When Risk Taking Goes Too Far - The Archegos Collapse

[Music] this video is brought to you by wires hi welcome to another episode of cold fusion from gamestop to wall street bets 2021 is set to be remembered as the year of stock market madness but now there's been another event that rocked the industry family fund archigos capital management has become a landmark cautionary tale about risk management and grief after suffering devastating losses in the billions bill huang the man at the center of the scandal is an interesting character he was once worth over 30 billion dollars and on track to become one of the richest people on earth though with his car of choice being a hyundai he wasn't your typical billionaire starting in 2013 bill used 200 million dollars from a previous venture and turned it into 20 billion and then in just two short days it was gone no individual has lost so much money so quickly the fallout from this event sent shockwaves through the market causing significant losses to share prices and a handful of banks lost billions of dollars and top banking executives have been fired over the scandal so what went wrong who was responsible and what have we learned from one of the biggest financial blunders in recent history sit back and relax as we dive into the story [Music] bill huang was largely mysterious to the general public and even the financial industry it would be only former co-workers and his church members that knew him well despite huang being worth billions he only drove a hyundai suv and lived in a suburban new jersey home this was a clue into bill's mindset being a devout christian he didn't believe so much in material wealth but did indulge in casino-like risk a paradox but a key part of his undoing in 1982 bill immigrated to the us from south korea he was the son of a pastor and raised by a widowed mother he eventually earned an mba at carnegie mellon university in 1996 after being a salesman at two security firms he landed an analyst job at tiger management the hedge fund tiger management was started by julian robertson an absolute legend in the field and bill huang was his protege to truly understand huang it's important to recognize just how successful his mentor was julian robinson was the titan of hedge fund management his career saw him turn an 8.8 million dollar investment from family and friends into 22 billion over two decades 50 former employees of julian went on to create their own successful hedge funds this group would be known as the tiger cubs obviously because they worked at tiger management and these tiger cubs were the best of the best even among this elite class of investors bill huang stood out to julian robinson huang's performance during his time at tiger management was so impressive that in 2000 as robinson was stepping back from fund management he gave huang a substantial initial investment to open a new york-based fund focusing on investing in asian markets in 2001 bill would unleash his aggressive investment style in the form of tiger asia management tiger asia management grew to become one of the biggest asian market focus funds in the united states turning an initial 1.2 billion dollars into 5 billion at its peak former clients and colleagues at tiger asia who spoke to the new york times say that bill concentrated his stock picks on a few select names and used borrowed money to increase his position according to a former employee bill was secretive often concealing particularly large holdings from his own analysts it wasn't until 2008 that attention began turning towards his risky investment style as he was one of many fund managers that was stung by the monumental volkswagen short squeeze rather than an extensive diverse portfolio it was clear that huang's success relied on a lack of diversity an investment style that would eventually be his undoing in this case bill huang was betting heavily against a small number of substantially shorted stocks things would get worse for him too in 2010 it was discovered that huang was being investigated by u.s security regulators this was over a suspected insider trading scheme involving chinese bank stocks two years later he pleaded guilty to criminal fraud charges admitting that he used confidential information for the basis of making profitable trades these illegitimate profits amounted to 16.2 million dollars in the wake of the controversy bill's hedge fund tiger asia was ordered to forfeit 16.2 million dollars as well as a further 44 million dollars to settle in a separate legal case huang decided to accept responsibility for his actions and return outside capital to investors although pleading guilty to fraud and insider trading to the banks huang was still seen as somebody who could make them buckets of cash and for that reason they were still willing to loan him massive amounts of money he just needed another venture to get back into the game after closing down tiger asia he turned it into a family office it would be at this point that archigas capital management was born archigos became the christian family values fund of huang's dreams everything from the name which in greek loosely translates to prince of christ were influenced by huang's christian views huang said that his intention to be a great investor is all for the purpose of benefiting society and pleasing god he claimed that the insider trading charges revived his christian motivations and he now would use his wealth to sponsor christian organizations throughout the us and south korea regarding these donations huang said quote i'm decreasing the amount of money under my name in order to do the things that god loves claiming quote i do it because i like god more than i like