Wall Street’s circular firing squad

Erik Schatzker

“Before he lost $20 billion in two days, Bill Hwang was the best trader you’d never heard of,” said Erik Schatzker. He invested his own money through a family office, Archegos Capital Management, that “never showed up in regulatory filings.” He used a type of derivative called “swaps,” in which a bank buys stock for a client, who gains or loses without being registered as the holder of the shares. Hwang was able to amass huge positions quietly, and no one knew he was piling on leverage by spreading his business among several major banks. Then the predictable shock came. One company Hwang was heavily invested in, ViacomCBS, saw its stock drop

amid doubts about its strategy. Hwang’s massive portfolio cratered so quickly, the losses “blew through the small buffer” he had saved, leaving banks with an ugly choice: Hope for a turnaround, or close out Hwang’s positions in a fire sale? If the stocks in Hwang’s portfolio rebounded, Hwang and the banks would be fine. “But if even one bank flinched, they’d all be exposed” to a selling frenzy. Morgan Stanley flinched, unloading $5 billion of Hwang’s holdings. Three more big banks followed, leaving the last two lenders, Credit Suisse and Nomura, with almost $7 billion in losses—another entry in the long story of banks letting financiers play with borrowed money.