20 billion dollars loss in 48  hours

 20 billion dollars loss in 48  hours

imagine losing 20 billion dollars in 48  hours sounds pretty much impossible right well today I'm going to tell you a  little story a story about a man who lost his multi-billion dollar fortune thanks to his own hubris a story about wall street recklessness in a time we thought it was behind us this is a storied folk that you can't afford to miss.

 let's dive in and see how someone lost 20  billion dollars in just over two days okay it's storytime with a guy so strap in grab a cup of something hot and get ready folks because this story is going to blow your socks off first of all the topic in question is bill Huang and his arches capital management hedge fund before he lost all of his 20 billion Huangdollars bills Huang was arguably the greatest trader on wall street that you'd never even heard of ironically you're more likely to have heard of him since March of last year.

 when his 20 billion net worth was reportedly wiped out in the space of 10  days now starting in 2013 bill turned more than 200 million dollars leftovers left over from his previous venture into an even more unbelievable fortune by betting on the stock market had he folded his hand in early march of 2021 and cashed in the bill would have stood head-to-head with some of the world's top billionaires but alas this wasn't to be and the sudden implosion of bill's archagos capital management in late march of 2021 is commonly referred to as one of the most spectacular failures in modern financial history.

 because quite frankly no individual has lost so much money in such a short time frame now at its peak bill's wealth briefly passed the 30 billion dollar mark but his financial case is an intriguing one for all the wrong reasons now unlike the wall street stars and Nobel laureates who ran long-term capital management which famously blew up in 1998 bill Huang remained largely unknown outside a small circle made up of fellow church-goers and former hedge fund managers as well as a handful of bankers.

  but all of this begs the following Huangquestion who on earth is bill Huang and what is archaegos capital management all right let me explain bill Huang is a long way from the archetypal larger-than-life finance bro one might expect to find at the center of a major financial fiasco there's no rooftop overlooking manhattan central park no fancy cars expensive chalets or flexy social life just a man living in a suburban home in new jersey and driving a standard Hyundai SUV  bill's truly is the paradoxical story of an individual devoted to his church and driven to give generously with an unprecedented appetite for casino-like risk in his professional life.

 he seems rather modest looking on the outside right well he had all the swagger he needed inside the wall street prime brokerage departments that finance big investors now sun cook Huang came to us from South  Korea in 1992 and took the name bill raisedSouth by his widowed mother he attended the University of California CaliforniaanCalifornia in Los  Angeles and eventually earned an MBA  from Carnegie Mellon University at university a videotaped business school reunion that was posted online.

 in 2008 bill recounted the one major objective he wanted to achieve after his graduation moving to new york in 1996 after stints as a salesman at Hyundai securities he landed a job as an analyst at the highly respected tiger management also known as quote the tiger fund is an  American hedge fund and family office founded by Julian  Robertson the fund began investing in 1980 and closed in march 2001 but it continues to operate today indirect public equity investments and ceding new investment funds now working for Julian Robertson Robertson a real titan in the industry was basically like playing for the new york Yankees for bill Huang.

  so after joining the powerhouse hedge fund tiger management bill became a quote tiger cub now the term tiger cub is commonly used on wall street to describe the former employees or disciples if you will of Julian  Robertson and this is because anyone who  had  previously worked under Robertson  was usually able to spin off and start their own profitable ventures including some of the world's most successful and well-recognized hedge funds these include the likes of Andreas  Halverson's Viking global investors  Philippe Lafont S coach management and  chase Coleman's tiger global management 

 now as bill recalled at the business school reunion Robertson taught him a  key lesson when it comes to fundamental investment strategies and that lesson was to learn to live with financial losses in fact at one point tiger had burned through a whopping 2 billion dollars for being on the wrong side of trade against the Japanese yen but Julian Robertson reportedly remained unfazed by this cataclysmic loss anywho following in the footsteps of fellow tiger cubs bill decided to start his own fund.

 this was actually at the urging of his mentor Julian Robertson himself  Robertson also offered to cede him some of the startup capital and that's what allowed tiger Asia to start now bill founded the tiger Asia management hedge fund in 2001 and it soon became a hugely successful firm at one point it was reportedly managing 10  billion dollars in assets bill initially sought to differentiate himself and his hedge fund by investing heavily in the Asian stock market and focusing primarily on Korean Japanese and Chinese companies that generated all of their revenue domestically according to former clients.

