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Archegos Capital Management LLC

S.E.C. Chair Gensler Emphasizes Transparency in Markets

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Gary Gensler is putting transparency in the markets and the need to understand the impact of new technology at the top of his priority list as the new chairman of the Securities and Exchange Commission.

“I think transparency is at the heart of efficient markets,” Mr. Gensler said during his first testimony on Capitol Hill as the nation’s top securities cop.

Mr. Gensler, speaking from his living room, appeared by video before the House Committee on Financial Services to discuss the S.E.C.’s response to the tumultuous trading in shares of GameStop in January. The massive run-up in the stock price of the video game retailer was fueled by small investors who bought its shares on Robinhood and other commission-free trading apps and banded together on social media to cause big losses for a hedge fund that had bet GameStop shares would fall. Some investors who bought shares of GameStop at the peak later lost money.

Mr. Gensler said the S.E.C.’s staff has been working on a report addressing the issues raised by the episode that will be released this summer. He also said new rules may be needed for brokerage apps that turn stock trading into a game or contest, a method called gamification.

the collapse of Archegos Capital Management, which caused more than $10 billion in losses for Wall Street banks, pushed regulators to consider whether traders should be required to disclose derivatives — the financial trading instruments that allowed Archegos to take massive positions in stocks without attracting attention. Archegos’s losses were mostly attributed to the firm investing heavily in total return swaps, a type of highly leveraged derivative that can give a trader exposure to a stock without actual ownership.

Mr. Gensler’s tenure got off to a rocky start after Alex Oh, his pick to serve as director of enforcement, had to resign just days after being named because Paul, Weiss, the big law firm she had worked for, was facing potential sanctions in a case in which she was heavily involved.

The hearing with Mr. Gensler was the third and final one focusing on GameStop and the frenetic trading in the markets held by the House Financial Services Committee. The first hearing on Feb. 18 was held when shares of GameStop were trading around $40 a share after falling from a high of $347 a share. Since then, the stock has soared again, rising nearly 300 percent to $160 a share.

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Meme Stocks and Archegos: Fed Calls Out Financial Weak Spots

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The Federal Reserve warned about financial stability risks emanating from frothy stocks and debt-laden hedge fund bets in its twice-annual report on potential vulnerabilities in the system, pointing to the rise of so-called meme stocks as one sign that risk-taking could be getting out of hand.

The central bank’s Financial Stability Report, released Thursday, followed an unusual six months for markets. Over that period, stocks climbed steadily as the U.S. economic outlook rebounded, and stories of excess began to crop up.

Internet discussion boards helped fuel interest in stocks such as GameStop, a cryptocurrency created as a joke has run up in value, and a little-known hedge fund melted down, stories that have captured headlines and caused many — including, evidently, some at the Fed — to ask whether the financial system was headed for problems.

“Vulnerabilities associated with elevated risk appetite are rising,” Lael Brainard, a Fed governor, said in a statement accompanying the Fed’s release. Stock prices are high compared with earnings, and “the appetite for risk has increased broadly, as the ‘meme stock’ episode demonstrated.”

Archegos Capital Management, spilled back to hurt banks. The fund had amassed big, leveraged stock bets that went bad and ended up costing banks it had done business with.

“While broader market spillovers appeared limited, the episode highlights the potential for material distress” at financial companies that aren’t banks “to affect the broader financial system,” the Fed said in its report. It said hedge fund opacity had also raised questions during the meme stock episode: Some funds that were betting against the stocks in question took losses as chat board vigilantes poured into them.

The answer to both episodes, the Fed and Ms. Brainard seemed to suggest, starts with better data.

“The Archegos event illustrates the limited visibility into hedge fund exposures and serves as a reminder that available measures of hedge fund leverage may not be capturing important risks,” Ms. Brainard said. She added that the episode “underscores the importance of more granular, higher-frequency disclosures.”

And while bubbles ranked high on the list of concerns, fundamental economic risks that could disrupt financial markets also persisted, based on the Fed’s assessment.

The coronavirus pandemic, which is coming under control in the United States but continues to rage across large portions of the world, poses continued risks to the system, it said.

“Despite substantial progress with vaccinations, perceived risks associated with the course of the pandemic and its effects on the U.S. and foreign economies remain relatively high,” the report said. “A worsening of the global pandemic could stress the financial system in emerging markets and some European countries.”

