Warren Buffett and Charlie Munger slam Robinhood, blast Archegos’ lenders, and reflect on their iconic friendship in a new interview. Here are the 15 best quotes

Warren Buffett and Charlie Munger sitting for a CNBC interview in May 2021.
Warren Buffett and Charlie Munger.

  • Warren Buffett and Charlie Munger blasted Robinhood and Archegos’ lenders in a recent interview.
  • The business partners also reflected on their six decades of friendship and biggest influences.
  • Buffett and Munger discussed remote working and the pandemic’s impact on Berkshire Hathaway as well.
  • See more stories on Insider’s business page.

Warren Buffett and Charlie Munger blasted Robinhood, slammed the banks that enabled the Archegos Capital meltdown, and reflected on their friendship of six decades in a CNBC interview that aired on Tuesday night.

The Berkshire Hathaway chairman and vice-chairman also shared their key lessons from the pandemic, discussed its impacts on their company, and clashed on the subject of Zoom meetings versus telephone calls.

Here are the 15 best quotes from “Buffett & Munger: A Wealth of Wisdom,” lightly edited and condensed for clarity:

Warren Buffett: “I knew when I met Charlie, after a few minutes in the restaurant, that this guy was gonna be in my life forever. We were gonna have fun together. We were gonna make money together. We were gonna get ideas from each other. We were gonna both behave better than if we didn’t know each other.”

Charlie Munger: “What I like about Warren is the irreverence. We don’t have automatic reverence for the pompous heads of all civilization.”

WB: “It goes well beyond buying a stock and selling it higher. He’s designed dormitories and helped build them. He’s worked at hospitals to understand how they can be made better, serve more people, and do it at less cost. Charlie’s worked on big problems, and he doesn’t need to. And Charlie has never shaded anything he’s told me since we met, in terms of presenting it to me in a different way than reality. He’s never done anything I’ve seen that’s self-serving. He makes me better than I would otherwise be. I don’t wanna disappoint him.” – describing what he admires about Munger.

WB: “I never heard my dad say to me in my life, ‘Be sure you pay all your debts.’ But I just watched how he lived, and you wanna have certain people in life that you don’t want to disappoint. You wanna have people that make you a better person than you otherwise would be. Charlie does that for me now, but my dad did it for me early on.”

WB: “What really is great is if you can do what you want to do in life, and associate with the people you want to associate with in life. We’ve had that luxury now for 60 years or close to it. That beats 25-room houses and six cars.”

CM: “If it’s clear that something is a mistake, fix it quickly. It doesn’t get better while you wait.”

CM: “Think of how massively stupid that was. It was the lure of the really easy money that the idiot was paying you, being the prime broker for the jerk. They were all foolish. But Credit Suisse has managed to be the biggest fool of all.” – commenting on the Archegos fiasco earlier this year.

CM: “Robinhood is beneath contempt. It’s a gambling parlor masquerading as a respectable business. It’s basically a sleazy, disreputable operation.” – on the popular trading platform.

CM: “The regulators need to change laws now. But if you’re running a gambling parlor, you want the big players to gamble more furiously. We don’t wanna suck people into gambling for way more than they can afford.” – criticizing lax rules in the securities business.

CM: “Our wonderful, free-enterprise economy is letting all these crazy people go to this gross excess. The communist Chinese are avoiding it. They step in preemptively to stop speculation. I don’t want all of the Chinese system, but I certainly would like to have the financial part of it in my own country.”

WB: “If you get enough people believing something won’t be there next week in banking, it won’t be there next week, absent the Federal Reserve.” – recalling companies’ mad rush to tap their credit lines when the pandemic struck.

WB: “The biggest thing you learn is that the pandemic was bound to occur, and this isn’t the worst one that’s imaginable at all. Society has a terrible time preparing for things that are remote but are possible, and will occur sooner or later.”

WB: “The economic impact has been extremely uneven. Millions of small businesses have been hurt in a terrible way, but most of the big companies have overwhelmingly done fine, unless they happen to be in cruise lines or hotels or something.” – Buffett added that the pandemic surprised his team in many ways, and cautioned there’s a lot they still don’t know about the fallout.

