it would take a $4.7 billion loss from dealings with Archegos, prompting it to overhaul the leadership of its investment bank and risk divisions.

Vivid demonstrat­ion

Dan Berkovitz, a commission­er on the US Commodity Futures Trading Commission, said in a statement on April 1, “The collapse of Archegos Capital Management, and the billions of dollars in losses to investors and other market participan­ts, is a vivid demonstrat­ion of the havoc that errant large investment vehicles called ‘family offices’ can wreak on our financial markets.

“A ‘family office’ has nothing to do with ordinary families. Rather, it is an investment vehicle used by centimilli­onaires and billionair­es to grow their wealth, reduce their taxes and plan their estates.”

Senate Banking Committee Chairman Sherrod Brown, an Ohio Democrat, wants answers from Credit Suisse and other banks on their margin calls and market activity related to Archegos.

In a letter sent on Wednesday to Credit Suisse Securities, Nomura Holding America, Goldman Sachs and Morgan Stanley, the senator said he is “troubled, but not surprised, by news reports that Archegos entered into risky derivative­s transactio­ns facilitate­d by major investment banks, resulting in panicked selling of stocks worth tens of billions of dollars and those banks collective­ly losing nearly $10 billion”.

Early this year, Hwang focused his trading on ViacomCBS, which was optimistic about its new streaming service, media company Discovery, Chinese stocks RLX Technologi­es — an e-cigarette company — and GSX Techedu — an education company.

By January, ViacomCBS stock, which was priced at $12 a year ago, was nearing $50. Hwang kept building his stake through the swaps, which gave him the returns without actually owning the shares, people familiar with his trading told The New York Times.

By the middle of last month, as the stock neared $100, Hwang had become the single-largest institutio­nal investor in ViacomCBS, according to those sources and an analysis of public filings by the newspaper.

However, if ViacomCBS shares were to suddenly reverse, he would have to pay the banks to cover their losses — or be cleaned out.

On March 22, ViacomCBS announced a new public offering, which it hoped would produce $3 billion to fund its strategic plans, including a streaming service.

Four people involved with the offering told The New York Times that bankers were counting on Hwang being the lead investor and buying at least $300 million of the shares.

Discovery Communicat­ions shares had a similar rise, moving from $19.27 in October to a high of $77.27 five months later, only to fall to about $41. The company also plans a streaming service, but investors believe competitor­s such as Netflix, Amazon Prime and Disney+ have an advantage.

Sometime between announceme­nt of the ViacomCBS deal and its completion on March 24, Hwang changed his plans. The reasons are not entirely clear, but shares of RLX and GSX both plummeted in Asian markets around the same time.

Hwang’s decision resulted in the ViacomCBS fundraisin­g effort ending up with $2.65 billion in new capital, short of the target.

By March 25, Archegos was reeling. ViacomCBS’ falling stock price was triggering margin calls from its prime brokers that Hwang could not fully meet.

As ViacomCBS shares flooded the market due to enormous sales by banks, Hwang’s wealth plummeted.

His problem was that he invested in a relatively limited number of companies, with several of them running into trouble simultaneo­usly.

Bloomberg Business Week reported: “It’s all eerily reminiscen­t of the subprime mortgage crisis 14 years ago. Then, as now, the trouble was a series of increasing­ly irresponsi­ble loans. As long as housing prices kept rising, lenders ignored the growing risks. Only when homeowners stopped paying did reality bite — the banks had all financed so much borrowing that the fallout couldn’t be contained.”

Credit Suisse, Switzerlan­d’s No 2 bank, which was forced to dump more than $2 billion worth of stock to end exposure to Archegos, said Lara Warner its chief risk and compliance officer, and Brian Chin, investment banking head, were stepping down following the losses.

Credit Suisse Chief Executive Thomas Gottstein said in a statement on April 5: “The significan­t loss in our Prime Services business relating to the failure of a US-based hedge fund is unacceptab­le. Serious lessons will be learned.”