money with quotes like that you would think that bill would play the market safe but his strategy was anything but safe it's in god's heart and it's my heart that a lot of people in investment community and these companies would know the reality of god and then creating culture which is god honoring you know serving one another and learning doing where it's not all about money you know but it's about long-term you know god certainly has a long-term view and it's all it's really helping a lot of people learn how to invest well and use capitalism to to help human societies advance in the grand scheme of things bill's trading strategy was strikingly simple akagos would borrow a bunch of money and stuff it into stocks that bill believed would go up stocks such as the chinese internet search giant baidu shopify and viacom cbs after doing fundamental analysis that is focusing on world trends and studying companies financial statements he built a highly concentrated portfolio around his stock picks anyone on reddit's wall street bets can pretty much do the same thing except in bill's case he had hundreds of millions of dollars in borrowed money to play with with an initial sum of 200 million dollars from his previous venture huang spent the past decade investing successfully turning that 200 million into an estimated 10 billion but the thing is while archigos managed to amass 10 billion dollars of its own money its positions were valued closer to 30 billion dollars thanks to a little trick called total return swaps and this is where the story begins to get really interesting while total return swaps aren't illegal they are considered a risky controversial way to boost profits they're investment contracts brokered by banks that enable investors to take large positions without needing the funds front essentially in a swap a hedge fund pays the bank a fee to gain exposure to the profit or loss of a stock without actually owning the stock itself it's all based on the trust and understanding that the borrower can cover the positions if the stock doesn't go in the right direction these return swaps also had the added benefit of hiding archigossa's name from appearing on the books of financial dealings an outside viewer would only see the bank's name holding the position not archigossa's name according to the new york times even the firms that finance bill's investments couldn't see the big picture this is how bill huang and his archigos fund managed to stay so secretive in the united states there are rules that prohibit the purchase of financial assets with over 50 borrowed money interestingly no such limits apply to hedge funds and family offices so archigos went wild and consistently increased their leverage to begin with it was an amount of around two times or borrowing one million dollars for every one million dollar of capital that they actually had but by late march the leverage level was over five times and where bill huang took the extra risk was in the number of banks that he had the swap agreements with due to the archigas reputation each bank trusted bill huang and trusted the archigos had the collateral to be able to cover the positions but what each bank didn't know is that they were one of many six in total goldman sachs morgan stanley credit suisse numara deutsche bank and ubs each bank understood the risk that they were taking individually but not as a whole by scattering his share through multiple return swaps archigos was able to make loads of profit without revealing themselves as major investors and as crazy as it was this extremely risky bet was paying off while the hedge fund's actual capital rose to an estimated 20 billion dollars the potential raised through swaps exceeded 100 billion dollars luckily for archigos things were going well and would continue to do so as long as the market moved how huang predicted of course it didn't before we continue i just want to give a shout out to today's sponsor wise as you're all probably aware the traditional banking system has its fair share of drawbacks when it comes to international dealings if you're a person that's looking for a fast and cheap way to send money overseas whether for business or family wise formerly known as transferwise makes it easy wise is seven times cheaper than traditional banks with no hidden fees you can send or receive money instantly in 50 different currencies between 80 different countries i've already used the service myself when i had to pay for some illustrations while i was writing my new thinking book by clicking on the link in the description you'll get a free transfer of up to 500. clicking the link helps support the channel so thanks [Music] by march of 2021 arcagos and the six banks held substantial long positions in a handful of successfully performing companies but things started to fall apart when bardu and far-fetched share prices both began to drop and on monday the 22nd of march viacom cbs which huang held a 10 billion stake in announced an upcoming sale of common stock that caused a massive sell-off and a 20 dip in the share price bill huang's risky investment model was suddenly unraveling a few bankers pleaded with him to sell shares as he would take losses but survive avoiding a default and a total wipeout huang refused if the stocks in his swap accounts rebounded everyone would be fine but if even one bank flinched and started selling they'd all be exposed to plummeting prices it was a game of chicken with very high stakes the losses began stacking up and archigos started selling off other stocks in its portfolio to offset the losses but this caused a problem in doing these actions bill huang no longer had the collateral that had given the