WB: “I don’t see any plus to it particularly. I’d rather have my feet on the desk, and I find the telephone a very satisfactory instrument.” – responding to Munger saying he’s “fallen in love with Zoom” and uses it three times a day.

WB: “I wouldn’t have wanted to work there. I’d resign or be fired. I’d rather be in a jail cell with a few people who are interesting, and plenty of reading material.” – commenting on how he would react to a centralized management system at Berkshire.

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The Archegos fiasco has reportedly made life harder for hedge funds investing in SPACs

Bill Hwang

A slowdown in SPAC IPOs since March could in part stem from the $20 billion unraveling of Archegos Capital, according to a report from the Financial Times’ Ortenca Aliaj and Joshua Franklin.

Bill Hwang’s Archegos utilized extreme leverage from a number of banks to build ahighly concentrated stock portfolio that ultimately moved against the firm as it was unable to meet margin calls. That leverage unwind caused $10 billion in combined bank losses, with Credit Suisse and Nomura losing the most.

Following the late-March leverage unwind, banks are exhibiting more caution when extending leverage to hedge funds and family offices, according to the report. Less leverage has forced hedge funds to rethink their strategy when investing in SPACs, according to the report.

Hedge funds would often employ leverage to buy SPACs at the $10 offering price, and then immediately sell any pops to get out early and lock-in gains. That leverage would significantly help juice returns for hedge funds.

A senior banker who works on SPAC deals told the Financial Times, “A lot of the return profile for hedge funds is derived from the leverage they employ. It was a gravy train when it was levered.”

Now, less leverage being offered to hedge funds in the wake of the Archegos fiasco has coincided with a significant drop in SPAC IPO listings. Over the past month, just 13 SPACs listed, compared to 110 SPAC listings in March.

“We are seeing it in the price action where securities are trading below par because banks are not offering leverage as freely as they did and it’s now more expensive,” Matthew Simpson of Wealthspring Capital told the Financial Times.

An analysis of Refinitiv data by the Financial Times found that 80% of SPACs that are still in search of a deal are now trading below the $10 level, which is often the IPO price for the blank-check firms.

“All the rocket fuel has come out of these things. If hedge funds were allowed to lever up, hedge funds would be levering up to buy all the SPACs trading under $10,” Matthew Tuttle of Tuttle Capital Management told the Financial Times.

But the unwind of leverage being offered to hedge funds isn’t the only reason why few SPACs have gone public in recent months. Increased regulatory scrutiny of SPACs and an unwind in the high-growth tech trade have certainly contributed to a decline in SPAC offerings.

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Ark Invest’s Cathie Wood welcomed the tumble in tech stocks – and revealed Archegos chief Bill Hwang funded the launch of her ETFs

Cathie Wood
Cathie Wood.

  • Cathie Wood celebrated the tech-stock slump as a chance to score higher returns.
  • The Ark Invest chief said the sell-off reflected a broadening bull market.
  • Wood disclosed that Archegos Capital’s Bill Hwang funded the launch of her ETFs.
  • See more stories on Insider’s business page.

Ark Invest’s Cathie Wood cheered the tumble in tech stocks, and revealed that Archegos Capital’s Bill Hwang was one of her early backers, in a CNBC interview on Friday.

“I love this setup,” the star stock-picker said about the sharp sell-off of Tesla, Shopify, and other holdings in Ark’s exchange-traded funds. “The worst thing that could have happened to us is to have the market narrowly focus on just our ilk of stock – the innovation space.”

Wood also argued that only the prices of her favorite companies have changed, not their prospects. She now expects to score compounded annual returns of 25% to 30% in her funds over the next five years, up from her target of 15% earlier this year.

The Ark chief’s flagship innovation ETF is currently down 12% year-to-date, a sharp reversal from its roughly 150% gain in 2020.

