Image: The Goldman Sachs Trolley Problem
TIL: You can amass $10 Billion without reporting it to the SEC
Soundtrack: Pure Imagination
Youtube: How Socialists Solved The Housing Crisis
Archegos Capital made last week's headlines in Financial news with a $35 billion shockwave echoed through wall street.
While this debt-fueled detonation isn't as meme-worthy as GameStop's W: The Big Squeeze, with a near-miss of a Lehman Brothers' style cascade, it does seem to echo the current state of the markets aren't far off.
To put this in prospect, let's read the tea.
Twenty to One
Educated in the US, Sung Kook “Bill” Hwang earned his reputation starting in the "90s as part of Julian Robertson's fund Tiger Management. Robertson is now retired and invests in hedge funds started by former employees known as Tiger Cubs. These cubs make up about 50 of the world's top funds.
In 2001, Sung Kook “Bill” Hwang left to start one of the cubs known as Tiger Asia Management Hedge, which mainly operated in the Chinese/Hong Kong markets specializing in Tech investments. At its peak, Tiger Asia was managing around $8 billion in assets.
Bill would fall from this height In 2012, as he was caught for manipulative and insider shorting of Chinese bank stocks.
This wasn't just your average insider trading. Bill was purchasing the shares at below-market prices while also attempting to manipulate the stock prices on top of insider information, efficiently maximizing his [illegal] leverage in those trades taking, per SEC, about $17 million in profits on this deal.
Attempted to manipulate the prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions by placing losing trades in an attempt to lower the price of the stocks and increase the value of the short positions. - SEC
After pleading guilty and paying the SEC a fine of $44 Million, Hwang was banned for five years from managing public money. In addition to this, I suspect he was no longer particularly welcome to trade in the Chinese markets as Bill returned to the US.
So Bill did what anyone wealthy US-based banned-trader does, and opened a family office, Archegos Capital, to play with his own 500 million dollars. With the fresh ban and being a relatively small player, most banks didn't want to touch him, so taking out loans, aka [legal] leverage, to increase his positions was limited.
Bill took his wealth and tech knowledge and started to invest in Silicon Valley. Picking up stocks like Netflix, back when they were still navigating the transition from DVDs, before becoming the streaming behemoth they are today.
These bets paid off well, but as you trade stocks or manage assets worth more than $100 million, one is typically required to file what is known as a Form 13F with the SEC.
To stay under the radar, Bill used a combination of derivatives contracts and transferring stocks to the Grace and Mercy Foundation for tax write-offs to avoid this tripwire as he traded with sometimes greater than 100% annual returns.
“All the alumni, we keep in touch and talk to each other,” says a former Tiger Cub investor. “It was well known within Tiger that Bill was worth more than Julian. He had multiple 100% years.”
Over the course of 9 years, Bill was able to take that initial $500 million seed and grow it to 10 billion dollars with incredibly accurate trades, all without filing a single Form 13F, making him a virtual ghost in the SEC's [ EDGAR | Electronic Data Gathering, Analysis, and Retrieval ] database.
With $10 billion in collateral and an impressive track record, Banks like Goldman Sacks reversed their bans and allowed Bill to take out swaps on a consolidated set of stocks leveraged as high as 20:1, putting his market position at $30 billion.
“Bill is not afraid of leverage. He does so much work on the companies he invests in and is always hedged, and the companies he invests in are generally high quality,” says a person familiar with Hwang's investment operations. “He truly is one of the world’s best investors.”
As ViacomCBS, a significant portion of Archegos's portfolios, prices started to very quickly raise nearing $100 a share; ViacomCBS capitalized on this opportunity by issuing $2.6 billion worth of shares to the market; Thereby releasing the pricing pressure on the secondary market, while capturing that take for themselves.
This then caused Archegos's position to fall, which combining with last week's regulatory tumble of the Chinese e-cigarette company RLX technology, was enough to trigger a margin call, prompting the closure of Archegos' $20 billion worth of positioning as Goldman Sachs and Morgan Stanley worked to big-block firesale the underlying ViacomeCBS and Discovery stocks. This exposed Nomura to about $2 billion in losses, and Credit Suisse "warned that the hits to their balance sheets would be ugly".
When the dust settled, before most traders even knew what happened, $35 billion worth of market “value” had been wiped out, punching multi-billion-dollar holes in the valuations of several companies.
In a World of Pure Speculation
Calls for SEC regulation of family offices, $5.9 trillion [vs. $3.9 trillion (2019) Hedgefunds] have resumed as attention is directed towards Hwang’s rap sheet, but this "A few bad Apples" framework is at best a distraction from the underlying mechanics that create this system in the first place.
Regulators are already bristling; on Thursday, Dan Berkovitz at the US Commodity Futures Trading Commission said oversight of family offices “must be strengthened”, noting that they “can wreak havoc on our financial markets”
In the background of Archegos, Investors are taking on record amounts of debt to buy stocks while Penny Stocks Are Booming.
