It is my great joy and privilege to introduce Bill Hwang. Can we please welcome Bill Hwang up here. Please welcome Bill Hwang. The question of who is Bill Hwang is one that everyone seems
to be asking right now. Here is someone who really
was not on anyone's radar, and yet he was ranking among
the world's wealthiest people. But now Bill Hwang and what
has happened to his firm will likely go down in 2021 as one of the most remarkable
stories of the year. Not just because of the rapid rise, but the even faster implosion. He was an outsized influence
on financial markets, but almost nobody had ever heard his name and nobody had ever heard
the name of his firm. Archegos Capital Management. This whole situation to me is like a string of "Are
you F-ing kidding me?" How could that many
prime brokers be so dumb as to lever up one guy all on the same stocks? It really is every bank for themselves at this point. It was this one family office
that caused so much mayhem. It was Bill Hwang's personal fortune which he had built into a firm that was pretty sizable in the market. One way to measure this fiasco is by adding up Bill
Hwang's losses, $20 billion, to the $10 billion that
the banks have lost. In total you've got $30 billion wiped out in the space of a week. Investors on Wall Street
lose money all the time, but Archegos is almost
unique in financial history because of the size of the positions that a single individual accumulated and the speed with which it unraveled. This is one of the most
spectacular failures in modern financial history. No individual has lost
so much money so quickly. My entry point to the Archegos
story was Goldman Sachs. Very early on, Goldman emerged as a seller of almost $10 billion of securities, on a Friday, dumping stock onto the market in a way that was exceedingly
rare, almost unprecedented. And any time I see the name Goldman Sachs, I'm always curious. And so I went down the
Goldman Sachs rabbit hole and found out some interesting details about Goldman's relationship
with this firm, Archegos, and the man behind it, Bill Hwang. It really goes back to
the final days of March when you had this frenzy of
block trades hitting the market. There were a bunch of
big Chinese tech names, US media conglomerates, and across the board we were
seeing the stocks falling. Everyone in the market
was trying to figure out what the heck was going on. Bill Hwang's background is very different from anyone else that you've heard of at the pinnacle of Wall Street. Here is someone who grew up
in a family of modest means in South Korea. His father was a pastor, he was assigned to a church in Las Vegas, and Bill Hwang and his family
moved to the United States when he was about 18 years old in 1982. Within a few months of his arrival, his father passed away. He used to work night
shifts at McDonald's. And it was on his mother's insistence that he go to college,
that he attended UCLA and subsequently earned a business degree at Carnegie Mellon. Back in the late '80s and early '90s, it wasn't so easy to get to Wall Street if you were an immigrant. He couldn't get a job at Goldman Sachs, he couldn't get a job at Morgan Stanley, yet his dream was to
come to New York City. So Bill Hwang ended up taking
a job at Hyundai Securities, and he turned out to be a
very good security salesman at Hyundai Securities because he caught the
attention of Julian Robertson. We have work. Julian Robertson is the
famous hedge fund manager who founded the powerhouse
firm, Tiger Management. And so Bill Hwang became a Tiger Cub. The term Tiger Cub is used to describe the former employee's
disciples, if you like, of Julian Robertson. Anyone who sort of worked
with Julian Robertson had great success under him and then was able to spin out and start their own hedge fund
or their own investing firm came to be known as a Tiger Cub. Julian Robertson seeded
Bill Hwang's hedge fund, and that's what gave Tiger Asia its stock. Bill Hwang's hedge fund, Tiger Asia, was a very, very successful firm. At one point, it managed $10 billion. But Tiger Asia crossed the line between aggressive and illegal. In 2012, securities
regulators across the world accused the firm of insider trading. Bill Hwang had to plead guilty
on behalf of his hedge fund for wire fraud. He had to shut down Tiger Asia. But after he settled that, and he shut down his hedge fund, he started Archegos. Archegos is what's known
as a family office. It's an investment firm managing
money for an individual, in this case, Bill Hwang, but instead of trying to
start a new hedge fund with the taint of a securities violation, he would take the money that he had, something north of $200
million at the time, and invest his own money, hire his own analysts, do his own work, and make money that way instead of having to
make money for clients. And he was incredibly successful. He did a couple of things