Wood told CNBC about her relationship with Hwang during the interview. The pair of proudly Christian investors met through church and first exchanged ideas in 2013, and Hwang invested in Netflix after Wood recommended the video-streaming stock to him, she said.

“He did provide the seed for our first four ETFs and we’re very grateful to him,” Wood continued, emphasizing that Hwang’s help was crucial as it was tough to secure funding for ETFs in the early 2010s.

She added that she wrote to him after Archegos blew up in March, and doesn’t know whether he’s still an investor in any of Ark’s funds.

Archegos imploded after Hwang’s aggressively leveraged bets on tech and media stocks soured. Several Wall Street banks slapped him with margin calls, declared him in default when he didn’t pay up, and rushed to dump more than $20 billion of his positions in a matter of days.

Credit Suisse and Nomura were among the banks caught out by Archegos’ collapse and the subsequent fire sale, and suffered billions of dollars in losses as a result.

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Archegos may wind down as banks seek to recoup billions in losses, report says

Bill Hwang
  • Archegos is preparing for insolvency as banks seek to recoup losses suffered during the meltdown, the Financial Times reported Wednesday.
  • The family office has reportedly hired restructuring advisers to tackle financial and operational obstacles.
  • Some of the banks are drafting “letters of demand” in which they are requesting repayment from Archegos before filing legal claims.
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Archegos Capital Management is reportedly preparing for insolvency as banks seek to regain roughly $10 billion in combined losses suffered during the meltdown in March, the Financial Times reported Wednesday.

According to the report, Bill Hwang’s family office has hired restructuring advisers to navigate financial and operational obstacles as well as the potential legal claims from the banks involved.

Credit Suisse, Nomura, Morgan Stanley, UBS, MUFG, and Mizuho all lost billions each after Bill Hwang’s family office failed to meet margin calls on highly levered positions in a handful of stocks.

As a result, some of the banks are drafting “letters of demand” to the firm requesting repayment before filing legal claims, according to the Financial Times.

On Wednesday, UBS Group Chairman Axel Weber apologized for the loss the bank suffered amid the Archegos fiasco in an interview with Bloomberg TV.

Weber blamed the episode on a lack of oversight of family offices, which do not have to disclose as much information about investments to regulators compared to other asset managers, such as hedge funds.

Policymakers and executives including Morgan Stanley CEO James Gorman have suggested tougher regulation on family offices, though no proposals surfaced to date since.

The implosion of Archegos caused widespread chaos on Wall Street and exposed the fragility in parts of the financial system, especially in lesser-known areas such as total return swaps.

The founder, a former Tiger cub, grew his $200 million investment to $10 billion but did not need to register as an investment advisor since he was only managing his own wealth.

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UBS takes a $744 million hit from Archegos in the first quarter, as the fund’s implosion continues to hurt banks

GettyImages 154993917
UBS took a sizeable hit from Archegos but still posted a 14% rise in profit in Q1.

UBS took a $744 million hit from the collapse of Archegos in the first quarter, as the US investment fund’s implosion continued to make itself felt on bank balance sheets.

Nevertheless, the Swiss banking giant beat analysts’ expectations with a net first-quarter profit of $1.82 billion, up 14% from a year earlier, as surging markets boosted fees from clients.

UBS’s first-quarter results, released on Tuesday, showed it had taken a $744 million hit on a US-based client of its prime brokerage business.

The hit from the Archegos fund, which spectacularly imploded in March after making risky bets, helped push down revenue in the bank’s global markets arm by 27% or $554 million.

Excluding the Archegos loss, UBS’ global markets revenue would have climbed 11% on the back of strong financial markets in the first quarter.

Archegos was a family office investment firm that managed the wealth of Bill Hwang, a former hedge fund executive.

It imploded in March when some of its highly levered bets on US media and Chinese tech companies started to go bad.

Its prime brokers – the banks which facilitate lending and sales to hedge funds and family offices – demanded it put up more collateral to cover potential losses. When Archegos failed to do so, the banks began to forcibly dump its holdings, leading tens of billions of dollars of selling.

