Archegos Capital Fallout EXPLAINED

Hey, welcome back to the show. Today we're gonna talk about Archegos Capital Management and the huge crazy fiasco we've had this past week with them. All things explained. We're gonna talk about their margin calls, what prime brokers are, and how they lost money on this. And it's gonna be a pretty fun episode to see how one family office brought a lot of firms to their knees today and actually sustained billions of dollars of losses. So it should be pretty fun. And by the way, if you're new to this channel, We teach all things funds, hedge funds, private equity, venture capital. If you're interested, click on the subscribe button below. We actually give out $100 to new subscribers every single month, so click the link below and we're gonna give out money in a little bit. So what actually did happen to Archegos Capital Management? First off, Archegos, they call it a hedge fund, but it really is just, all it is is a family office. This is one family, pretty much, family office, ran by Bill Hwang, who was former protégé of Julian Robertson of Tiger Capital Management, the famous hedge fund out of the '80s and '90s, incredible. He's the guy, right? So he's on this. They estimate they have around $10 billion. Billions and billions, $10 billion. They've, you know, invested in a number of things, right? Ran by Bill, smartest guy ever, right? Let's trust Bill with our money, he's gonna do great things. Well, that all came crashing down over late last week through the weekend, and what happened with their holdings and massive margin calls and swaps that they had on those securities. So let's dive into what actually happened with these guys and how it actually brought almost 6 prime brokers to their knees. Now first off, let's talk about what a prime broker is. So in a family office or a fund, you guys have seen me draw this out before. Typically you'll have a general partner, you'll have your limited partnership, which is— this is the fund, okay? Now in most cases, limited partners or investors will put money into this fund. Now in this case, I'm guessing there's only one group. This is just the family's money. It's the family office. So the family money is all here. Now, and for a hedge fund specifically, many times they will use what's called a prime broker over here to help facilitate trades and regulations, and they can add margin to whatever trades they're doing. So I'm gonna write prime broker Right here, PB for short. We'll call them because we're having a number of these PB. Okay, what they did, and this is just an example, but we're going to show what happened at scale. So Bill Huang's his family office fund. They took out a big position in Viacom and did very well. Viacom is up, I think, 9x. I don't know when they got in, but this has been a hot stock even through the GameStop and everything. It's gone up a ton. And what they did is they took out a lot of margin through swaps and other things, but we'll just keep it simple for right now, but margin on this account. So for example, if you had $1 million, excuse me, you wanted to buy $1 million of stock, you could put in, if you put down 20%, or $200,000 in this example, of margin, the bank would lend you the rest, $800,000, and would allow you to get into this position, okay? And then you can go up. Now, what happens, margin and leverage is always a two-edged sword. So if it goes up, you take great returns, you're paying small fees back for the interest on the $800,000 you borrowed, but also, if it goes down, your money is the first money lost. And also, the bank or the prime broker will have what's called a margin call because, let's say in this example, they wanna maintain 20% margin. In the trade. If this went down to, uh, in half, kind of like we saw with Viacom— we'll talk about in a second— it goes down half to $500,000. Well, your $200,000 is now wiped out of equity, and, uh, they, uh, the other $300,000 is lost, and they're gonna want to do a margin call to get back up their ratio, hoping that it's gonna go back up. Now, in some cases, if it drops— that's a big drop, 50%— Sometimes what will happen— this is what happened over the weekend, okay? Now in this example, it's not $1 million. It's— I don't know how big their stake was. It's significant in Viacom and a few other— Discovery and a few other big stocks they had. They had a lot of margin. We don't, we don't know the exact numbers. I'm reading on CNBC Washington. They don't, they don't know the exact amount of how much margin they had on these, but they were estimating even 10% down or 20%, levering up 80% on these trades. And then also Doing this with swaps. And so they were trading essentially derivatives of essentially a side bet behind the table. This is what happened in the 2007-2008 crash with credit default swaps. They were taking side bets. If you guys seen The Big Short, I love this scene where she talks about there's, there's bets going on on the table and then there's a side bet on the side bet on the side bet on the side bet. These are swaps and derivatives that happen. And this is still a developing story. They're trying to figure out all the positions they were in. But over last week, Viacom had a— they were trying to issue new stock with JP Morgan. It failed, and this started a sell-off of Viacom. And what a few things that can happen here from a prime broker, back to this example, and we're kind of jumping around, but hey, that's why we're here. They can do a number of things. They can either call you up, hey, you know, Bill, hey, send us some money to cover the losses. Here, they can either do that, do a margin call. And they said they kept talking, and they did this with six prime brokers. They said they were trying to figure out with family. They a lot of times will have other securities that they can use as collateral. So they will sell those securities, or they will sell the underlying security that they purchased. And so it's a trickle effect and a snowball effect that happens if it starts to sell significant. The prime broker here. Has authority if they want to, to sell the security to cover their butts because they have taken out this huge leverage and they need to get out of the trade. Is that kind of making sense? You guys with me so far? So prime brokers last week, Viacom trying to issue new stock. It doesn't, doesn't work out, doesn't go very well. They had 6, as we know of right now, 6 prime brokers that they were working with. 6 prime brokers. And this, I mean, these are huge names. I'll read them off right