The accused mastermind of a massive financial fraud that sent shockwaves throughout Wall Street goes on trial.
In short, Archegos Capital Management made massive wagers that resulted in a near-apocalyptic meltdown, costing over $100 billion in market value in just a few days. Now, two years later, Bill Hwang, the 60-year-old founder and CEO of the firm, is set for trial in Manhattan court for 11 counts of racketeering, conspiracy, and fraud. There are several reasons for the interest in this trial.
First, Hwang is an intriguing character (more on that later). Second, the Archegos collapse happened when the financial industry was intoxicated with cheap capital due to the Federal Reserve's unprecedented market interventions, and the era of low-interest rates that many desire to return to. Finally, market reform advocates use the Archegos collapse as a warning about the lack of regulation for family offices - private firms set up by the wealthy to manage their wealth.
What transpired?
The indictment claims Archegos (pronounced Ar-KHAY-gos) set up deceitful schemes to raise the value of certain publicly traded stocks, including Viacom and Discovery (latterly known as Warner Bros. Discovery, parent company of CNN). Essentially, Hwang utilized financial instruments known as "total return swaps" to get exposure to these stocks without owning them. While this is legal, it's also incredibly risky and contentious.
Hwang and his team supposedly lied to banks they borrowed from, using swaps to hide the sizable positions they were accumulating to bypass regulations. This ruse worked initially. Archegos' $1.5 billion portfolio ballooned to $35 billion over a year.
However, when the prices of these stocks took a dive, Hwang faced significant challenges. He first attempted to buy more shares to reverse the decline. It failed, and the margin calls from banks continued to come in, eventually compelling banks to liquidate Archegos' positions, further driving down stock prices, and leaving Archegos with a massive debt. One of these banks was Credit Suisse, which suffered a $5.5 billion setback on its loans to Archegos, contributing to its downfall a year later.
Within a week, according to the indictment, the Archegos collapse erased "more than $100 billion in apparent market value for almost a dozen companies." Notably, the fire sale eradicated more than half the value of media giant Viacom.
A glimpse into Bill
The son of a Korean pastor, Bill Hwang is a devout Christian who doesn't shy away from pushing his faith, even on his staff, per a lawsuit filed by a former employee. The lawsuit describes a "toxic culture" within Archegos, focusing on employee submission and adulation. Hwang allegedly urged his staff to dedicate more time to their faith and attend scripture readings. Staffers were reportedly obliged to devote at least 25% of their bonuses to the firm's deferred compensation plan, which lost $500 million when Archegos collapsed.
The civil case is ongoing. Hwang's attorneys didn't promptly reply to a request for comment.
The name Archegos is derived from the Greek word for "leader" and was utilized in the Bible to denote Jesus Christ.
A Bloomberg article detailed a huge piece of art Hwang commissioned that depicted the blood of Christ washing over a gloomy New York City skyline, "purifying the metropolis of its sins."
His criminal trial, beginning on Wednesday, is not his first brush with the law. In 2012, he confessed to wire fraud related to his Tiger Asia Management hedge fund, which was entangled in an insider-trading scandal.
The importance of the case
Although white-collar crime on Wall Street might seem like a distant concern for most Americans, it matters if you have any kind of retirement fund. The Archegos charges suggest the DOJ is toughening its stance on fraud, personally prosecuting Hwang and two of his associates.
"The Archegos debacle did not occur in a vacuum," noted Dennis Kelleher, CEO of the nonprofit advocacy Better Markets, in a statement. "It was enabled by lax regulatory policies that have allowed excessive risk into our financial markets."
Hwang has pleaded not guilty to the 11 federal charges, each carrying a maximum imprisonment of 20 years.
Read also:
- Lack of snow also opens up new opportunities for winter tourism
- Abrupt end to e-car subsidies
- The chemical industry has little confidence
- Intersport boss hopes for sales boom through sporting events
Source: edition.cnn.com