Credit Suisse was the most badly burned by these fire sales. It eventually took a hit of $4.7 billion from Archegos in the first quarter after being slow to ditch its exposure. It pushed the bank to a $275 million loss in the first quarter.

Morgan Stanley took a $911 million loss from Archegos in its prime brokerage unit. But its profit nonetheless jumped 150% to $4 billion on the back of buoyant markets.

UBS chief executive Ralph Hamers said: “Our first quarter results also factored in a loss related to the default by a single US-based prime brokerage client. We are all clearly disappointed and are taking this very seriously.

“A detailed review of our relevant risk management processes is underway and appropriate measures are being put in place to avoid such situations in the future.”

UBS shares fell 2.73% in early trading to 13.74 Swiss francs ($15).

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The Archegos meltdown caused huge messes at some of the world’s largest banks – but it also proved the post-financial crisis rules made us safer

GettyImages 1207533986 Traders work during the closing bell at the New York Stock Exchange (NYSE) on March 17, 2020 at Wall Street in New York City. - Wall Street stocks rallied Tuesday on expectations for massive federal stimulus to address the economic hit from the coronavirus, partially recovering some of their losses from the prior session. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)
A potential market catastrophe was shrugged off by the financial system at large thanks to post-2008 regulation.

  • The billion-dollar losses faced by the firm Archegos didn’t impact the volatility of the broader market.
  • This is evidence that the banking system is safer because of regulations following the 2008 financial crash.
  • By holding more capital, banks ensure that sudden losses don’t impact the entire system.
  • George Pearkes is the global macro strategist for Bespoke Investment Group.
  • This is an opinion column. The thoughts expressed are those of the author.
  • See more stories on Insider’s business page.

Archegos, the family office of former Tiger Capital Management portfolio manager Bill Hwang, grabbed the attention of investors around the world in mid-March when the firm suffered catastrophic losses thanks to a portfolio that had two big problems: high leverage and intense concentration in a few stocks.

The Archegos mess grabbed global eyeballs not just for the size of the losses, but also for its distinct pre-financial crisis feel. There were derivatives, huge losses, exposure for large international banks, counterparty risks…all the echoes of the 2008-era blow ups.

But as disastrous as the unwinding of Archegos trades was, the billions of losses that ended up piling up at the banks (specifically, their prime broker units) facilitating the trades didn’t end up spilling into other markets. Specific stocks in the portfolio certainly got walloped – look no further than Viacom’s share price – and the dealers who took losses – like Credit Suisse and Nomura – saw a hit to their stocks as well, but broader market volatility did not tick up.

Indeed, the VIX (an index designed to measure stock market volatility) closed March at 52-week lows. Credit default swaps tied to large banks and brokers were basically unflustered. And there were no reports of contagion to other asset classes.

In other words, a multi-billion dollar blow up at a giant fund that some of the world’s largest banks had massive exposure to was basically shrugged off by the financial system at large.

That’s great news and evidence that reforms to raise the amount of capital banks hold following the global financial crisis worked.

The banking system is getting safer

As the US banking system approached the meltdowns of 2007 and 2008, US banks were highly leveraged. Borrowing by banks accounted for over 90% of risk-weighted assets and rising. Funding contributed by Tier 1 capital, that is first-in-line-for-losses equity and internally-generated earnings, was only about 8%. Post-crisis, that number is much higher at 12%, and very stable. Banks are holding more capital and are borrowing less relative to their assets. Leverage is lower, and capital is higher.

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This is important because if a bank has capital equivalent to 8% of its assets, it is technically insolvent should assets decline in value by 8%. By raising capital levels, banks have raised the bar for insolvency should they suffer sudden drops in the value of their assets.

In addition to making it less likely a given bank goes bust, higher capital levels also ensure that a problem for one bank doesn’t spread. For instance, with less capital, the reported losses suffered by Credit Suisse (the worst-hit of the banks who lent to Archegos) might lead them to default on other obligations, passing on their problems to other firms.