that worked very well in his favor. The first was he invested in tech stocks. He rode the decade-long boom in firms like Amazon, LinkedIn, Expedia. Netflix, Facebook, Google. The other thing he did, increasingly, was use borrowed money. On Wall Street, it's called leverage. He had borrowed a lot of money, and that meant his gains were exacerbated. And he then plowed them
all back into the same bet that by the end of it you had someone who had taken a fortune that started at a little over 200 million and in under seven years had
taken it to over $20 billion. Jesus says, "I'm the bread of life. If you come to me, you
never be hungry again." Bill Hwang was someone who
was devoted to his church, who was focused on the idea of
spreading the word of Christ. Your people will be my people, and your God will be my God. He believed that, by
investing in these companies, he was advancing society on behalf of God. My company does a little bit of our part bringing the fair price
to Google stock price. Is it important to God? Absolutely. In some ways, he was able
to find a justification for all his wagers, to stick with them and
to double down on them, irrespective or not being mindful of the hedges he would
have had to have in place. He talks about this idea that
everyone else on Wall Street is burdened by the
thought of being powerful and having too much money. And he says he doesn't feel it. He says he's not afraid of death or money. He says, "I am just following God's word, and that is truly a
fearless way to invest." He didn't live large. He didn't have a penthouse
apartment in New York city. He didn't have a fancy
vacation home in the Hamptons. He lived a relatively modest
life in suburban New Jersey. He drove a Hyundai SUV. This is really a grown up version of someone you will see on
Wall Street Bets or Robinhood. This is someone who really
likes a stock or two or three, would bet on it, and stick with it, and not worry about anything else. There was no complicated
investing strategy here. God has clearly showed us what money does in a positive way. Here's someone was is
completely driven by faith, who completely believed in
the right of what he was doing and allowed that to
become the driving force, not allowing any sort of
distraction for self-doubt or even second thought
in what he was doing. And that proved to be his undoing. On the afternoon of March 22nd, ViacomCBS announced a stock
and convertible bond sale. The company wanted to raise $3 billion. Here was a stock Bill Hwang
was really invested in. He had a huge outsize position in it. Every time the stock moved up, he would throw more money into it and the stock would keep
going up and up and up and up. Instead of helping the stock, the stock sale hurt the stock terribly. The following day, ViacomCBS went down 9%. On the Wednesday, it went down 23%. With the stock declining
that far, that fast, it forced a margin call. A margin call is a demand
by Wall Street firms for more collateral. If you borrowed so much money that all of a sudden
there's no equity left, after a stock drops that quickly, the firm will demand more collateral. If Bill Hwang has no money left or refuses to put up any further money, the dealing firm takes over his position. The Wall Street dealers
pleaded with Bill Hwang to sell some stock so that
he would at least survive. He might take some losses. From $20 billion, he might go down to 10
or perhaps even less, but he would live to fight another day. And Bill Hwang refused. If it was just one bank making the demand, that might have been fine. When all his banks made the same demand, you knew you had a problem, and really that was the beginning
of the end for Bill Hwang. Any fortune built on borrowed money is standing on a shaky base. A gust of wind could threaten it. In the case of Bill Hwang, he was facing down a hurricane. Names that he had plowed
billions of dollars into were moving against him, and he never had any effective hedge. The banks had started to panic, they had loaned him a lot of money, and they were demanding that he needs to post a lot more cash; otherwise, they would have
to terminate the agreement and liquidate his portfolio. He did not have enough
spare cash lying around and they did have to cut their ties and liquidate his entire portfolio. In the end, Bill Hwang lost at all. But not just that. The banks that had lent him money, they also lost quite the fortune. Think of Archegos as a burning building and its bank lenders as
the people trapped inside. The moment one of those people, one of those banks makes
a break for the exit, all hell breaks loose. You had someone like Credit
Suisse losing $5.5 billion. Nomura in Japan losing in
excess of $2.5 billion. And yet you had banks like Goldman Sachs, Wells Fargo, Deutsche Bank who seem to have escaped
this largely unscathed. In total, you've got $30 billion wiped out in the space of a week. The last person out of
