The names of the key players are different, but the lessons similar. The spectacular implosion of hedge fund Archegos Capital Management, much like the GameStop saga earlier this year, serves as a reminder of the dangers posed by extreme leverage, secret derivatives and rock-bottom interest rates.
ViacomCBS (VIACA), Discovery (DISCA) and other media titans’ stocks crashed Friday as Wall Street banks lent to Archegos forced the firm to unwind its bets. The epic firesale wiped out more than half of Viacom’s value last week alone.
Significant banks face billions of dollars in losses from their exposure to Arches. Both Credit Suisse (CS) and Nomura tumbled Monday after warning of substantial hits to their earnings.
The most startling part about the tale of Archegos is that it is a firm that few people had ever heard of before this weekend. And yet, in this era of easy money, Archegos was able to borrow so much that its failure created shockwaves large enough to ripple across Wall Street — and impact everyday Americans’ retirement accounts.
When GameStop shares instead went to the moon, Melvin Capital suffered staggering losses and was forced to reach a $2.8 billion bailout with larger rivals.
“We saw it on the short side when GameStop blew up. Now we see it on the long side,” Hogan said.
Arches Capital used borrowed money — apparently a ton of it — to make outsized bets that propped up media stocks. This type of excessive leverage is made possible by meagre interest rates from the Federal Reserve.
The full scale of these bets wasn’t precise until now.
Perhaps to avoid making public disclosure filings,
Arches reportedly used derivatives known as total return swaps to mask some of its extensive investment positions. Investors using these swaps receive the total return from a dealer, and those returns are typically amplified by leverage.