By Christiana Ioannou
If you haven’t heard of Archegos Capital yet here is the rundown of what occurred. On Wednesday, March 24, 2021, ViacomCBS’s stock fell a total of 30% from its Monday high, which Archegos Capital had been heavily invested in. Archegos had used many different banks to overextend their leverage on a few key stocks, like ViacomCBS and Discovery, that all dipped at the same time. This loss of capital caused many world banks to start a fire-sale of Archegos’ assets that were not worth nearly as much as they had leveraged. Some of the main banks that were involved were; Credit Suisse, Deutsche Bank, Goldman Sachs, Nomura, UBS, and Morgan Stanley.
How was This Able to Happen?
Since Archegos was considered a family office, it was subject to more lax regulation and reporting. This allowed them to overextend their leverage in the stock market by effectively turning $10 billion in assets into $60 billion worth of investments. They were able to do this by taking the potential profit they made from their stocks and reinvesting it into the same stocks. Normally a hedge fund is required to disclose when they own more than 5% of one company, but family offices do not have the same disclosure requirements.
Everything began to collapse when the global banks saw that the stocks Archegos owned through them began to take a dip and instituted a margin call on Archegos. A margin call is when your bank sees your position begin to fall and they will demand you deposit more money into your account with them to maintain your position. The problem here was that Archegos did not have the capital to meet these margin calls, which resorted to the fire sale. This particular sale was drastic because Archegos only really owned 8 different stocks and all of the major banks needed to sell them off to recover their losses.
What Has Happened Since?
The first big change that has already occurred is that some major global banks lost a lot of money, Credit Suisse has started its losses are over $4.7 billion. These major losses have caused many major banks to re-evaluate how their prime brokerage arm does business and the extent of the business they do with family offices. A family office is a hedge fund that is normally not as big as Archegos but is made up solely of one family’s money. The $4.7 billion loss for Credit Suisse is significant because it is more than triple their profits from 2020.
Finally, one of the more important things that might still occur is that the US Congress might get involved to investigate what happened and what can be done to ensure it never happens again. Currently, family offices or funds are given special privileges by the Investment Advisors Act of 1940. This allows them to completely ignore the Dodd-Frank Wall Street Reform and Consumer Protection Act as long as they only manage their own money and no one else’s. Since Archegos was able to wreak so much havoc on the US stock market, there will most likely be changes that occur to how they report their assets and leverage in the future.
1 Comment