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Hurt by Losses, Credit Suisse Faces Reckoning Under New Chairman

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But risk problems lingered under the surface: The departure of longtime bankers during his tenure had cost Credit Suisse valuable institutional knowledge, and the bank had built an increased zeal for working with up-and-comers, like Luckin Coffee and Greensill.

In finance, risk management — the ability to take into account a sometimes-volatile mix of bank positions, market activities, assets and liabilities, and reputational and technological concerns to foresee potential losses — is a crucial skill.

But the bank’s approach has been extremely technical, said Arturo Bris, a professor of finance at the IMD business school in Lausanne, Switzerland. An overreliance on calculation can be a problem if those in charge aren’t taking a holistic view.

“Most of these failures have much more to do with human mistakes,” he said. “I don’t think they’re good risk managers.”

Consider the Archegos collapse: The prime brokerage head of risk who oversaw Credit Suisse’s dealings with Archegos had once handled the bank’s sales relationship with the firm. Above him was a chief risk officer whose background was in finance and compliance — not risk.

Credit Suisse has held more than a half-dozen executives responsible for its recent stumbles. The last day for Brian Chin, the chief executive of the investment bank, was Friday. Lara Warner, the chief risk and compliance officer, already departed. And then there was the departure of Mr. Gottschling, the board’s risk committee leader, who did not seek re-election at the annual meeting.

Now Mr. Horta-Osório will have to figure out whether Credit Suisse can steady its investment bank with personnel changes, or if a more serious makeover is in order.

If he chooses to make big changes, he may have to move swiftly.

“Shareholders and employees cannot wait for months for a new strategy,” said Manuel Ammann, a professor at the Swiss Institute for Banking and Finance at the University of St. Gallen. “They need to deliver fast.”

Anupreeta Das contributed reporting.

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Credit Suisse reports a loss as regulators open an investigation.

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Credit Suisse said on Thursday that it suffered a loss in the first quarter stemming from loans it made to the collapsed investment fund Archegos Capital Management, a debacle that has prompted Switzerland’s financial regulator to investigate whether the bank was doing a poor job monitoring the riskiness of its investments.

The loss of 252 million Swiss francs, about $275 million, from January through March came after a loss of 4.4 billion francs from Archegos that wiped out a big increase in revenue. Credit Suisse also said on Thursday that it had sold bonds to investors to raise $2 billion to shore up its capital.

The bank expects additional losses from Archegos of about $655 million as it finishes winding down its exposure to the firm, Thomas Gottstein, the chief executive of Credit Suisse, said during a conference call with reporters Thursday.

The bank, based in Zurich, has suffered a series of calamities this year that have severely damaged its reputation and finances. Swiss regulators are also investigating a spying scandal and Credit Suisse’s sale of $10 billion in funds packaged by Greensill Capital. The funds were based on financing provided to companies, many of which had low credit ratings or were not rated at all. Greensill collapsed in March, and its ties to former Prime Minister David Cameron of Britain have caused a political scandal.

Finma, said it would “investigate in particular possible shortcomings in risk management” at Credit Suisse. Finma also said it would “continue to exchange information with the competent authorities in the U.K. and the U.S.A.”

The Wall Street Journal that Credit Suisse’s exposure to Archegos had reached more than $20 billion before the fund collapsed in late March. Mr. Gottstein conceded that Credit Suisse was one of the banks most exposed to Archegos.

The quarterly loss, which Mr. Gottstein described as “unacceptable,” compared with a profit of 1.3 billion francs in the first quarter of 2020.

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Gary Gensler, Wall Street’s New Watchdog, Has a Full Plate

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Mr. Gelzinis said Mr. Gensler would probably draw on his familiarity with the subject matter — he taught classes on blockchain technology at the Massachusetts Institute of Technology — to approach regulation around digital currencies more strategically. That would be a departure from his predecessor Jay Clayton, who favored enforcement actions against initial coin offerings without providing much regulatory guidance, he added.

Paul Grewal, chief counsel of Coinbase, the cryptocurrency exchange that went public last week, said the industry was “hopeful” about Mr. Gensler, noting that he is fluent in its language. Mr. Grewal said the industry wanted Mr. Gensler to provide clarity on how securities regulators decide when a digital asset is considered a security and subject to S.E.C. review, as opposed to a currency that is largely free from S.E.C. oversight.

The question grew in importance after the S.E.C. sued the San Francisco company Ripple Labs in December over the sale of its popular digital tokens to the public. The S.E.C. said the company was selling unregistered securities, while Ripple and others said the tokens should be classified as a digital currency. The enforcement action was one of the last brought before Mr. Clayton stepped down as chairman in the waning days of the Trump administration.