bank's assurance in the first place archigas had lost the leverage that convinced banks to offer the return swaps in the first place the banks wanted more money as collateral and bill didn't have it [Music] it wasn't long before the banks noticed that archigos wasn't going to be able to cover the collateral in an attempt to minimize losses representatives from morgan stanley goldman sachs credit suisse and nomara met to discuss the best course of action credit suisse and namara who knew that they would face the biggest losses suggested working together slowly to undo the damage over the course of a month though ultimately the banks failed to reach an agreement and it became a race of panic selling the next morning without consulting the others morgan stanley threw the other banks under the bus goldman sachs would be next as they believed the market would catch wind of the situation within days and the losses would maximize this quick action and going behind the other banks backs led to both banks being able to avoid major damage but their massive sell-offs triggered a further decline in stock prices by the time the other banks involved managed to move the now toxic shares the damage was done credit suisse says it will lose 4.7 billion dollars and now have removed two executives from the company over the incident nomara will lose two billion the other banks got off lighter but not lightly it has been reported that between the six banks involved and estimated 10 billion dollars was lost according to bloomberg bill lost 20 billion dollars in two days and bloomberg described the situation as one of the most remarkable failures in modern history it is truly a historical loss of wealth in such a short period of time despite this huang is optimistic about the future of archigas insiders predict that the family office would inevitably file for bankruptcy in the near future though well look this is devastating the losses they took versus everybody else i know that the risk control chief has been traded but i think the whole management has to go i mean this is one of those things just unforgivable if you don't know how to handle a busted uh client then you shouldn't be handling anyone and this is uh it's just a really dark day for credit suisse wow uh this is remarkable and i i think that credit suisse has to completely reevaluate itself and i think the uh i think the regulars have to re-evaluate them i'm not sure they know what they're doing the global fallout from this blunder has sparked renewed conversation about how family funds are regulated and monitored it is estimated that family offices hold assets in excess of 6 trillion globally twice the size of hedge funds despite these staggering numbers details of family offices are largely hidden both from the public and regulatory authorities disclosure requirements for family offices are extremely minimal compared to hedge funds and could be insufficient considering the power they possess to influence the global market after the global financial crisis of 2008 the united states passed the dodd-frank act this dramatically tightened regulations for the financial industry but due to the cause of the crisis the securities and exchange commission exempted family offices this kind of makes sense on paper as angelo robles founder and chief executive of the family office association said quote if it's their money they can do what they want just like the average person why should they be disclosing things end quote but incidents like archigos call into question how much control these unimaginably rich families can have over the direction of financial markets perhaps there should be a monetary threshold where above this amount you're required to disclose more information bill huang's actions have cast a light on the need for tighter regulation heightened transparency and a reassessment of the inadequate laws that govern family officers in a time where wealth is becoming more concentrated each and every day something needs to change if we are to have any hope of something like this never happening again in the grand scheme of things it can also just show how temperamental stocks can be especially if you're playing a risky game with such extensive leverage and little diversification bill huang was playing the casino and he lost big time so if you watched the previous episode on the 11 billion fraud that was worldcom you might be interested in this next tidbit i had someone from the cold fusion discord mentioned that he knew bernie ebbers he had been to bernie's house and took note of just how insane it was according to this discord member bernie was a nice guy but just stupidly wealthy i thought it was just some interesting insight if you want to join the cold fusion discord and have a chat about video topics and many other things links will be in the description so that's it thanks for watching if you want to see anything on business technology science or history be sure to subscribe to cold fusion my name is digogo and you've been watching cold fusion and i'll catch you again soon for the next episode cheers guys have a good [Music] it's me one [Music] [Applause] [Music]

Channel: ColdFusion

Views: 1,366,528

Keywords: Coldfusion, TV, Dagogo, Altraide, Technology, Apple, Google, Samsung, Facebook, Tesla

Id: NtP3xT53dkU

Length: 18min 27sec (1107 seconds)

Published: Tue Jun 01 2021

Reddit Comments

[u/IKilledTheBank]

A good watch.

[u/bentaxleGB]

Idiot bankers fail again. (Credit Suisse.) But their lunacy isn't confined to the bank. This stupidity is one of the main causes of e.g the Tesla share price fall. It was ridiculously overpriced anyway, but there will be painful losses for some retail investors.