here. Goldman Sachs, Morgan Stanley, douche bank, Credit Suisse, Nomura Holdings out of Tokyo. Okay, and I don't even know, maybe there's more, who even knows? At least 6 prime brokers that they, we don't know if they knew each other were doing this much leverage. We don't know what was going on because they were trading swaps as well, and swaps don't have to be disclosed as much. It's off the table a lot of times. So these prime brokers over the weekend, that's why Monday morning was one of the most anticipated openings in a long time because everyone was worried about what was happening here. And what happened over the weekend, a lot of these prime brokers wanted to exit these positions. And so they did a number of things that I— reading other reports. So Goldman Sachs, they took very— the least amount of loss. They sold out a decent amount. Apparently they had great collateral from this family that they could cover losses. So they didn't actually— Looks like they don't have— they didn't have that big of losses. And they were doing a number of these prime brokers were selling block trades. So they would sell— I mean, you're dealing with millions of shares here. It's hard to issue these shares and have a buyer and how to exit these shares. So they can do block trading. So they were selling huge blocks of trades, 23 million shares. I saw one, 40 million shares they were selling in blocks to other firms at a discounted price. if they would just close quickly so that they could get out of these terrible positions. 2 of the banks hit us hardest. You see on this sheet here, I'll pull it up again. Credit Suisse down, their stock down, I believe even further, it fell further, 12% today. Nomura down, I think is even further, 16% today on their stock. They both reported significant losses on this because They allowed way too much leverage from Bill Hwang and his family office of Archegos. I think I'm saying that right, Archegos. Archegos, of what they did here. And it's very interesting that banks did not have the checks in place. It sounds like from Goldman Sachs and Morgan Stanley, they both said, hey, we did a very good job in our risk management department. We actually mitigated this risk very well. We had Very good collateral. It seems like Credit Suisse and Nomura didn't have the collateral in place or the controls in place to be able to have this type of sell-off. Or what happened was Goldman Sachs or Morgan Stanley, maybe they took the collateral first. They were just a first mover and were able to grab the collateral. And Credit Suisse— it's— I don't know if these guys knew each other, were playing the same game. I don't— It seems interesting that one family office has 6 prime brokers doing very high leverage on this. Now the other point that I think is even crazier, okay, is now on the other— I mentioned that margin example. I did a poor job in mentioning that, but you guys know what margin, I'm sure, if you're watching this show. The stock has been going up like crazy. Viacom has been doing very well. And so when the stock— let's say you, back to that million-dollar example, you bought in, you put down $200 grand, took out $800 grand of margin, you now have a million-dollar position in Viacom. Well, Viacom has been going up. Well, I mean, it's, it's been on just a tear the last few months. It's been an incredible stock to buy. And you, when the stock goes up, that adds to your, your on-paper account. Right? So they should have had plenty of buffer. Like if this holding went from $1 million to $2 million, right? Archegos now has another extra million dollars on the— apparently on the balance sheet that they can use as margin. And so if it fell back, they would still be okay. It seems like that's not the case, right? With Viacom specifically, for them to fire sell that quickly and have 6 banks, I mean, doing block trading, doing anything they can to get out of this position, it seems like as the stock rose, that Bill Hwang decided to take out more margin and take out more leverage as it grew. Does that make sense? So as the stock grew, he just kept levering it higher and higher, and hiccups next week, the stock, right? They couldn't issue the common shares with Morgan Stanley, and it hiccups, and all of a sudden the world's on fire and we gotta sell everything and get out and prime brokers are losing their shorts. I don't know, it doesn't make a lot of sense that they would put that much risk on this. And I don't know what other— I mean, we see Viacom, we see Discovery, we see they've listed a few other positions. I don't know the extent of the positions they were in, but I think that's very interesting that they were, they were taking that much leverage out on their stock. And anyways, this is— maybe we'll do a follow-up. So this is— I mean, we're mid-story right now. I'm recording this mid-Monday. Um, we'll see what happens the next few days and what we can figure out and learn as it— as this goes on. But I think it's pretty interesting, uh, what happened here and the lack of controls that happen, especially with doing swaps. Um, I mean, I— Warren Buffett came out a number of years ago and said just swaps is one of the most risky and dangerous things to Wall Street. I mean, it is Credit default swaps led to a huge piece of the 2007-2008 crash. A lot of times, SEC has wanted to restrict them from retail traders using swaps because most people don't understand how they work. They don't understand the collapse that can happen when you're making side bet after side bet after side bet and you're building derivatives on derivatives. Doing that type of investing is very interesting. Hopefully this episode helped explain a few things on Archegos Capital Management. If you like this channel, go check out our other videos on how to start funds, how to actually— I launched my first few funds, how I'm launching my third fund right now. We walk through all the stuff on there. If you're interested, click on the link below, subscribe, hit the bell, all the good YouTube stuff. If you're listening to this on the podcast, come over and watch us on YouTube. We're doing a— subscribe on YouTube, subscribe on the podcast as well, leave us a review if you can. We love that as well and we'll keep pushing out good content. Comment below too if I missed something or if I need to do a follow-up video. I'm probably gonna do a follow-up video in a couple days here. We'll see if we can get more details, but I wanted to get this out to you guys right now. Thank you all so much, and I'll see you next episode. Bye. Bye.