Nomura, Japan’s largest investment bank, warned on March 29 that it faced a possible $2 billion loss due to transactio­ns with a “US client”.

While some banks were able to offload collateral related to Archegos relatively quickly, including shares of ViacomCBS, Baidu and Tencent Music Entertainm­ent Group, Credit Suisse was still selling on April 5.

Economics student

Sung Kook (Bill) Hwang was born in South Korea and moved to Las Vegas in 1982 as a teenager. He spoke little English, and first worked as a cook at a McDonald’s restaurant on The Strip. Within a year, his father, an evangelica­l minister, had died at age 50. Hwang and his mother moved to Los Angeles, where he studied economics at UCLA, from which he said he barely managed to graduate.

He later earned an MBA at Carnegie Mellon University in Pittsburgh, before working for about six years at South Korean financial company Hyundai Securities in New York. He eventually landed a coveted job as an investment adviser for Julian Robertson, the revered stock investor whose Tiger Management, founded in 1980, was considered a hedge fund pioneer.

After Robertson closed the New York fund to outside investors in 2000, the following year he helped seed Hwang’s hedge fund — Tiger Asia — which focused on Asian stocks and at one point managed $3 billion for outside investors.

According to The Wall Street Journal, Tiger Asia was based in New York and became one of the biggest Asia-focused hedge funds, running more than $5 billion at its peak.

Robertson, now 88, said he was “very sad” about Hwang’s fall.

“I’m a great fan of Bill and it could probably happen to anyone, but I’m sorry it happened to Bill,” he told Business Insider on March 29.

In 2008, Tiger Asia lost money when investment bank Lehman Brothers filed for bankruptcy.

The next year, Hong Kong regulators accused the fund of using confidenti­al informatio­n it received to trade some Chinese bank stocks.

Investment losses and regulatory issues in Hong Kong and the US ultimately led to the company closing in 2012, when Hwang pleaded guilty to wire fraud relating to illegal trading of Chinese bank stocks and separately paid $44 million to US authoritie­s to settle insider trading charges.

Shortly after closing Tiger Asia, Hwang opened Archegos, named after the Greek word for “leader” or “prince”.

The new company, which also invested in US and Asian stocks, was similar to a hedge fund, but its assets comprised Hwang’s personal wealth and that of certain family members. The arrangemen­t shielded Archegos from regulatory scrutiny because of the lack of public investors.

Hwang made large, concentrat­ed bets on shares in South Korea, Japan, China and elsewhere, using significan­t amounts of borrowed money.

Archegos’ assets rose from $200 million when he founded it in 2012 to more than $10 billion.

Larry McDonald, a former Wall Street trader and creator of the Bear Traps Report, an investment newsletter for hedge fund profession­als, estimates that Hwang must have been compiling annual returns of 35 percent or more to see such an explosion in assets under management, the Fox News website reported.

“If those numbers are accurate, they are truly astounding,” McDonald said.

Seldom noticed

Traders said Hwang became one of Wall Street’s biggest customers, which may account for blue-chip companies overlookin­g his troubled regulatory record.

According to media reports, he tended to keep to himself.

Bloomberg Wealth reported: “Even on Wall Street, few ever noticed him. Until suddenly everyone did.”

Unlike other money managers, Hwang avoided the financial media and never made the annual billionair­es lists published by outlets such as Forbes. When he was quoted in the media, it was mostly about his Christian faith and charitable contributi­ons.

Hwang, 57, and his wife, who have a college-age daughter, live quietly in an affluent, predominan­tly Asian area of Tenafly, New Jersey, a 30-minute drive from his office on Seventh Avenue in Manhattan, which overlooks Central Park.

A recent story on Bloomberg’s website said, “A generous benefactor to a range of unglamorou­s, mostly conservati­ve Christian causes … Hwang eschews the trappings of extravagan­t wealth, rides the bus, flies commercial and lives in what is, by billionair­e standards, humble surroundin­gs in suburban New Jersey.”