  colleagues bill concentrated the tiger  Asia portfolio in a small number of  stocks and leveraged it  some of his 25 or so positions were  longs and some were short trades  naturally right  but bill always remained rather  secretive often concealing particularly  large holdings from his own team of  analysts  a pattern which he repeated years down  the line with archagos which I'll get to  in a bit  now at least once bill stepped over the  line between aggressive and illegal  in fact after years of investigation in  2012 the u.s securities and exchange  commission accused tiger Asia management  of insider trading and market  manipulation in two Chinese bank stocks  the agency accused bill of receiving  confidential information about pending  share offerings from the underwriting  banks and then using it to capitalize  and reap elicit profits  bill settled the case without admitting  or denying any wrongdoing and tiger Asia  pleaded guilty to a u.s department of  justice charge of wire fraud.

 which subsequently led the bill to close down his tiger Asia fund after that bill started arkaygos capital management now archagos was what was called a  family office technically speaking a  family office is an investment firm managing money for an individual in this case bill but instead of attempting to open a new hedge fund with the taint of a  securities violation he decided to take the money that he'd already had within his personal asset portfolio invest it in his own assets and hire his own analysts effectively continuing his financial operations this way with RK ghosts bill's investments proved incredibly successful and true to the traditional Huang investing strategy.

 he solely focused on a few hand-picked stocks and positions and he deployed this strategy incredibly well to, begin with that is first of all he allocated capital heavily into tech stocks which enabled him to ride the decade-long supremely lucrative tech boom led by firms such as amazon LinkedIn NetflixLinkedIn google Expedia and  Facebook the second component of this strategy revolved around using an increasing amount of borrowed money aka leverage yep.

 I'm looking at you bitcoin futures traders now rules prevent individual investors from buying securities with more than 50 of the money borrowed on margin but interestingly no such limits apply to hedge funds or family offices the whole idea of setting up arcades as a family office starts to make sense now doesn't it according to employees and other people who are familiar with archagos it was reported that the firm consistently began ramping up its leverage over time initially.

 the firm's leverage positions were set at 2x which essentially equates to 1 million dollars borrowed for every  1 million dollars of capital deployed but by the late march of 2021 bill's leverage was at 5x or more now because archagos borrowed a lot of money to leverage and increase its position size this also meant that the firm's gains were exacerbated and archagos then redeployed its gains into the same bet by using this strategy bill managed to grow his initial available capital leftover from his tiger Asia management fund which was around 200 million dollars into a 20 billion dollar fortune in a  little under seven years that's right folks.

 he hit that divine  100x we in crypto all crave daily and this was no defy but tray at its finest now the third component of his investment strategy was a rather unorthodox one his utter dedication to being a good Christian and to his faith okay I know this might sound a bit odd but let me explain contrary to the wall street rockstar he could have been for years a bill was a  pillar of his church community he even founded a charitable foundation called the grace and mercy foundation that donated millions of dollars a year towards Christian causes bill also hosted three scripture readings a week at his foundation offices in the heart of Manhattan where he would relate and analyze biblical scriptures, in essence, a man thoroughly devoted and focused on spreading the word of god.

  now he believed that by investing in these stocks and companies through archagos he was effectively advancing society on god's behalf this was most definitely an alternative approach to investment and through his faith bill seemed to find a  justification for all his investments to stick with them and double down on them irrespective of the hedges he would have had to have in place during his religious meetings he would relay stories about wall street's money-hungry capital-driven way of life and power obsession constantly shedding light on the holy and necessary role that religion should play in driving the world of finance forward furthermore his seminary retreats offered a glimpse of how.

 he reconciled faith with finance as he explained it cutting-edge tech companies such as amazon facebook LinkedIn and Netflix were fundamentally doing divine work by advancing and bettering society he also told attendees at his 2019  appearance at the metro community that god endorsed the alphabet's google because it provided quote the best information to everybody all hail the almighty algorithm ultimately bill believed that by simply professing his own faith he possessed a  truly fearless way to invest but his enlightened self also coexisted with his other more obscure side.

  in fact, bill kept his banks and brokers in the dark by executing trades via swap agreements in a typical swap a bank gives its client exposure to an underlying asset such as a stock,  and while the client gains or loses from any changes in price the bank still shows up in filings as the registered holder of the shares this is precisely how bill managed to amass such huge positions in the background and because lenders only had details of their dealings with him they also couldn't have direct access to the amount he was piling on leverage.

