D-Day for Archegos Capital: Why Was it Allowed So Much Tier 1 Liquidity?

Archegos Capital is finally about to bite the dust, leaving behind a trail of destruction.

The day has finally come.

Ill-fated hedge fund Archegos Capital is finally about to bite the dust and be castigated into the annuls of history, leaving behind a trail of destruction, which includes a number of Tier 1 banks having been so badly affected that their stock prices are in the gutter whilst others flourish.

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As if watching HSBC, which had no involvement with Archegos, declare an incredible 80% increase in pre-tax profit. Yes, profit, in the first quarter of 2021, whilst the banks that got themselves involved with Archegos plunge into a situation which has caused them to go from anticipating huge earnings and healthy stock prices to scratching their chins and worrying immensely about their capital position.

Household names including Switzerland’s Credit Suisse and UBS, American giant Morgan Stanley, and Japan’s Nomura, MUFG and Mizuho together lost more than £7billion.

All of these are Tier 1 FX interbank dealers with significant market share and are supposed to be astute risk managers. They are the ones, after all, which curtailed counterparty credit to OTC derivatives brokerages – their

Andrew Saks Head of Research and Analysis at ETX Capital
Andrew Saks Head of Research and Analysis at ETX Capital

key clients and liquidity takers – stating that OTC FX liquidity agreements could result in default.

As a result, many good quality FX counterparties, which are genuine experts at risk management, went off to seek better service from their providers, hence, non-bank market makers now dominate the Tier 1 FX dealing sector, ahead of 17-year top-slot dominant force, Citigroup.

Hardly surprising, when banks treat their core Tier, 1 liquidity customers, with trepidation yet allow themselves to get fleeced by a fly-by-night hedge fund to the extent that it almost brings the banks into insolvency to the potential detriment of their public shareholders and investors.

Today, the legal tug of war begins, as Archegos has hired restructuring advisers to prepare to wind down the firm, as the banks weigh up lawsuits to scrape back their losses.

They will need a strong tailwind and some degree of good luck. It is very rare that the civil courts favor banks, especially those who made negligent decisions due to sensing a potential quick gain without considering the consequences that could adversely affect shareholders and customers.

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Some of the banks involved are examining whether they were ‘fraudulently induced’ to do business with Archegos. End result? Yet more costs pour on the fire as the lawyers take the banks which are now desperate for retribution and restoration of their reputation for as much as they can.

It’s like the old phrase about who wins during a divorce battle: the lawyers.

Mr. Hwang, who founded Archegos Capital Management, has a record behind him too. In 2012, he pleaded guilty to insider trading of Chinese stocks. This makes it even more of a travesty.

The Prime Brokerage divisions of major banks will look down their noses at order flow sent from good quality, long-established FX firms with incredibly astute risk management executives and years of expertise, yet they will allow a former criminal to come out of nowhere and take them down for $7 billion.

The best thing for these banks to do would be to draw a line under it rather than exert their anger via lawyers. We all know that the cost of this will rile shareholders even more who have already been subjected to irrecoverable losses.

It is clear that bankrupt firms are not sources of restitution. It is impossible to claw anything back from a failed business, and even if restructuring consultancies are hired, they will charge a consultancy rate and take often as much as 70 cents on the dollar. Thus, even if a tiny bit was recovered, it would be 30 cents on the dollar for the banks.

Rather astonishingly, Mr Hwang remains heralded as one of the greatest traders on Wall Street in recent times and almost has celebrity status.

What constitutes a celebrity is very odd these days…


Andrew Saks is Head of Research and Analysis at ETX Capital

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