In 2006, Hwang establishe­d the Grace and Mercy Foundation, a nonprofit based in New York that sponsors Bible readings and religious book clubs. He raised its assets from $70 million to $500 million in less than a decade. The foundation has donated tens of millions of dollars to Christian organizati­ons.

US Internal Revenue Service records show the foundation was involved in some of the types of complex financial transactio­ns that Hwang used at Archegos. While the foundation received millions in donations of stocks, records show it also bought and sold derivative­s with mixed results.

In 2016 and 2017, Hwang contribute­d $210 million of Netflix stock to the foundation, and from 2015 to 2018, he gave it $236 million of Amazon stock, tax records show. He donated another $48 million of Expedia and Facebook stock. Hwang also gave the charity smaller amounts of stock in Facebook, Hawaiian Airlines and Expedia.

From 2007 to 2018, the foundation distribute­d nearly $80 million, with amounts rising steadily over time, according to the Forbes website. Most of it went to Korean Christian causes.

In a video posted by his foundation in 2019, Hwang said: “I’m not afraid of death or money. The people on Wall Street wonder about the freedom that I have. Ultimately, the most important thing is the Bible.

“When we create good companies through the capitalism that God has allowed, it enhances people’s lives. … God delights in those things.”

On his being a big investor in LinkedIn, which he described as a company that helps people realize their potential, Hwang said: “Do I think God loves it? Of course! I’m like a little child looking for what I can do today, where I can invest, to please our God.”

He said in a 2018 interview: “I’m decreasing the amount of money under my name, in order to do things that God loves. I do it because I like God more than I like money.”

Credit Suisse has been in touch with Swiss financial market supervisor FINMA, the Prudential Regulation Authority in the United Kingdom and the US Federal Reserve over the Archegos developmen­ts, a source familiar with the matter said.

The US Securities and Exchange Commission and the UK’s Financial Conduct Authority have launched preliminar­y investigat­ions into the Archegos meltdown, according to a different source familiar with the situation.

The SEC said in a statement on March 29, “We have been monitoring the situation and communicat­ing with market participan­ts since last week.”

Japanese Finance Minister Taro Aso said on Friday that Tokyo is looking into the financial losses incurred by Japan’s Mitsubishi UFJ Financial Group and Nomura, and will share informatio­n on the matter with the Bank of Japan and overseas authoritie­s.

The collapse of Archegos Capital Management, and the billions of dollars in losses to investors and other market participan­ts, is a vivid demonstrat­ion of the havoc that errant large investment vehicles called ‘family offices’ can wreak on our financial markets.” Dan Berkovitz, commission­er on the US Commodity Futures Trading Commission

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 ?? BRENDAN MCDERMID / FILE PHOTO / REUTERS ?? Clockwise from left: A view of the New York Stock Exchange. Traders work on the floor of the exchange on April 7. COLIN ZIEMER / NEW YORK STOCK EXCHANGE VIA AP Bill Hwang (right), founder of Tiger Asia Management, leaves a federal court in Newark, New Jersey, with his attorney Lawrence Lustberg (left) after a hearing in December 2012.
BRENDAN MCDERMID / FILE PHOTO / REUTERS Clockwise from left: A view of the New York Stock Exchange. Traders work on the floor of the exchange on April 7. COLIN ZIEMER / NEW YORK STOCK EXCHANGE VIA AP Bill Hwang (right), founder of Tiger Asia Management, leaves a federal court in Newark, New Jersey, with his attorney Lawrence Lustberg (left) after a hearing in December 2012.
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 ?? ARND WIEGMANN / FILE PHOTO / REUTERS ?? Credit Suisse was among the companies that experience­d heavy losses after Archegos Capital Management defaulted on margin calls.
ARND WIEGMANN / FILE PHOTO / REUTERS Credit Suisse was among the companies that experience­d heavy losses after Archegos Capital Management defaulted on margin calls.

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