the burning building is the one who always
sustains the greatest damage. In this case, that was Credit Suisse. It was only in the days after that, that we were able to piece
together what really happened and the root cause behind it all. A whale is Wall Street slang for someone who wields outsized influence in financial markets. It's like looking at the ocean and seeing a glass-like surface, but under the surface is this
enormous, enormous creature. That's what Bill Hwang
was like to Wall Street. He was an invisible whale. Almost nobody had ever heard his name and nobody had ever heard
the name of his firm. And that all goes back to this financial instrument that he used, which was swaps. Now what are swaps? Swaps are a type of derivative that allows you to
effectively remain invisible. Instead of your name showing
up in securities filings, it's the name of the firm you're
dealing with that shows up. So it could be Credit Suisse. It could be Goldman Sachs. It could be Deutsche Bank. It's the banks that appear
as the stockholders, and he was the one
benefiting from the move in the price of the stock. And that would allow
him to remain anonymous through that process. The people familiar with Archegos, both its accounts and its positions, spoke to us on the condition of anonymity because they weren't
authorized to comment. "We don't really have a good idea of what Bill Hwang has left. We know he's got a suburban
home in New Jersey. We know he drove a Hyundai. Presumably he's still got that. But we're not aware of
any other investments that he may have had." But with so little financial
disclosure available, it's very difficult for anybody
to have a really solid idea of what Bill Hwang has
left after this collapse. The only saving grace, perhaps,
from this entire fiasco, is that we really haven't
seen a systemic problem. We really haven't seen
banks almost pullback risk, expose more hedge funds to the problems and see more dominoes falling. However, what is the
lesson that we all learn from what happened to Archegos? So far, the prime brokerage business hadn't been top of mind for regulators, hadn't been top of mind for politicians, but you've had both entities
jumping into the fray, for now demanding answers, for now trying to figure out how stable and sound the system was. You don't want these
invisible whales out there who have great outsize holdings and stock and no one knows about it. So the same disclosure rules
that apply for hedge funds will possibly be the case going
forward for family offices. Bill Hwang has undoubtedly suffered some reputational damage as a result of the collapse of his firm. And it's hard not to see
the irony in this story. On the one hand, you've got Bill Hwang, the
pillar of his church community, and on the other, you have this guy who's
making wildly speculative bets with enormous amounts of borrowed money. It's so hard to bring
those two people together into the same person, which is why we keep
asking ourselves, "Why?"
One could 3x leverage triple leveraged ETFs (you read that right) until quite recently on a lot of brokers trading platforms using portfolio margin.
Hugely leveraged positions are quite common. It's why when the market crashes, it crashes so hard and rebounds so fast. That the leveraged investors get margin called out, the market crashes, and then quickly recovers since the crash was purely based on leverage and not fundamentals.
What Hwang did by trading on 5:1 leverage without a hedge was not illegal nor particularly unethical, it was just very foolish, risky, even depending on his motives possibly greedy and he paid heavily for it. By taking increasingly huge gambles never expecting his good fortune to turn, and when it did, he lost it all and then some.
All the banks had collectively agreed to slowly unwind his positions over several months, which would have ensured they all came out on top, or at the very least minimized any losses. However, Goldman's first - followed by JP Morgan, DB, Wells Fargo, Citi, etc quickly dumped their own stakes in huge block trades making a tidy profit further tanking the stock price in his basket of stocks but leaving Credit Suisse and Nomura holding the bag.
Of course, naturally, Goldman Sachs and the rest were only looking out for number one - their shareholders, no honor among thieves and whatnot. Hwang should have known better and used a long spoon by hedging his bets, especially when dealing with predators like this. You don't borrow money from Tony soprano and expect it to ever end well.
“The first principle is that you must not fool yourself — and you are the easiest person to fool.” - Richard Feynman
"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful." - Warren Buffett
"Any fortune built on borrowed money is standing on a shaky base. A gust of wind could threaten it."- Sridhar Natarajan
“He who dines with the devil should use a long spoon.” - Unknown