Archegos Losses Expected to Reach Up to 11 Trillion Won... Calls for Stronger Wall Street Regulation Gain Momentum

Senator Warren "Hedge Funds Must Be Regulated"...Interest in 'Regulation Advocate' Gensler's Path as SEC Chair Nominee

Senator Elizabeth Warren of the U.S. Democratic Party (left) and Gary Gensler, nominee for Chairman of the U.S. Securities and Exchange Commission (SEC) [Image source= AFP Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] As projections suggest that the banking sector's losses from the hedge fund Archegos Capital Management incident could reach up to $10 billion (approximately 11.334 trillion KRW), calls to strengthen Wall Street regulations are growing louder once again. Following the GameStop incident earlier this year, the Archegos case has prompted U.S. Senator Elizabeth Warren (Massachusetts), known as Wall Street's "Grim Reaper," to raise her voice immediately.

According to Bloomberg on the 30th (local time), Senator Warren pointed out via email that "the Archegos incident exhibits all the dangerous market characteristics: unregulated hedge funds, opaque derivatives trading, undisclosed over-the-counter transactions, high leverage ratios, and traders operating beyond the authority of the U.S. Securities and Exchange Commission (SEC)." She added, "To avoid the risk of hedge funds harming the economy and financial system again, financial regulators must demand greater transparency from banks and increase oversight."

With the GameStop incident earlier this year followed by the Archegos case, it is expected that voices advocating for regulation will gain momentum. Last year, when the U.S. financial system was threatened by COVID-19, the Federal Reserve (Fed), the U.S. central bank, introduced zero interest rates, supplied massive cash liquidity, and relaxed various Wall Street regulations. The result was a series of financial accidents, leaving Wall Street unable to respond for some time.

The Biden administration is also expected to support regulatory strengthening. President Joe Biden has already nominated Gary Gensler, known as a regulation advocate, as SEC chairman. Gensler worked at Goldman Sachs for 18 years and became a partner at the young age of 30, making him someone who understands Wall Street better than anyone. Having enjoyed many benefits on Wall Street, Gensler entered public office during the Bill Clinton administration and transformed into a strong regulation advocate. From 2009 to 2014, shortly after the financial crisis, he served as chairman of the Commodity Futures Trading Commission (CFTC) under the Barack Obama administration, leading efforts to strengthen derivatives regulation.

The cause of the Archegos Capital incident was also due to a complex derivative called a Total Return Swap (TRS). Archegos founder Bill Hwang was able to conduct large-scale leveraged trades using TRS. Although Archegos’ assets were only $1 billion, Bill Hwang used TRS to operate investment positions exceeding $50 billion by borrowing funds from Wall Street banks.

Gensler’s nomination passed the U.S. Senate Banking Committee subcommittee on the 11th with 14 votes in favor and 10 against. The nomination is expected to be presented to the full Senate next month.

Meanwhile, JP Morgan Chase estimated that banking sector losses from the Archegos Capital incident could range from $5 billion to $10 billion. Bloomberg pointed out that these losses could wipe out a year's worth of net profits for Wall Street banks. It also noted that future capital expenditure plans might be disrupted.

After the COVID-19 outbreak last year, the Fed restricted banks’ share buybacks and dividend payments, emphasizing that banks must maintain sufficient capital to prepare for financial crises. The Fed conducted two stress tests (capital adequacy tests) last year and allowed share buybacks in January this year, but dividend payments have remained restricted. However, on the 25th, Treasury Secretary Janet Yellen told the Senate Banking Committee that banks have secured enough capital to pay dividends, leading to speculation that the Fed might allow dividend payments in the second half of this year.

This content was produced with the assistance of AI translation services.