EC How Might The Archegos Situation Affect Markets Going Forward?

By now, I assume that you have heard something of the situation involving Archegos, the family office of Bill Hwang, a former Tiger Cub. If not, the short version of the story is that this fund experienced significant margin liquidations over the past few sessions in order to meet its obligations to its prime brokers. As with other situations where excesses at one market participant spilled into markets as a whole, there are a wide range of current and future considerations that could affect investors across the financial spectrum.

This is one of the largest margin calls in history, so it certainly merits careful scrutiny. I think it is important to view the Archegos saga in two parts. First, what was specific to that fund and its holdings?Second, what if any second-order effects might result from the events around this fund? 

The most pressing question involving this fund is how a fund with a reported $5-$10 billion in capital end up with exposures that are likely to cause losses that may be as high as $30 billion?  A press release by Nomura indicates that it has about $2 billion from a US client, widely believed to Archegos. Credit Suisse (CS) declined to provide a number but noted a “highly significant and material” loss. Morgan Stanley (MS) and Goldman Sachs (GS) also warned of financial hits, though the latter described their loss as “immaterial.”Their situation is especially ironic, however, since they stopped doing business with Mr. Hwang after a guilty plea for wire fraud several years ago. 

It appears that the nexus of the saga relates to ViacomCBS (VIACA, VIAC). Consider the following graph:

VIACA Daily Chart, Past 3 Months

(Click on image to enlarge)

VIACA Daily Chart, Past 3 Months

Source: Bloomberg

We can see that the stock began to go parabolic in February, after rising on a steady, but linear pace prior to that. The stock finally stalled around the $100 level. After the close last Monday, March 22nd, the company announced that it would issue about $2.65 billion in equity and convertible bonds. The stock unsurprisingly fell about 10% the next day, but few would question the motives of a corporate board doing an equity financing after its shares doubled in about 5 weeks. The problems began to kick in when the stock fell to about $70 the next day. Remember, parabolic moves often comes to a messy end. Any investor who was utilizing margin would have experienced some stress after a two-day, 30% fall in a holding, but this was not an investor utilizing normal margin. It appears now that Archegos was more highly levered than that, and we don’t know if he was using his excess margin to continue buying VIAC or other holdings. Thus the quick drop in VIAC may have been the proverbial straw that broke the camel’s back.

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