Archegos Hedge Fund Disaster Shows Banks Preparing a Financial Crash
May 3, 2021 (EIRNS)—The major bank losses from derivatives bets with the Archegos hedge fund, now at $10 billion publicly acknowledged by Credit Suisse, UBS, Nomura and Morgan Stanley and with suspected losses up to $100 billion, are likely to be the turning point which Bear Stearns’ two failed hedge funds were in July 2007, pointing to the global financial crash in the fall of 2008.
The biggest Wall Street- and City of London-centered banks are absolutely loaded with reserves and deposits courtesy of the endless quantitative easing programs of the biggest central banks. After years of using this reserve/deposit base to finance incredibly high-risk debt to zombie corporations across the trans-Atlantic world, these banks are now throwing hundreds of billions into derivatives games, with the central focus being stock values. Like the U.S. home mortgage and commercial real estate assets of 15 years ago, stock prices now only rise, they “will never go down” for very long.
The Archegos case has shown that these banks, if not broken up on the Glass-Steagall principle, cannot be capitalized enough to cover the risks they are betting on. Capital equal to 20%, even 30% of “risk-weighted assets”? The risk-weighting does not approach the risks the banks’ trading desks are taking in the swaps and derivatives markets to report “record trading profits” every quarter until a crash. Credit Suisse, the only major bank forced to “come clean” on some of its Archegos losses so far, had only about $25 billion equivalent in counterparty risk-weighted assets—i.e., collateral—and $2 billion of its own capital backing hundreds of billions of dollars exposure in “equity (stock) finance”—swaps, repos and derivatives, according to the Risky Finance blog.
What were these banks doing with Archegos? Among other things, they took Archegos’ holdings of stock in a particular company as collateral; themselves bought up to seven times as much of that stock and lent it to Archegos in swaps and repurchase agreements; and for fees, financed Archegos’ betting on the daily closing price of that stock, including its bets with them! Archegos’ liquidation blew up $50 billion in apparent “values” of a few stocks in which the hedge fund had appeared to become the biggest holder. How much of that $50 billion is the bank losses, so far reported as only $10 billion?
Risky Finance on April 27 estimated the biggest banks’ total exposure to this sort of “equity finance” at $3 trillion. Matt Taibbi, in a long and humorous article on his TK News on April 30, “Will ‘Goldman Penis Envy’ Crash the Economy Again?” sketches the weird Elmer Gantry-like character Bill Hwang who ran Archegos, and says, “The real issue isn’t Hwang but his banks.” Hwang was banned by the SEC after similar disasters in the 2008 crash, but the banks lent him many, many billions for a truly crazed derivatives-betting scheme. Wall Street has been scrambling to contain both the financial and reputational damage. Taibbi wrote:
“To date, the monetary hit to the banks alone is said to be $10 billion, but that number keeps rising, as Nomura and UBS only just this week disclosed a combined $3.7 billion in losses. Meanwhile, some analysts think the total loss in market value due just to this episode might ultimately be as big as $100 billion—one source thinks the number might be $200 billion.”
Read the details, and you’ll get an idea why a new, $30 trillion “green finance” bubble looks so enticing to them. These banks are in the terminal stages of a vast bubble of unpayable corporate debt—which they have partially eased out of, leaving shadow banks in their place, like the mortgage-backed securities (MBS) of the last crash—and an exploding “equity finance” bubble which they cannot escape without triggering a global crash.
