Why Wall Street Lent a Huge Sum to Arkegoseu

[Asia Economy Reporter Cho Hyun-ui] Korean-American investor Bill Hwang (Korean name Hwang Sung-guk), who made a name for himself on Wall Street as a 'Tiger Cub,' was recently arrested on fraud charges. Amid this, a British financial media outlet reported that there is much speculation in the international financial community about the reasons why major financial firms such as Morgan Stanley provided Hwang with huge sums of money.

Hwang caused approximately $10 billion (about 12.6 trillion KRW) in losses to these financial firms. His firm, Archegos Capital Management, invested about $50 billion worth of stocks?more than five times its assets?through derivative contracts such as total return swaps (TRS) and contracts for difference (CFD). At one point, Archegos's leverage ratio reached 1000%.

The media explained, "Archegos avoided public scrutiny by using derivatives that shielded them from the public eye," adding, "After purchasing shares of companies they wanted to bet on and approaching the 5% ownership threshold that triggers disclosure requirements, they switched their strategy to total return swaps (TRS)."

TRS is a high-risk, high-return transaction that involves borrowing multiples of the invested capital to expand the scale of operations. The asset manager can conceal transaction details under its own name, which is why family offices like Archegos frequently use it. Family offices are not subject to the strengthened U.S. financial regulations implemented after the 2008 global financial crisis, allowing them to trade shares far exceeding public disclosure thresholds while avoiding regulatory oversight.

The U.S. federal prosecutors stated, "Archegos was able to manipulate the stock prices in its portfolio through TRS contracts." As the swap size increased and financial firms continued buying, the stock prices rose. His portfolio grew dramatically from $1.5 billion in March 2020 to $35 billion by March the following year.

The media reported, "Financial firms took Hwang's word at face value," citing an example where Archegos told UBS during negotiations to increase trading limits that it could unwind the entire portfolio within a month without causing major market disruption. However, the U.S. Department of Justice said it would have actually taken more than 100 days, not just one month.

Archegos also claimed to hold significant positions in Amazon, Google, and Apple, but in reality, it concentrated investments in Chinese companies such as Baidu, Tencent Music, and GSX Techedu. As the stock prices of these companies plummeted, astronomical losses occurred. Financial firms eventually issued margin calls (requests for additional collateral due to stock price declines), but Archegos failed to meet them.

UBS suffered losses of $861 million due to the Archegos incident. The media reported, "UBS did not respond to inquiries about whether it believed more due diligence should have been conducted before extending Archegos's credit limits." Besides UBS, Credit Suisse incurred the largest loss of $5.5 billion. Nomura Securities and Morgan Stanley also suffered losses of approximately $2.85 billion and $911 million, respectively.

Damian Williams, the lead prosecutor in the Archegos investigation, said, "Hwang's lies caused stock prices to rise, and the rising stock prices led to more lies," adding, "Billions of dollars vanished overnight. The scale of stock price manipulation is historic." If the prosecution's charges are accepted by the court, Hwang and others could face up to 20 years in prison.

Robert Webb, a professor at the University of Virginia, said, "The financial firms that suffered losses from the Archegos incident were victims of Hwang's false claims, but at the same time, they wanted to keep him as a client and the money associated with him."

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