This “contagion” was what led to a spiraling series of failures in the US financial system that claimed firms like Bear Stearns, Merrill Lynch, and Lehman Brothers. But in a well-capitalized system, a shock to one firm gets absorbed by its capital, without spilling to other dealers.

Put another way, Tier 1 capital is sort of like a wall holding back wastewater from a lake. As banks sustain losses, wastewater rises towards the top of the wall, and if it overflows, wastewater (a bank’s risky assets) that leak into the lake (the broader financial markets) can be dangerous and cause a mess.

Prior to the financial crisis, these walls were dangerously low and massive leaks of risky assets resulted in a broader contamination of financial markets around the world. But after that crisis, regulators made banks rebuild those walls to be much higher and able to hold back much more before leaking any of the waste into the larger lake. This has hurt banks’ profitability, but it’s also made the system safer.

Blow ups aren’t spreading anymore

Archegos is not the first time since the crisis that large shocks to the financial system failed to result in contagion. The 2014 to 2016 oil price collapse, 2016’s Brexit shock, plunging Treasury prices after the 2016 election, or the collapse in volatility-linked exchange-traded products in early 2018 all showed that the system has gotten more resilient.

In each of these cases, pundits speculated that the huge dislocations would create positive feedback loops of contagion that would spin out of control, something I’ve previously written about.

But a well-capitalized financial system makes positive feedback loops much less likely, because a given mess doesn’t extend beyond the institutions immediately exposed to it.

Economist Hyman Minsky identified a tendency for financial instability to repeatedly arise as participants are rewarded for speculative activity. He contended that preventing speculation was a fool’s errand – there would always be a new frontier for leverage and risk-taking to build up.

While instability may be inevitable, it can be contained. Regulators were not prescient enough to prevent investors from piling into short volatility ETNs, couldn’t have predicted the outcome of the initial Brexit referendum, and didn’t have the visibility to see how large Archegos positions were getting.

But if capital levels are sufficiently high, regulators don’t have to predict every possible disaster on the horizon. Should a given fund or dealer run into trouble, that would be bad news for investors directly exposed…but not for the financial system as a whole.

High levels of capital have worked well for the financial system since 2009, and that was proven again with the Archegos blow-up. Efforts to reduce minimum capital requirements should be viewed skeptically given their track record keeping specific meltdowns isolated and staving off the “Minsky moment” of financial system collapse we saw in 2008.

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Credit Suisse just put $2 billion of Archegos-linked stocks on the market after the hedge fund’s meltdown, reports say

FILE PHOTO: The logo of Swiss bank Credit Suisse is seen at its headquarters at the Paradeplatz square in Zurich, Switzerland October 1, 2019. REUTERS/Arnd Wiegmann
  • Credit Suisse is still unloading Archegos-linked stocks after the US hedge fund’s collapse.
  • The lender put up about $2 billion worth of block trades after Tuesday’s market close, Bloomberg said.
  • Shares in Discovery and Chinese video-streaming website iQIYI were offered at the lower end of ranges.
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Credit Suisse put up large blocks of Archegos-related stocks on the market after regular trading on Tuesday, Reuters reported, citing multiple sources.

The stock offerings, including Discovery and iQIYI, amounted to roughly $2 billion, according to Bloomberg.

The Swiss bank isn’t yet done unloading stocks linked to Archegos, even though it’s already taken a $4.7 billion charge from the hedge fund’s collapse last month. Several top executives, including the chief risk officer and investment bank head, are departing following the fund’s failure to meet margin requirements.

In late March, Archegos used borrowed money to make large bets on some stocks until Wall Street banks forced it to sell over $20 billion worth of its shares as it couldn’t meet a margin call.

JPMorgan said this week global banks are expected to lose up to $10 billion following the fund’s implosion.

Tuesday’s block trades were offered at a discount to their closing prices. They included 19 million Class A shares of Discovery sold at $38.40, 22 million Class C Discovery shares sold at $32.35, and 35 million shares of Chinese online video-platform iQIYI at $15.85, Bloomberg said, citing one source.

