How They Could Regulate An “Arch Ego”

Like so many others, I have continued to be fascinated by the blowup at Archegos, the Hwang family office. Banks have experienced billions of dollars in losses as a result of this debacle. While the losses never rose to the level of systemic risk – hence the broader markets’ willingness to take the events largely in stride – there is nothing to suggest that it couldn’t have metastasized into something larger. Regulators need to ensure that a single customer’s leveraged exposures can never cause a result like the one we saw over the past few days. 

Yesterday, I asserted that Mr. Hwang (whom I’ve never met) appeared to have a certain swagger, an “arch ego” if it were, that enabled him to rise phoenix-like from a guilty plea for wire fraud in 2012. Even more amazing to me, it appears that the recent blow-up hasn’t shaken the confidence that Mr. Hwang’s former mentor, Tiger Management founder Julian Robertson, still retains in his protégé’s prowess. There were clearly loopholes that a charismatic, aggressive investor could exploit, and only a regulatory regime can close, or at least shrink them.

As I related earlier this week, it was impossible to know who was behind the huge block trades in affected stocks that were hitting the market last Friday. We could figure out which brokers were doing the trades, but the only holders with positions large enough to execute the trades were the brokers executing them. Since it was highly unlikely that the banks were willing to speculate so heavily in their own account, the speculation was that the shares were owned in “street name”, meaning that the institutional ownership was somehow the broker rather than the fund itself. We only learned later that the banks were indeed the owners, holding them as collateral for equity swaps and other private contracts done on behalf of clients. Or should I say client, singular, since the bulk appeared to be held on behalf of Archegos?

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