Another Global Meltdown Close Call – While We Slept

By Shlomo Maital     

   In 2008 global capital markets were in meltdown, driven by Casino-like gambler behavior by principal actors, hidden behind a screen of subterfuge, misleading labels (credit default swaps, which weren’t swaps at all), bad regulation and greed.  

    Some said – it can happen again, And it will.

    And, while we slept, while we were preoccupied by the pandemic, it nearly did.  In fact, three times.  The fourth time may be the real thing.  Fasten your seat belts.

     Here is a timeline account of what happened. I will skip a lot of the technical stuff.  Warning:  This is long, about 800 words.

     Background:  Bill Hwang is a New York hedge fund manager, who ran Tiger Asia; he set up his own hedge fund and called it Archegos (which means “one who leads the way” in Greek – as you will see, highly ironic). 

      Wednesday March 24:   the media company ViacomCBS begins selling shares to raise money.  ViacomCBS employs some 22,000 people, has $25 b. in revenues, with about $2 b. in profits.  The day before, Viacom shares fell 9%, and was down 30% from its high on Monday, on Wednesday.  Why?  The capital markets expected Archegos to buy tons of Viacom shares; but Archegos did not.  (We will see why not, later).  That turned out to be Bill Hwang’s downfall. 

     Hwang had bought huge chunks of Viacom shares, but used a derivative (an asset derived from shares, not actually a share itelf) to hide what he bought, known as TRS total return swap.  His purchases were based on debt – “leveraged”.  Some 85% of the price he paid was borrowed from banks.  This made him wealthy, with assets of $20 b. at one point. But it was his downfall.  Because – the collateral (backing) for his loans was the shares he bought. But when the value of the collateral falls, as Viacom shares did, the banks call you and say, hey!  I need money, your collateral is too small.   And Hwang was strapped, because some of his other investments (in Asia) were doing poorly.   

     So the banks had to sell some of Hwang’s Viacom shares, at low low prices, to pay up these so-called ‘margin calls’.  This caused Viacom stock to drop even further. A doom loop.  Not unfamiliar, in financial meltdowns and bubble bursts.  The banks knew this was ‘doom’ – but it was a race to see who could pull out their money before bankruptcy.  The most alacritous banks succeeded; the slow banks lost heavily.

     Thursday March 25    Hwang tries to get the banks to hold off on their margin calls, and arranges a conference call with his creditors.  But Goldman Sachs refuses and sells off Viacom shares.  Credit Suisse, in contrast, favors holding off.

     Friday March 26.  Goldman Sachs sells $3 b. to $4 b. worth of Viacom stock held by Archegos, with Archegos’ agreement.  During the day Goldman sells of more than $10.5 b. worth of Viacom shares. Morgan Stanley unloads $8 b. worth.  Deutsche Bank follows suit.   Credit Suisse and Nomura, who lent scads of money to Hwang, are left holding the ball.

     Monday March 29.  Nomura reports a possible $2 b. loss.  Credit Suisse ‘flags’ a possible $1 b. to $4 b. loss. 

     Tuesday March 20.  Mitubishi UFJ Financial Group reports $300 m. in possible losses.  JP Morgan, unscathed, says Wall St. losses could total $10 b.   US regulators and UK regulators say they are “discussing the meltdown”.  (Wow – quick work, guys.  Forget to set your alarm clocks?)

     Wed. March 31:    Credit Suisse losses could total $5 b.  A senior credit manager loses her job.    US Treasury Secretary Janet Yellen says she will revive a regulatory working group (disbanded under Trump) to examine the risk hedge funds pose to the financial system.

     Thursday April 1.   NOT April Fools.  The losses spread – Japanese firms report losses too.

    And today, as I write this:  Tuesday April 6.   It’s business as usual.  The S&P and Dow-Jones Industrial Indices are both at record highs. 

     Meltdown?  What meltdown? 

     The bottom line:  Hwang used a ‘leverage’ (debt) strategy, buying stocks on borrowed money, hidden, (because he bought on his own account, for a ‘family’ hedge fund, and did not technically have voting rights, requiring open reporting).  He ran up Viacom stocks, at one point was worth $20 b.  in just one year – and now, has probably lost all of it. 

     Does this sound similar to Sneaky Sam, Gamblin’ Man, who rolls the dice in Las Vegas, makes millions, and then on one roll of the dice – loses every penny,  and borrows $5 to hop a cab to his hotel room. 

     Except —  global capital markets are not supposed to be casinos.

     One day, maybe, we will find a way to turn global casinos into what they are meant to be:   Channelling money from those who have it to those who need it, in a transparent, open, orderly and bubble-free manner.

p.s. Mohammed El-Erian, formerly CEO of the huge bond trading fund PIMCO says we have had fully three near-meltdowns in recent weeks, and sums up, “this was an accident waiting to happen, and it happened.”[The previous two near-meltdowns were linked to the GameStop shares and Robinhood].