Shares in Discovery and iQIYI fell sharply in after-hours trading on Tuesday. Credit Suisse fell 2% in morning trade on Wednesday.

Credit Suisse last week sold around $2.3 billion in block trades in Viacom, Vipshop, and Farfetch in an attempt to limit further losses from the fiasco.

A spokesperson for Credit Suisse didn’t immediately respond to Insider’s request for comment.

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Nomura to tighten financing for hedge fund clients in the wake of Archegos blowup, new report says

Nomura
  • Nomura is tightening financing for some hedge fund clients, per Bloomberg sources.
  • Japan’s largest brokerage is facing an estimated $2 billion loss due to the Archegos collapse.
  • Nomura will limit margin financing exceptions for hedge fund clients in order to prevent another blowup.
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Nomura is reportedly tightening financing for some of its hedge fund clients in the wake of the $20 billion collapse of Archegos Capital.

Japan’s largest brokerage is facing an estimated $2 billion loss due to the family office blowup, according to unnamed Bloomberg sources.

The Archegos collapse started when the family office, run by Bill Hwang, used total return swaps to take on leverage and place concentrated bets on a handful of stocks like ViacomCBS and Discovery.

Then a decline in share prices sparked a massive margin call that Archegos was unable to meet, leading banks to liquidate the family office’s assets.

The result was combined losses of $10 billion for global banks, according to estimates from JPMorgan.

Now in order to prevent similar blow-ups in the future, banks are taking action to reduce risk associated with hedge fund clients. The Securities and Exchange Commission has also opened an investigation into the matter.

Specifically, Nomura is tightening leverage for some clients that were previously granted exceptions to margin financing limits, Bloomberg said, citing people with direct knowledge of the matter.

The Japanese firm is the second bank to take action after the Archegos collapse.

Credit Suisse said earlier in the week that it will change margin requirements on swap agreements to dynamic from static after the collapse. Dynamic margin requirements force clients to post more collateral as positions move down, rather than setting a fixed margin requirement at the onset of the leverage contract.

Before the Archegos implosion, Nomura had been hitting on all cylinders with net income reaching a 19-year high for the nine months ended in December.

Now though, the bank has been forced to cancel the planned issuance of $3.25 billion in senior notes and share prices are down roughly 20% from March 26 highs.

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Archegos chief Bill Hwang donated huge amounts of Amazon, Netflix, and Facebook stock to his private foundation. Those gifts would be worth $950 million today

Bill Hwang
Bill Hwang of Archegos Capital Management.

  • Bill Hwang donated Amazon, Netflix, and Facebook shares to his private foundation.
  • The Archegos chief’s Grace and Mercy Foundation cashed them in for $325 million.
  • Grace and Mercy could have sold the shares for nearly $950 million today.
  • See more stories on Insider’s business page.

Bill Hwang, the investor who lost $20 billion in two days when his family office imploded in March, donated technology stocks to his private foundation that would be worth almost $950 million today.

The Archegos Capital Management boss – whose portfolio was swiftly dismantled when his leveraged stock bets soured and he defaulted on his lenders’ margin calls – is the cofounder of the Grace and Mercy Foundation, a Christian charity that helps the poor and oppressed.

Grace and Mercy’s tax filings, reviewed by Insider on ProPublica, show Hwang donated around 121,000 Amazon shares, 945,000 Netflix shares, and 51,000 Facebook shares to the foundation over the past decade. Grace and Mercy sold those shares for about $325 million in total between 2017 and 2018, scoring a handsome $186 million gain.

However, if the foundation had kept the gifts instead of selling them, they would fetch around $946 million today, reflecting the three stocks’ price gains in recent years.

Grace and Mercy also bought shares in Amazon, Netflix, Apple, Expedia, and other companies, its tax filings show. It cashed them in for a total of $200 million between 2014 and 2016, notching a $103 million gain.

Those shares would be worth $722 million today, including Amazon stock worth $449 million and Netflix shares worth $219 million.

Grace and Mercy, which boasted nearly $500 million in assets at the end of 2018, may have cashed in Hwang’s stock gifts because it needed to finance grants to charities and fund its operations. But it undoubtedly left money on the table by selling them.

