The former hedge fund manager, who caused CS and other banks to lose billions, must pay for his reckless bets.
The “Archegos” leads and is a role model for others – at least that’s how it was thought in ancient times. In modern investment banking, the conceptual subtleties from ancient Greek have been lost: Anyone who followed the call of Archegos Capital Management, Bill Hwang’s financial vehicle, in 2021 was not led into the light, but into ruin.
Now a New York jury has found Hwang guilty of fraud and market manipulation. One of the biggest financial scandals of the last fifteen years has reached a milestone, although it has not yet come to an end.
The death angel of Credit Suisse
Until spring 2021, former Wall Street trader Bill Hwang bet on a few stocks with enormous sums of money borrowed from banks, driving up their prices. Within a few months, he was able to multiply his stake and drive it to dizzying heights. When the value of key stocks that Hwang was betting on collapsed in March 2021, Archegos also collapsed. The family office’s bankruptcy caused more than $10 billion in losses for the investment banks involved and briefly sent shockwaves through the financial system.
Credit Suisse was hit the hardest, losing $5.5 billion because of Archegos; this huge default greatly accelerated the loss of confidence among CS customers and consequently the bank’s downfall. But UBS also lost around $800 million in its dealings with Archegos.
The jury in New York found the 60-year-old guilty of defrauding these two and other banks and manipulating stock prices, as media reports unanimously. The jury largely followed the arguments of the federal prosecutor. Patrick Halligan, the former chief financial officer of Archegos, was also convicted.
Hwang’s sentence is to be announced on October 28, until then he will remain free on bail. The verdict can be appealed. Halligan’s lawyer has already told the Wall Street Journal that she will appeal.
One deceived . . .
The trial against Hwang also attracted attention because Archegos had exploited the risk management of numerous large banks in order to finance its billion-dollar bets. Some banks, including Credit Suisse, adjusted their risk management processes following the debacle. Nevertheless, the question remained: How did Hwang manage to fool some of the supposedly best bankers in the world?
For the New York federal prosecutor, the answer was clear: he had lied to them through and through. Hwang had worked with a number of banks, and none of them knew how much credit Hwang had outstanding with the other banks.
The Archegos representatives also failed to disclose that they were using the billions they had borrowed for very concentrated bets, which significantly increased the risk of default and could have been interpreted by the banks as a warning signal. Hwang also invested in his selected securities via equity swaps. These financial contracts enabled him to conceal his signature in the market and from the regulator.
. . . others were deceived
Hwang’s defense attorney argued that the evangelical Christian and former Wall Street trader was simply very convinced of the potential of the stocks he had invested in. Hwang himself had never lied to the banks, but his employees had done that. The defense attorney also accused the prosecutors of not being able to plausibly explain how Hwang could have profited from the huge positions he built up with the borrowed money.
In fact, many observers were not clear about how Hwang had planned to exit his positions. As soon as he had started to reduce his holdings, the share prices would have faltered and the house of cards would probably have collapsed.
However, the prosecution was able to present two key witnesses, the former head of risk and the former head trader of Archegos. Both had previously pleaded guilty, cooperated with federal prosecutors and explained in detail how the Archegos system worked.
As a result, the defense was unable to get its arguments across to the jury. The jury was not persuaded by their accusation that the banks had thrown themselves at Hwang of their own accord in order to profit from his golden bets.
But some bank managers who followed the trial must still have felt uncomfortable, because they know that without the gullible banks, Hwang, who already had a criminal record at the time, would never have been able to build his house of cards.
The “Archegos” did not make her rich – but perhaps it gave her valuable insight for her future professional life.