‘Argh Chaos!’ And The Biggest Margin Call Of All Time

“This is a challenging time for Archegos Capital Management, our partners and employees,” Karen Kessler, a spokeswoman for Bill Hwang’s family office said, in an emailed statement to the media late Monday.

Kessler is CEO of Evergreen Partners, which specializes in PR, crisis and strategic communications. “Karen is the region’s most sought after crisis and reputation management consultant, having counseled corporations, public institutions and high profile individuals facing allegations of legal, business and personnel misconduct, political corruption, professional integrity issues, social media fallout, large-scale public investigations and other sensitive matters,” a bio reads.

Her remarks appeared to be the first public comments attributed to Archegos since the firm found itself at the center of the financial universe over the weekend, after multiple outlets pieced together the story behind a series of large block trades triggered by a margin call on Hwang.

Read more:

Sometimes, You Blow Up

Tetris

“All plans are being discussed as Mr. Hwang and the team determine the best path forward,” Kessler went on to say.

Her characterization of the situation facing Archegos as “a challenging time” is an early candidate for understatement of the year. While the suggestion that Hwang’s flameout might pose a systemic risk seems unfounded (for now), the blow-up does appear destined for a dubious spot in the annals of market history.

For example, Bloomberg ran a story on Monday evening characterizing Hwang’s plight in stark terms. He managed to keep a relatively low profile while amassing a multi-billion dollar fortune which he leveraged through Archegos, ultimately building total positions estimated as high as $100 billion.

“It evaporated in mere days,” Bloomberg wrote. It’s still unclear, the same article said, “what positions derailed, or what hedges he had set up,” but Hwang will henceforth be known as the man who suffered “one of the biggest margin calls of all time,” leading directly to “one of the world’s greatest hidden fortunes [being] wiped out in days.”

Mike Novogratz spoke to Bloomberg for the same article. “I’ve never seen anything like this — how quiet it was, how concentrated, and how fast it disappeared,” he marveled, without so much as a hint of irony to account for his own high-profile stumbles or the possibility that his affinity for cryptocurrencies might one day lead him astray.

As noted in “Sometimes You Blow Up,” (linked above) Hwang may not have been “highly” leveraged depending on your definition of “high.” “Average leverage for the 10 largest hedge funds, measured as the average ratio of gross assets to net assets, peaked at 24.6 in June 2019,” Treasury’s Office of Financial Research said, in a recent annual report to lawmakers. If media reports are correct, Hwang was nowhere near that figure. The concern, though, is what the leverage is applied to and how concentrated those bets are.

The SEC and FINRA are now starting to dig into the swaps, apparently. That means it’s just a matter of time before lawmakers start tweeting, if they haven’t already. After that, don’t be surprised if hearings are scheduled. Jen Psaki said Joe Biden is aware of the situation.

Also on Monday, reports indicated that Credit Suisse attempted to marshal support for a coordinated effort that would have made the chaos less… well, less chaotic, but the effort devolved into back-stabbing and recrimination between banks. (Imagine that.)

“Archegos appeared to have initiated the same directional positions in individual companies with several brokers simultaneously,” JonesTrading’s Mike O’Rourke said Monday. “The questions we had over the weekend now grow in importance as it appears the positions involved were approximately twice the size they appeared to be on Friday, and at least three times the number of brokers were involved,” he added. “The amount of leverage and lack of disclosure questions are even more glaring.”

I’m not quite sure how he does it, but Rabobank’s Michael Every somehow manages to one-up himself almost every, single day when it comes to producing what is easily some of the most colorful, entertaining daily market commentary you’ll ever come across. To paraphrase it would be a crime, as that would risk diluting the humor. Below, find one brief excerpt from Every’s latest:

Archegos? ‘Argh, chaos’ more like.

This overshadowed the good news that the Suez Canal is now open again. However, there is a link between the two: both stories reveal how stupid the key infrastructure of the global economy and financial system still is. ‘Too big to sail and too big to fail’, as some dub the two halves of this dyad: and Joe Public can again see our system encourages entities to get so large and complex that when a simple incident happens, everything gets stuck. Something surely needs to change, unless we are going to assume there can’t be any more ‘Argh, chaos’ “because markets”, or any more stuck giant ships in the Suez Canal “because boats”.

As it turns out, Archegos is Greek for “one who leads the way.”