Hwang is one of several “tiger cubs” who left billionaire investor Julian Robertson’s Tiger Management to start their own funds. He shut down Tiger Asia Management in 2012 after pleading guilty to insider trading in federal court, and launched Archegos in 2013.

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The Archegos meltdown will result in a $10 billion loss for global banks, JPMorgan says

Wall Street.
Big Tech recovers after a rough day Wednesday on Wall Street.

  • Global banks are expected to lose up to $10 billion from the Archegos meltdown, JPMorgan said.
  • This is 5x the normal loss level for a collateralized daily mark-to-market business, JPMorgan added.
  • It however cited three lessons the industry could take away from the implosion that has roiled the markets.
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Global banks are expected to lose up to $10 billion following the Archegos Capital Management meltdown, JPMorgan said Monday – raising its estimate from an initial $2 billion-$5 billion – with Credit Suisse Group and Nomura Holding hardest hit.

“One line of argument which could explain why the scale of losses suffered by [Credit Suisse] and Nomura was higher could be a higher level of leverage extended by these banks compared to [Goldman Sachs and Morgan Stanley], which seem to have suffered smaller losses if any,” JPMorgan analysts led by Kian Abouhossein said in a research note Monday.

JPMorgan clarified that there may also be additional considerations that determined the sizable difference between the scale of losses suffered, such as the timing of the sale of positions, among others. Nonetheless, the entire episode affects the industry overall, given that global banks could end up losing five times the normal loss level for a collateralized daily mark-to-market business.

JPMorgan cites three lessons the industry could take away from the fund’s implosion.

First, investment banks in general are in better shape today and are more focused on high-volume execution platforms.

“There is no excessive leverage in the [investment banking] or [private banking] industry,” JPMorgan said. “Although [private banking] leverage has been increasing, it is nowhere near prior peaks.”

The bank also said it sees no excessive equity-swap growth, a simple instrument all parties will benefit from.

Second, US regulatory frameworks like Basel III and the Dodd-Frank Act have improved the risk profile of investment banks. JPMorgan, however, noted that there is still weak oversight for non-bank entities, especially when it comes to family offices.

Archegos, a family office founded in 2012, did not have to disclose investments, unlike traditional hedge funds. JPMorgan also pointed to the lack of transparency when it came to equity-swap filings.

The Archegos sell-off exposed the fragility of the financial system, especially those involving lesser-known practices such as total return swaps, a derivative instrument that enabled Bill Hwang’s office not to have ownership of the underlying securities his firm was betting on and the secrecy of family offices. Typically, family offices enjoy the “private adviser exemption” provided under the Advisers Act to firms as these usually advise less than 15 clients, among other conditions.

But JPMorgan said, “filing requirements would have applied to Archegos given its sizable exposure to some US securities. However, the fact that Archegos did not file with the [Securities and Exchange Commission] can be explained by the usage of total return swaps, which seems to be the primary method through which the sizable positions were built by Archegos.”

Dan Berkovitz, a Democratic commissioner on the Commodity Futures Trading Commission, denounced family offices and their ability to skirt some oversight.

“A ‘family office’ has nothing to do with ordinary families,” he said in a statement on April 1. “Rather, it is an investment vehicle used by centimillionaires and billionaires to grow their wealth, reduce their taxes, and plan their estates.”

Third, JPMorgan said private banks, specifically those linked to Archegos, moving forward could improve their onboarding, especially with clients with backgrounds such as Hwang, who has run into trouble in the past. Private banks could also strengthen their risk management by giving less leverage to non-transparent family offices with concentrated positions and ensure checking the clients’ rehypothecation risk, among others.

Archegos in late March used borrowed money to make large bets on some stocks until Wall Street banks forced Archegos to sell over $20 billion worth of its shares after failing to meet a margin call. Hwang grew his family office’s $200 million investment to $10 billion. Reports say the former Tiger Management trader lost $8 billion in 10 days.

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