More recently, a brokerage affiliated with Sustainable Holdings, a financial technology company, asked the S.E.C. to weigh in on whether nonfungible tokens, which are being used to create digital art, are securities that require registration. The company, in its letter, asked the S.E.C. “to engage in a meaningful discussion of how to regulate fintech companies and individuals that are creating NFTs that may be deemed digital asset securities.”

Mr. Gensler, while teaching at M.I.T., acknowledged that regulators had struggled with how to treat digital assets. In a 2018 interview, he said digital assets could at times appear to be both a commodity and a security. At his Senate confirmation hearing, Mr. Gensler spoke strongly for heightened requirements for companies to disclose climate risks and diversity efforts.

“Diversity in boards and senior leadership benefits decision-making,” he said.

Mr. Gensler declined to be interviewed.

One thing the past three months have shown is that the stock and bond markets have a way of quickly writing the agenda for anyone who leads the S.E.C. That means SPACs will almost certainly be scrutinized. In particular, Mr. Gensler will have to determine whether these blank-check companies are a good market innovation for taking fledgling companies public or an investment vehicle that has the potential to harm retail investors, Mr. Hawke of Arnold & Porter said.

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Archegos Left a Sparse Paper Trail for a $10 Billion Firm

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Lawyers and securities experts said a multibillion-dollar family office like Archegos could avoid making 13F disclosures, but it would require threading a needle: The firm could have managed money for only Mr. Hwang and his spouse — not other family members, fund employees or his charity, which operated on the same floor of a Midtown Manhattan office building. The firm could also have been able to skip filing a 13F if it sold off enough stocks to fall below the $100 million threshold before the end of each quarter. It also could have requested confidential treatment from the S.E.C. to keep such disclosures private, lawyers and experts said.

Archegos was set up to make filings to the S.E.C. — it had its own Central Index Key number — but a search for documents returns no results.

The S.E.C. has opened an informal inquiry into Archegos and the spillover effects of its collapse, which caused billions of dollars in losses at banks around the globe. Regulators have declined to comment on the investigation.

Senator Sherrod Brown, chairman of the Senate Banking Committee, sent letters to the half-dozen banks that did business with Archegos — including Credit Suisse, Goldman Sachs and Morgan Stanley — seeking information about their dealings with Mr. Hwang’s firm. That includes information about any transactions that “would be subject to regulatory reporting with the S.E.C.”

The rules for 13F filings apply to “registered investment advisers and exempt reporting advisers that manage accounts on behalf of others, including advisers to separately managed accounts, private funds, mutual funds, and pension plans.” They must file if they have “discretion” over $100 million or more in securities at the end of a quarter.

Nicolas Morgan, a former S.E.C. lawyer, said a family office could get around the stock reporting requirement in only rare circumstances. It “would be outside the norm” to not file a 13F, said Mr. Morgan, a partner in the white-collar defense practice at Paul Hastings.

After the failure of Archegos, Americans for Financial Reform, an advocacy group, sent a letter to the S.E.C. calling for a review of 13F filings and whether gaps in the disclosure process created the registration exemption for family offices, which control roughly $6 trillion in assets, according to Campden Wealth, which provides research and networking opportunities to wealthy families.

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Companies Can’t Stay on the Political Sidelines

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Around 50 groups have filed amicus briefs in a coming Supreme Court case pitting charities against the state of California in a fight over donation disclosures. The Capitol riot on Jan. 6 put a spotlight on corporations’ direct and indirect political donations; justices agreed on Jan. 8 to hear the case and arguments will take place later this month.

Business interests want to create a “broad expansion of dark money rights,” according to a new brief from 15 Democratic senators, referring to untraceable donations that are often routed via nonprofit groups. The court case is an influence campaign disguised as a technical legal fight, the senators said. The case pits California against a charity, the Koch-affiliated Americans for Prosperity Foundation, over private access to tax documents. The Chamber of Commerce and National Association of Manufacturers are among the trade groups supporting the foundation’s demand for anonymity.

Anonymous donors work like covert intelligence operations, the senators wrote. The donors give millions annually to “social welfare” groups that spend it in an effort to influence politics and policy. The senators pointed to congressional appropriations rules blocking disclosure efforts by the I.R.S. and S.E.C. over the past decade as evidence that the groups have swayed lawmakers behind the scenes. The case is the latest attempt “by powerful interests to both cement and obscure their influence over the public sphere,” the senators argued.

