How Archegos manipulated Swiss banks

Bill Hwang is now being charged. The boss of Archegos, whose bankruptcy Credit Suisse cost about $5 billion, is accused by the federal court of Manhattan of stock exchange fraud and extortion. The indictment, released in the evening, reveals how the financier defrauded the banks.

Also read: Archegos, Credit Suisse’s “trustworthy customer” and symbol of its mistakes

Because the second Swiss bank was not the only one who was concerned. UBS lost $774 million after the hedge fund’s failed bets that went bankrupt in March 2021. This affair, which also involved US and Japanese banks, is estimated to cost the industry more than $10 billion.

Repeated lies

In a 60-page document detailing the charges against Bill Hwang and three others, the New York Southern District attorney provides several examples of Archegos’ lies. The hedge fund made use of several banks, who regularly asked him questions about the positions he held elsewhere in order to better understand the risks.

Also read: ‘A fundamental failure’ of management and controls: Credit Suisse delivers assessment of Archegos fiasco

From late 2020, early 2021, the trading limits imposed by the banks began to be reached for the fund that used and borrowed derivatives to invest, thus providing leverage. For example, Archegos, financed mainly by Bill Hwang’s fortune of 1.5 billion, was able to invest 35 billion, the prosecutor said. But if the branches could have seen the size of the portfolio and its concentration, they would never have agreed to raise the limits, he continues.

Map castle

For example, in January 2021, Archegos explained to representatives of Credit Suisse that the fund’s largest position represented 35% of its capital at the end of November 2020. While in reality it already reached 96%. It was ViacomCBS, one of Bill Hwang’s best bets, that fell last March when a capital raise went awry, causing his house of cards to collapse.

Then, in February 2021, Archegos ran into the limit imposed by UBS. To convince the bank to increase capital, Bill Hwang and his accomplices explained that the top ten positions equaled 30-35% of the capital, when in reality the distribution was completely unbalanced. They convinced UBS to increase the limit to 1.5 billion. Then, in March, the same argument, used at other banks, allows him to get an additional 2 billion from UBS.

Liquidated in a few days

In mid-December 2020, Bill Hwang had also signed an agreement with Credit Suisse under which he pledged never to hold more than 20% of a company’s stock. This threshold had already been crossed at the time of his application, especially at ViacomCBS (30%, a share that according to the indictment will rise to 60%).

Archegos also appears to have lied about the portfolio’s liquidity, ie the ability to quickly dispose of positions in the event of market turbulence or other problems. For example, in February 2021, defendants explained to UBS that they could liquidate the entire portfolio in two weeks. In reality, the prosecutor estimates, under the terms of Archegos, it would have taken 134 trading sessions to get rid of all the shares of the Chinese company Vipshop he owned and 78 for ViacomCBS.

The following month, Archegos again explained to UBS that the positions taken there were not representative of its portfolio, which included Amazon, Google, Apple and Microsoft, highly liquid stocks, among its largest holdings. It was all wrong. Archegos held practically the same positions at all banks, while serving the same discourse as at UBS.

Also read: UBS boss reflects on Archegos debacle

This does not absolve the banks whose risk management has failed. The investigative report, released by Credit Suisse last summer, found the losses were the result of a “fundamental failure of management and controls in investment banking, and more specifically in its Prime Business service.” And yet there were “countless alarms,” ​​which many associates had reported, then underlined by US law firm investigators Paul, Weiss, Rifkind, Wharton & Garrison. But the prospect of profit had taken over.

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