You may not know the story Bill Hwang and Archegos Capital. So I’m going to share it because it’s one of the most amazing “blow up your portfolio and lose all your money” stories in stock market history.
And even if you have heard it, there’s a twist that you definitely shouldn’t miss.
The backstory is: Bill Hwang came out of the Julian Robertson fund managing tree. Robertson was the founder of Tiger Management in the early 1980s – a model for modern hedge funds. Bill Hwang made his name by launching the Tiger Asia fund with $25 million from Julian Robertson and growing it to $5 billion.
Hwang got busted for insider trading in 2012 and was kicked off the Hong Kong exchange. So he started a “family office” trading his own money called Archegos and kinda dropped off the map until 2021.
As a family office, you don’t have shareholders or investors to answer to. It’s yours and/or your family’s money, so nobody’s asking you for quarterly statements or shareholder letters that explain what you’re doing or why.
As a hedge fund manager with a lot of years under his belt, Bill Hwang knew people at brokerage firms like Goldman Sachs, UBS, Jeffries, Morgan Stanley, and so on…
Any fund – hedge fund, family office, whatever – needs a brokerage to execute its trades and hold its cash. And it’s not at all uncommon for a fund to get margin loans from its brokerage, with the funds’ stock holdings as backing for the loans.
But Bill Hwang didn’t have just one brokerage. He had 12. And he used the same playbook at each one: open account, buy stock, borrow money, buy more stock, push price higher, borrow more money, buy more stock – over and over again until he had grown his wealth from $10 billion to $36 billion.
It’s honestly a pretty decent plan – if you can be sure that the stock prices will keep going up; or, at the very least, not go down.
As it turns out, Hwang had a plan for that. He only bought 7 stocks. Across 12 different brokers. And he was using margin loans at each one to keep buying the same 7 stocks, a pump scheme that pushed the total value of his portfolio up.
One of the stocks he was buying was Viacom/CBS, which changed its name to Paramount Global in February 2022. Here’s the 10-year chart:
In the 5 years before the pandemic, it was a very boring stock, trading between $45 and $60. Pretty obvious when Bill Hwang started buying it and spiked the price to over $100 in March 2021.
The stock had never been that high, not even close. Rumor has it that various trading firms were openly wondering just what the heck was going on because it didn’t make sense.
And of course, Bill Hwang had all his holdings spread out over 12 different brokers, and so nobody suspected it was Hwang’s borrowing and buying that was driving the whole thing.
The Secondary Offering that Wiped out Hwang
Here’s something Hwang didn’t plan on.
The bosses at Viacom/CBS saw this massive price movement and made a fairly predictable move. They decided to sell stock at the all-time highs and raise some cash.
On March 21, Viacom/CBS shares closed at $100.34. The next day, March 22, the stock fell 10% to $91 and after the close of trading, Viacom/CBS announced a secondary offering of stock to raise cash. Then it got ugly. On March 23, the stock fell 23% to $70.
When the value of the assets you’ve used to back a margin loan falls, a brokerage will ask for cash to make up the difference. This is known as a margin call. And on March 24, the margin calls started rolling in, to the tune of $2.5 billion. (I’m relying on Bloomberg’s excellent reporting on this case that is currently in court for this timeline. Here’s the Bloomberg coverage: https://www.bloomberg.com/features/2024-bill-hwang-archegos-collapse-timeline/?cmpid=BBD062624_MONEYSTUFF&utm_medium=email&utm_source=newsletter&utm_term=240626&utm_campaign=moneystuff)
Now, Bill Hwang did have some cash at some of these brokerages. And he also still had paper gains at some of them, which he could theoretically borrow against. Also, his relationship with his various brokerages gave him a little leeway in how he could meet his margin calls.
This is also the point where the story gets weird.
UBS has $173 million of Archegos cash on March 24. UBS knew that the next day, March 25, its margin call on Archegos would jump to $400 million. But somehow, when Archegos called UBS to ask for its $173 million to be wired and assured UBS that it would meet the next day’s $400 million margin call, UBS said “sure, here’s your $173 million.”
Needless to say, the next day’s $400 million payment was not made.
Another really weird twist concerns Goldman Sachs. Goldman had $470 million of Archegos cash. Apparently, a junior trader at Archegos tried to get that cash wired to Archegos but accidentally hit the wrong button and sent Goldman an additional $470 million!
And then, when Archegos tried to get any of that nearly $1 billion back, Goldman said nope, we’re keeping it!
But that’s not even the best story to come out of all this.
Remember, all these brokerages didn’t know that Hwang had accounts with each other, none of them knew just how bad the situation was.
I’m going to let Bloomberg’s brilliant writer Matt Levine tell this last part, which occurred on March 26:
“Here is some elite investment bank chief executive officer performance:
Jefferies calls CEO Rich Handler, who is on holiday in Turks and Caicos with a spicy margarita on the way. They tell him Archegos isn’t answering their calls. Handler says he’s going to get his cocktail and he wants Archegos positions gone and a tally of losses by the time he comes back. It was one of the few banks that escaped with minimal losses.
Perfect. When your underlings call you up and say “hey we have a big trading counterparty that lost a lot of money, we’re sending margin calls and they’re not answering the phone,” the correct answer is “liquidate them immediately,” but the stylish (and equally correct) answer is “liquidate them by the time my margarita arrives.” Handler handled Archegos way better from his vacation than Credit Suisse handled it at the office.”
$36 Billion to Zero in 4 Days
That ladies and gentlemen is how Bill Hwang and Archegos Capital lost $36 billion in 4 days.
UBS lost $773 million. Nomura lost over $2 billion. Credit Suisse lost over $5 billion. In total, the banks that Hwang dealt with lost $10 billion. Jeffries and Goldman Sachs faired much better.
Bill Hwang is wiped out and on trial right now for market manipulation and defrauding his lenders.
Godspeed.
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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