As the “suits” finally get into Bitcoin, the crypto crowd has moved on to the next big thing: BitClout, a “polarizing” open-source crypto social network that monetizes influencers via personalized tokens that can be traded by users, essentially quantifying a person’s reputation.

BitClout’s recent launch has generated outrage because the company didn’t ask permission from people featured on the platform, instead launching with “reserved” currencies linked to celebrities like the Tesla founder Elon Musk, the pop star Katy Perry and about 15,000 others. Influencers can claim their coins, which requires buying in, but in the meantime fans can still buy and trade their tokens, BitClout’s white paper explains.

Silicon Valley bigwigs have backed BitClout, including Sequoia Capital, Andreessen Horowitz, Social Capital, Coinbase Ventures, Winklevoss Capital and the Reddit co-founder Alexis Ohanian. A crypto wallet on the platform reportedly holds more than $150 million worth of Bitcoin, thought mostly to have been raised from these A-listers.

The company’s founder goes by “DiamondHands,” a reference to investors who steadfastly hold speculative assets, popularized during the meme-stock frenzy. His true identity is an open secret among crypto insiders; signs point to Nader al-Naji, a former Google software engineer who has not denied the claim. Brandon Curtis of the exchange Radar Relay recently sent a cease and desist letter to Mr. al-Naji, protesting the commercialization of his persona without permission, and his counsel confirmed to DealBook that his profile was removed after that letter was sent.

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He Built a $10 Billion Investment Firm. It Fell Apart in Days.

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Until recently, Bill Hwang sat atop one of the biggest — and perhaps least known — fortunes on Wall Street. Then his luck ran out.

Mr. Hwang, a 57-year-old veteran investor, managed $10 billion through his private investment firm, Archegos Capital Management. He borrowed billions of dollars from Wall Street banks to build enormous positions in a few American and Chinese stocks. By mid-March, Mr. Hwang was the financial force behind $20 billion in shares of ViacomCBS, effectively making him the media company’s single largest institutional shareholder. But few knew about his total exposure, since the shares were mostly held through complex financial instruments, called derivatives, created by the banks.

That changed in late March, after shares of ViacomCBS fell precipitously and the lenders demanded their money. When Archegos couldn’t pay, they seized its assets and sold them off, leading to one of the biggest implosions of an investment firm since the 2008 financial crisis.

Almost overnight, Mr. Hwang’s personal wealth shriveled. It’s a tale as old as Wall Street itself, where the right combination of ambition, savvy and timing can generate fantastic profits — only to crumble in an instant when conditions change.

in a 2019 speech. “I couldn’t go to school that much, to be honest.”

Grace and Mercy Foundation, a New York-based nonprofit that sponsors Bible readings and religious book clubs, growing it to $500 million in assets from $70 million in under a decade. The foundation has donated tens of millions of dollars to Christian organizations.

“He’s giving ridiculous amounts,” said John Bai, a co-founder and managing partner of the equity research firm Fundstrat Global Advisors, who has known Mr. Hwang for roughly three decades. “But he’s doing it in a very unassuming, humble, non-boastful way.”

But in his investing approach, he embraced risk and his firm ran afoul of regulators. In 2008, Tiger Asia lost money when the investment bank Lehman Brothers filed for bankruptcy at the peak of the financial crisis. The next year, Hong Kong regulators accused the fund of using confidential information it had received to trade some Chinese stocks.

In 2012, Mr. Hwang reached a civil settlement with U.S. securities regulators in a separate insider trading investigation and was fined $44 million. That same year, Tiger Asia pleaded guilty to federal insider-trading charges in the same investigation and returned money to its investors. Mr. Hwang was barred from managing public money for at least five years. Regulators formally lifted the ban last year.

ViacomCBS announced plans to sell new shares to the public, a deal it hoped would generate $3 billion in new cash to fund its strategic plans. Morgan Stanley was running the deal. As bankers canvassed the investor community, they were counting on Mr. Hwang to be the anchor investor who would buy at least $300 million of the shares, four people involved with the offering said.

But sometime between the deal’s announcement and its completion that Wednesday morning, Mr. Hwang changed plans. The reasons aren’t entirely clear, but RLX, the Chinese e-cigarette company, and GSX, the education company, had both spiraled in Asian markets around the same time. His decision caused the ViacomCBS fund-raising effort to end with $2.65 billion in new capital, significantly short of the original target.

