Often times when a firm is successful, many investment bankers knock on their door to offer help. If the firm has been consistently successful over a few years, the interest is even higher. Archegos Capital Management is run by Bill Hwang and its clients are family interests. When a company manages family interest the regulatory environment is very low, because it assumed the family manages the governance. Archegos Capital Management was managing $12 billion, but it was concentrated in a very few names. The company became the largest shareholder of ViacomCBS and as the shares rose, the investment bankers offered the firm a way to make bigger returns. The investment banks would hold the shares in their name and sell Archegos synthetic products to increase the leverage and increase the return, this made Archegos control $20 billion in ViacomCBS stock. Under Mr. Hwang, the stock were from $12 to $50 to $100. All is good when share prices rise.
With a higher price, the management of ViacomCBS went into the markets to sell shares, they were going to sell $ 3 billion and Mr. Hwang was expected to buy $300 million of it. He did not buy because some of his other investments were not doing well, the other shareholders were allocated his holdings, but did not want they and they sold. The price went down and Mr. Hwang received a margin call.
The investment bankers included Goldman Sachs, Morgan Stanley, Deutshe Bank, Nourma Securities and Credit Suisse. All were making increased fees from Archegos, but the risk level was rising or if and when share prices decreased, margin calls were made, however Archegos did not have the money to pay down the debt requirements. Goldman and Morgan Stanley sold billions of dollars of shares to take them off their books, the other investment bankers were slower to sell and thus incurred losses. (there is a movie called Margin Call staring Kevin Spacey which would give you the idea of how it happens).
At Credit Suisse according to an article by Brenna Hughes Neghaiwi and Matt Scuffman of Reuters, the CEO of Credit Suisse Thomas Gottstein fired the heads of its investment bank and risk divisions for allowing a concentration of money into Archegos as Credit Suisse lost $5.9 billion on the sales by Archegos. The issue is why not the exposure to Archegos Capital Management become so big?
The risk department is suppose to ensure risk levels are manageable, and investment bankers bring in fee income but the income should be consistent. At a large investment bank, there is no reason to back a frim, unless the government is offering a bailout if something happens. Ideally, firms such as Credit Suisse pay millions to manage risk, what would cause Credit Suisse have no more exposure?
Credit Suisse also lost money when a UK firm called Greensill, which was disrupting the supply chain system declared Chapter 11 bankruptcy.
Linking to dividend paying stocks, everyone loves profits, but profits need to be managed. It can be very expensive to chase fees with seemingly low regard for what happens if everything does not work out and prices fall or contracts which people hope for do not materialize. It is easier to say yes, but no can save you money and there is always a balance. Consistently profitable companies tend to know when to say no, they are not perfect but they tend not to need growth at any cost. With your investments, the companies tend to receive many opportunities but say no to most of them, do you have a sense of when they say no?
There are more questions than answers, till the next time – to raising questions.