Opinion: Financial crises happen every 10 years, making the collapse of Archegos puzzling

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Financial crises are never the same. In the late 1980s, nearly a third of the nation’s savings and loan associations failed, ending with a taxpayer bailout, in 2021 terms, of roughly $ 265 billion. In 1997-1998, financial crises in Asia and Russia led to the near collapse of the largest hedge fund in the US: Long-Term Capital Management (LTCM). Its scope and operating practices were such that Federal Reserve Chairman Alan Greenspan said that when LTCM failed, “he had never seen anything in his life that compared to the terror” he felt. LTCM was deemed “too big to fail” and engineered a bailout by 14 major US financial institutions.

Exactly a decade later, too much leverage by some of those same institutions and the bursting of a US housing bubble led to the near collapse of the US financial system. Once again, the big banks were deemed too big to fail and taxpayers came to the rescue. The tendency? Every 10 years or so, and they all look different. Are we in the early stages of a new crisis now, with the explosion at the Archegos Capital Management LP family office? A family office, for the uninitiated, is a private wealth management vehicle for the ultra-wealthy. Here’s what I mean by ultra-wealthy: Consulting firm EY estimates that there are some 10,000 family offices around the world, but manages, according to a separate estimate by market research firm Campden Research, nearly $ 6 trillion. That $ 6 trillion is likely to be much higher now, given it‘s based on 2019 data. Unregulated money managers Here’s the potential danger. Family offices are generally unregulated. The Investment Advisers Act of 1940 says that companies with 15 or fewer clients do not have to register with the Securities and Exchange Commission. What this means is that there are trillions of dollars at stake and no one can really tell who is handling the money, what it is invested in, how much leverage is being used, and what kind of counterparty risk may exist. (Counterparty risk is the probability that a party involved in a financial transaction may default on a contractual obligation to another person). This appears to be the case for Archegos. The firm bet heavily on certain Chinese stocks, including e-commerce player Vipshop Holdings Ltd. VIPS, -3.22%, Chinese mentoring company GSX Techedu Inc. GSX, which is listed in the US, -10.04%, and companies. of US media ViacomCBS Inc. VIAC, -2.40% and Discovery Inc. DISCA, -3.79%, among others. Stock prices have plummeted lately, prompting large sales (about $ 30 billion) by Archegos. The problem is that only about a third of that, or $ 10 billion, was his own money. We now know that Archegos worked with some of the biggest names on Wall Street, including Credit Suisse Group AG CS, + 2.29%, UBS Group AG UBS, + 0.94%, Goldman Sachs Group Inc. GS, -0.55%, Morgan Stanley MS , + 0.47%, Deutsche Bank AG DB, + 0.26% and Nomura Holdings Inc. NMR, + 1.68%. But given that family offices can operate largely unregulated, who can say how much money is actually involved here, and what is the extent of market risk? My colleague Mark DeCambre reported last week that Archegos’ true exposures to bad trades could actually be closer to $ 100 billion. Counterparty Risk Danger This is where counterparty risk comes into play. As Archegos’ bets went south, the aforementioned banks, considering their own losses, hit the company with margin calls. Deutsche quickly dumped around $ 4 billion in holdings, while Goldman and Morgan Stanley are also said to have dumped their positions, perhaps limiting their downside. So is it a financial crisis? It does not appear to be. Still, the Securities and Exchange Commission has opened a preliminary investigation into Archegos and its founder, Bill Hwang. A colleague, Tom Lee, the head of research at Fundstrat Global Advisors, calls Hwang one of the “10 best investment minds” he knows. But federal regulators may have a lower opinion. In 2012, Hwang’s former hedge fund Tiger Asia Management pleaded guilty and paid more than $ 60 million in fines after being accused of dealing with illegal data on Chinese banks. The SEC banned Hwang from managing money on behalf of clients, essentially kicking him out of the hedge fund industry. So Hwang opened Archegos, and again, family offices are generally unregulated. Yellen on the case This issue is on Treasury Secretary Janet Yellen’s radar. He said last week that greater oversight of these private corners of the financial industry is needed. The Financial Stability Oversight Council (FSOC), which it oversees, has reactivated a task force to help agencies “better share data, identify risks and work to strengthen our financial system.” Most financial crises end with American taxpayers stuck with the bill. Profits belong to risk takers. But the losses belong to us. To paraphrase Abe Lincoln, family offices, a multi-billion dollar industry allowed to operate in the shadows in a global financial system that is more intertwined than ever, are owned by the super rich, the super rich and for the super rich. wealthy. And anyone else. The Archegos collapse may or may not be the start of another financial crisis. But who can say what thousands of family offices are doing with their trillions and if similar problems could erupt?