ViacomCBS executives hadn’t known of Mr. Hwang’s enormous influence on the company’s share price, nor that he had canceled plans to invest in the share offering, until after it was completed, two people close to ViacomCBS said. They were frustrated to hear of it, the people said. At the same time, investors who had received larger-than-expected stakes in the new share offering and had seen it fall short, were selling the stock, driving its price down even further. (Morgan Stanley declined to comment.)

By Thursday, March 25, Archegos was in critical condition. ViacomCBS’s plummeting stock price was setting off “margin calls,” or demands for additional cash or assets, from its prime brokers that the firm couldn’t fully meet. Hoping to buy time, Archegos called a meeting with its lenders, asking for patience as it unloaded assets quietly, a person close to the firm said.

Those hopes were dashed. Sensing imminent failure, Goldman began selling Archegos’s assets the next morning, followed by Morgan Stanley, to recoup their money. Other banks soon followed.

As ViacomCBS shares flooded onto the market that Friday because of the banks’ enormous sales, Mr. Hwang’s wealth plummeted. Credit Suisse, which had acted too slowly to stanch the damage, announced the possibility of significant losses; Nomura announced as much as $2 billion in losses. Goldman finished unwinding its position but did not record a loss, a person familiar with the matter said. ViacomCBS shares are down more than 50 percent since hitting their peak on March 22.

Mr. Hwang has laid low, issuing only a short statement calling this a “challenging time” for Archegos.

Kitty Bennett contributed research.

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Investment Firm’s Collapse Put Unseen Risks on Full Display

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After the implosion of a little-known investment firm saddled banks around the world with billions of dollars in losses last week, one big question is being asked all over Wall Street: How did they let this happen?

The answer may stem from the way the firm, Archegos Capital Management, with ample assistance from at least half a dozen banks, made bets on stocks without actually owning them.

Archegos used esoteric financial instruments known as swaps, which get their name from the way they exchange one stream of income for another. In this case, Wall Street banks bought certain stocks Archegos wanted to bet on, and Archegos paid the banks a fee. Then, the banks paid Archegos the stocks’ returns.

These swaps magnified the fund’s buying power, but they also created a two-pronged problem. Archegos was able to build up much more influence over the share prices of a few companies, including ViacomCBS and Discovery, than it could afford on its own. And because there are few regulations about these types of trades, it was under no disclosure obligations.

was embroiled in an insider-trading case under his leadership. But it used leverage — essentially, trading with borrowed money to amplify its buying power — perhaps as much as eight times its own capital, some Wall Street analysts calculated.

In this case, leverage showed up in the form of swap contracts. In return for a fee, the bank agrees to pay the investor what the investor would have gotten from actually owning a share over a certain period. If a stock rises in price, the bank pays the investor. If it falls, the investor pays the bank.

Archegos focused its bets on the share prices of a relatively small number of companies. They included ViacomCBS, the corporate parent of the country’s most-watched network; the media company Discovery; and a handful of Chinese technology firms. The banks it used to buy swaps held millions of shares in ViacomCBS alone.

Normally, big institutional investors are required by the S.E.C. to publicly disclose their holdings of stock at the end of each quarter. That means investors, lenders and regulators will know when a single entity holds a big ownership stake in a company.

But S.E.C. disclosure rules don’t usually cover swaps, so Archegos didn’t have to report its large holdings. And none of the banks — at least seven that are known to have had relationships with Archegos — saw the full picture of the risk the fund was taking, analysts say.

the most recent data available, according to the Bank for International Settlements, an international consortium of central banks.

Mitsubishi UFJ Securities Holdings Company, a unit of the Japanese financial conglomerate, reported a potential loss of around $270 million.

Analysts say the damage was relatively contained, and while the losses have been large for some players, they’re not big enough to pose a threat to the broader financial system.

But the episode will most likely reinvigorate a push to expand the regulation of derivatives, which have been associated with many prominent financial blowups. During the 2008 crisis, the insurance giant AIG nearly collapsed under the weight of unregulated swaps contracts it wrote.

The cascade of problems that began with Archegos was only the latest example of derivatives’ ability to increase unseen risk.

“During the financial crisis of 2008, one of the biggest problems was that many of the banks didn’t know who owed what to whom,” said Tyler Gellasch, a former S.E.C. lawyer who heads the Healthy Markets Association, a group that pushes for market reforms. “And it seems that happened again here.”

Matthew Goldstein contributed reporting.

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