Here we can see the relative spread between the S&P 500 and the amount of debt being issued to traders as leverage adjusted for inflation across the Tech bubble (2001), Housing Bubble (2008), and the Pandemic-Market of today.
Like any debt, these loans are furnished with interest, so in addition to the risk of being margin-called, all of this additional cash flow is being taxed. Bank of America, a lender, sees the relationship between high margin debt as a positive indicator of a bullish market with expectations that it could last for years.
However, looking at the data and the history of debt, I would suggest that high debt levels are a leading indicator of systemic risk.
Building on W: The Big Squeeze, where we see how speculation naturally affects pricing the market by increasing cash flow, events like 2008, college pricing, or Archegos highlight how the value of an asset can be further propped up by debt as a type of localized inflation.
Now, as long as the market continues to grow, barring any constraints on natural resources, natural disasters, or windy trade routes, this debt, which is designed with interest to have an inherit clock, is serviceable and continues to grow unabated.
Players like Archegos will hedge their positions across the market to stabilize their debt-fueled grip on assets. Still, as the underlying asset prices fall, these hedges fail, thereby cascading into various flow-on effects. Note how Archegos’ localized failure constructed out of $10 billion of assets, with $20 billion of leverage, managed to collapse $35 billion’s of [market value | list price]. When this happens, the underlying assets can be scooped up at relatively low prices by the bigger players in this winner takes all game.
Debt isn’t limited just to market player’s spreadsheets, but it’s a core part of the entire capitalist economy. It’s people’s mortgages [$10.04 trillion, 2020], student loans [$1.57 trillion, 2021], credit cards [$915 billion, 2020], medical debt [$45 billion, 2020], down to the pay later options popping up across all of e-commerce.
Rollups
After the collapse of 2008, as Fannie Mae and Freddie Mac were looking to offload their troubled debt, they sold their books to Wallstreet. Who came in force and acquired $60 billion worth of single-family houses while inventing an entirely new rental asset class.
Companies like Blackstone’s Invitation Homes started to purchase entire neighborhoods; some companies sent suits to auctions with duffle bags of cash, pushing out the more typical local-landlord class.
These properties were then rented out, sometimes to the same people who just lost their mortgage, with increasingly higher price tags while long contracts pushing all of the landlords’ responsibilities effectively onto the tenant. Finally, these blocks of rental income would be packaged into securities and sold up the food chain.
“What is really dangerous to tenants and communities is the full integration of housing within financial markets,” says Maya Abood, who wrote her graduate thesis at the Massachusetts Institute of Technology on the single-family-rental industry. “Because of the way our financial markets are structured, stockholders expect ever-increasing returns. All of this creates so much pressure on the companies that even if they wanted to do the right thing, which there’s no evidence that they do, all of the entanglements lead to an incentive of not investing in maintenance, transferring all the costs onto tenants, constantly raising rents. Even little, tiny nickel-and-diming, if it’s done across your entire portfolio, like little fees here and there — you can model those, you can predict those. And then that can be a huge revenue source.”
Now that investor-capital flow has been opened up into the single-family house market, prices are being driven up as these funds expand. Some neighborhoods are being sold for as much as 50% gross margin, making it that much harder for people to become anything but perpetual tenants in decaying properties.
Edward Coulson, director of the Center for Real Estate at the University of California, Irvine, found that if single-family-rental ownership in a neighborhood went up by 10 percent, property values went down by 4 to 7 percent.
Abood told me that “the easiest thing for people to understand is the most sensationalized: ‘Invitation Homes is a horrible landlord, and people are mad,.” she said. “Yeah, that’s a story. But the harder story to make people care about is the way that all of our lives are starting to be intertwined into these financial markets that most of us have no investment in. The financiers are making so much money that depends on our everyday debt and expenses. Our mortgages, our rents, our car loans, our student loans. And all of that is dependent on low- and moderate-income people.”
So not only does this situation create an increasingly more expensive and less quality private market product while destroying housing stability and communities, but by increasing tying the daily aspects of our lives to the extractive economics of speculators, we become further exposed to the instability of this system.
As of March, 11 million disproportionally Black and Hispanic families [out of 43 million (2017)] are behind on rent or mortgage payments due to the absolute failure response to the pandemic and risk eviction or foreclosure.
While the National eviction moratorium has been extended until June 30th, small-time landlords are feeling squeezed and trying to process evictions in hopes they can refill the homes.
The COVID-19 Payment Deferral program will allow some borrowers to repay their missed payments by refinancing into more debt. However, with a still elevated 6.2% unemployment rate, many will have to pay back their debt when their house is resold at auction; at around the same time, nearly 20% of homes face similar situations.
It’s not like Biden and his advisors with Wallstreet influence, including Blackstone, one of the largest purchases of homes during the 2008 recovery, would have any conflict of interest when it comes to helping people stay in their homes?