Banks involved in Archegos meltdown face US probe

At the root of the collapse were Archegos's massive bets on certain stocks. PHOTO: REUTERS

NEW YORK (BLOOMBERG) - United States investigators who focus on corporate collusion are examining how global banks handled multibillion-dollar trades with Archegos Capital Management that sent stocks into a spiral and burned other shareholders.

The Justice Department's (DOJ) antitrust division is handling at least part of the probe into the collapse of Mr Bill Hwang's firm after lenders rushed to liquidate souring positions in March, according to people familiar with the matter. The debacle also erased much of the billionaire owner's fortune and saddled banks with more than US$10 billion (S$13.4 billion) in losses.

The division has been seeking information from Mr Hwang's biggest backers on Wall Street, who had discussed the possibility of moving in concert to unwind the portfolio and sever ties with his busted family office, the people said, asking not to be identified because they are not authorised to discuss the inquiries.

A spokesperson for the DOJ declined to comment.

In the months since Archegos's downfall, authorities have not accused the family office or its banks of breaking any laws, but the episode has attracted criticism from regulators and kicked off inquiries from watchdogs across the US and Europe.

At the root of the collapse were Archegos's massive bets on certain stocks, such as media companies ViacomCBS and Discovery, as well as Chinese tech darling Baidu. Banks provided billions of dollars in leverage, eager to reap fees handling the investment firm's burgeoning portfolio. But as the positions started to sour, Archegos was unable to meet margin calls, and bankers soon realised the extent to which it had placed parallel positions with competitors.

Top prime brokers including Credit Suisse Group, Morgan Stanley and Goldman Sachs Group held hasty meetings that month to discuss an orderly way to unwind the positions and minimise billions of dollars in losses. But the talks soon devolved into a race to dump the shares and, behind the scenes, bankers were left bickering and pointing fingers over who broke ranks.

Representatives for the three banks declined to comment.

Fortunes diverged among the firms that Archegos had dealt with: Credit Suisse, Nomura Holdings and Morgan Stanley incurred some of the steepest losses. Others, including Goldman Sachs, Wells Fargo & Co and Deutsche Bank, escaped relatively unscathed.

The impact on the underlying stocks was severe. ViacomCBS, which began declining after announcing a share offering to raise money and then tumbled dramatically as banks liquidated Archegos's positions, is down 58 per cent from its high on March 22. Discovery is down 62 per cent from its peak that month. Another firm, China-based edtech company GSX Techedu, is down even more since the debacle. It recently changed its name to Gaotu Techedu, but that has done little to cure the stock's malaise.

Morgan Stanley had a key role in the blowup: It was the firm leading the fund-raising for ViacomCBS and then later in the week was among the first to start dumping shares tied to Archegos that included its giant holdings in the media company. The bank reasoned that it needed to meet its underwriting obligations first before it started the Archegos share sales, chief executive officer James Gorman said in April.

Securities and Exchange Commission chair Gary Gensler has been emphasising the need for better regulations to prevent similar market mishaps. In an interview with Bloomberg on Wednesday, he specifically called out the need to rethink disclosure requirements for equity-based swaps, the instruments that allowed Mr Hwang to quietly build his outsized bets.

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