Archegos Capital Management
From Invertopedia, the encyclopedia of how things fail
Archegos Capital Management was Bill Hwang's family office, set up in 2013[1]. Using total return swaps bought on margin, it grew from about $1.5 billion with $10 billion of exposure in March 2020 to more than $36 billion with $160 billion of gross exposure a year later[2]. When a few of its stocks fell in late March 2021, it could not meet its margin calls[3], and the banks that had lent to it lost more than $10 billion[1]. Hwang was convicted of fraud, market manipulation and racketeering conspiracy and sentenced to 18 years in prison[3].
Contents
The bet
Hwang held himself out as a long-term investor focused on company fundamentals, with a three- to five-year horizon[3]. The bet that grew Archegos was different: keep buying more of the same handful of stocks, with borrowed money, and the prices would keep going up[3].
Swaps made it possible. Archegos bought them on margin from several banks at once[2], the shares behind them sat with those banks[1], and each bank had to rely on what Archegos told it about the rest[3]. When banks started to set limits, Hwang and his finance chief told them the portfolio was smaller, more spread out and easier to sell than it was[3].
What happened
| 2013 | Bill Hwang sets up Archegos as a family office.[1] |
|---|---|
| Mar 2020 | Archegos has about $1.5 billion and $10 billion of market exposure.[2] |
| Fall 2020 | Hwang now spends nearly all of Archegos's capital on constant trading in the same core stocks.[3] |
| Mar 2021 | At the peak, Archegos is worth more than $36 billion, with $160 billion of gross exposure. Its biggest holdings include ViacomCBS and Discovery.[2][3] |
| Mar 22, 2021 | ViacomCBS announces a stock offering.[3] |
| Mar 23, 2021 | Hwang directs nearly $1 billion of new buying in ViacomCBS and other stocks to hold their prices up.[3] |
| Mar 24, 2021 | A last attempt fails. At the close, Archegos faces margin calls it cannot meet.[3] |
| Late Mar 2021 | The banks sell about $20 billion of stock. Goldman Sachs and Morgan Stanley move faster than Credit Suisse and Nomura, which are left with the biggest losses.[4] |
| Apr 27, 2022 | The SEC, the Justice Department and the CFTC charge Hwang and other Archegos executives.[2] |
| Jul – Nov 2024 | A jury convicts Hwang on 10 counts in July. In November, Judge Alvin Hellerstein sentences him to 18 years; the court later orders more than $9 billion in restitution.[1][3] |
The kill shot
Each bank saw only its own slice, and Archegos lied about the rest. When the prices it had pushed up started to fall, there was no cash behind the position and every lender ran for the exit at once.
The SEC alleged that Archegos repeatedly misled its counterparties about its exposure, concentration and liquidity so that they would give it more room to keep buying swaps in its biggest positions[2]. Prosecutors showed that by March 2021 the portfolio rested on a few stocks whose prices Hwang's own buying had pushed up[3].
That made the position fragile in both directions. A single stock offering at ViacomCBS was enough to start the fall, and Hwang's answer was to buy nearly $1 billion more[3]. Once the margin calls went unpaid, the banks raced to sell the same shares. The ones that sold first lost least[4].
Red flags ignored
- Leverage nobody could add up. The shares behind the swaps sat with the banks that wrote them[1], and each bank had to take Archegos's word for the rest of its book.[3]
- A few stocks, very large. By March 2021 Archegos's money was concentrated in a handful of names, including ViacomCBS and Discovery.[3]
- Limits answered with lies. When counterparties tried to cap its trading, Archegos told them false things about its portfolio to get more capacity.[3]
- Growth too fast to be skill. Capital went from about $1.5 billion to more than $36 billion in roughly a year.[2]
- Buying to hold prices up. Archegos timed trades, including at the close, to push prices and give a false picture of demand.[3]
The cost
The banks lost more than $10 billion, including $5.5 billion at Credit Suisse[1], and Nomura warned of a loss of about $2 billion within days[4]. More than $100 billion of market value was wiped out[1].
Archegos's own staff lost millions of dollars, because they had been required to put much of their pay into the firm as deferred compensation[3]. Hwang was ordered to pay more than $9 billion in restitution[3].
The inversion
Never let one counterparty be the only one who sees a position. If you lend against something, ask who else is lending against it, and treat a borrower who will not tell you as a borrower who cannot repay.
What survived
The case. Hwang was convicted in July 2024 of racketeering conspiracy, securities fraud, market manipulation and wire fraud, and his finance chief Patrick Halligan was convicted at the same trial[3] and sentenced in January 2025 to eight years[5]. Judge Hellerstein said the losses were "larger than any other losses I have dealt with"[1]. As of January 2025 both men were free on bail while they appealed[5].
References
- ^ “Archegos' Bill Hwang sentenced to 18 years in prison for massive U.S. fraud”. NBC News, November 21, 2024. Bank losses of more than $10 billion, $5.5 billion at Credit Suisse, over $100 billion of market value wiped out, the 2013 family-office start, Judge Hellerstein's sentence and quote, the 21-year request, the 10 counts.
- ^ “SEC Charges Archegos and its Founder with Massive Fraud”. U.S. Securities and Exchange Commission, April 27, 2022. The SEC charges against Hwang, Halligan, Tomita and Becker; total return swaps bought on margin; misleading counterparties on exposure, concentration and liquidity; growth from about $1.5 billion with $10 billion of exposure to over $36 billion with $160 billion of gross exposure; the parallel DOJ and CFTC cases.
- ^ “Founder and Head of Archegos Capital Management Bill Hwang Sentenced to 18 Years in Prison for Orchestrating Massive Market Manipulation and Fraud Schemes”. U.S. Attorney's Office, Southern District of New York, December 19, 2024. The primary record: the charges and July 2024 jury verdict, the 18-year sentence, more than $9 billion in restitution, the move from a long-term approach to constant trading in the same stocks by fall 2020, the lies to counterparties, ViacomCBS and Discovery, the March 22-24, 2021 sequence and the losses to employees' deferred pay; Halligan's conviction.
- ^ “Credit Suisse and Nomura face multi-billion prime brokerage losses from Archegos sell-off”. The TRADE, March 29, 2021. The roughly $20 billion fire sale, Goldman Sachs and Morgan Stanley selling faster than Credit Suisse and Nomura, Nomura's signalled loss of about $2 billion and Credit Suisse's "highly significant" warning.
- ^ “Former Archegos CFO Halligan gets 8-year prison sentence”. Reuters via Yahoo Finance, January 27, 2025. Halligan's eight-year sentence, and both Halligan and Hwang free on bail while appealing.