 in the same stocks via swaps with other banks now it's important to note that leverage was playing a growing role on wall street during the 2000s and 2010s and bill Huang's risk appetite always led him to want more banks such as Credit Suisse and Morgan  Stanley had been doing business witharcagos for years regardless of bill's brushes with regulators and at the close of every trading day archagos would settle its swap accounts if the total value of its positions in the account rose the bank in question would pay archagos in cash.

 if the value fell however our logos would have to put up more collateral or post margin in wall street lingo now the fourth quarter of 2020 was a  fruitful one for the bill and his family office while the s p 500 appreciated by almost  12 percent seven of the stocks archagos was known to hold gained more than 30  percent other stocks such as Baidu Vipshop and farfetch jumped at least 70 percent that's a pretty impressive move in traditional markets I must say all this bullish activity and the firm's gains made archagos one of wall street's most reputable and respected clients.

 but the tiger cubs decline began during the week of March the 22nd 2021  the American mass media and entertainment conglomerate Viacom CBS  failed to keep up with the likes of Disney plus and apple tv and Netflix announced a 3 billion sale of stocks and convertible debt at that time archagos had exposure to tens of millions of Viacom CBS's shares through a series of banks including Morgan Stanley Goldman  Sachs credit Suisse and wells Fargo and had a huge outsized position in it and every time the stock moved up in price bill would allocate more money to it.

  the stock would simply carry on rising in value but instead of helping the stock price the stock sale affected the asset terribly and the following day Viacom CBS's price fell by nine percent it then proceeded to tank by an additional 23  ouch thus with the stock price declining so far and so fast it forced what is called a margin call on the bill's highly over-leveraged over-leveraged position for those who don't know a margin call occurs.

 when the value of an investor's margin account falls below the broker's required amount to keep a position open essentially in bill's case it was a demand by wall street firms for more collateral given that bill had borrowed such an over-leveragedridiculously outsized amount of money for his via composition and due to the stock's declining trend, there was no liquidity left to keep his position open therefore banks naturally demanded more collateral bill's bets had suddenly gone haywire jeopardizing his swap agreements.

  a few banks pleaded with him to sell his shares meaning he would have taken some losses but would have lived to fight another day avoiding a complete default but bill Huang refused our classic bill I think he forgot the advice that his mentor RobertsonJulian Robertson imparted learn to live with the losses now if it had been just one bank making the demand for a margin call he perhaps would have been able to stomach it but when all of his banks made the demand well that was a real problem and this signified the beginning of the end for the tiger cup.

  now it is worth noting here that any fortune built on borrowed capital is naturally standing on shaky foundations but in the case of bill Huang, he was facing an earthquake stocks that he had invested heavily in was all of a sudden moving against him and the worst part of it was that he had never implemented an effective hedging mechanism to protect himself or archagos against eventual losses.

 of course, banks began to panic because they had loaned him an outstanding amount of money and they demanded that he post more upfront capital otherwise they would have been forced to terminate his swap agreements and liquidate his portfolio and that's exactly what occurred he did not have enough cash lying around to meet the demands so the big banks were forced was facing liquidate his entire portfolio and just like that all of his 20 billion portfolios was gone now not only that but the banks that had lent him money to leverage his positions also took quite the hit Credit Suisse, for instance, lost a  whopping 5.5 billion dollars, Tamura, in  Japan lost more than 2.5 billion dollars and all because of bill's excessively leveraged positions and inability to fund his unhedged margin calls.

 now it was only in the days after credit Suisse and Nomura's crumble that analysts were able to piece together what had really happened for years bill had operated as a whale meaning someone with an outsized external influence on financial markets but as an invisible whale of sorts because almost nobody had heard of him nor his family office beside his employees and other investors close to him and that all goes back to the financial instrument that he used those mighty yet opaque swap agreements fundamentally.

 this is a type of financial derivative that allows the investor to remain pretty much invisible this is because instead of his name appearing in securities filings it was the name of the entity or bank he was dealing with be it Goldman Sachs credit  Suisse or Deutsche bank the banks appeared as the stockholders whereas bill was the one benefiting from the moves in the price of the stock therefore through swaps he was able to remain anonymous through the trading process and in the wake of this financial fiasco because of his swap agreements and almost anonymity we aren't too sure about what bill Huang has left nor of any other investments.

he might have held and with so little available financial disclosure it's hard to know exactly what he has left after a  calamity of this magnitude so you may ask what's the moral of this story well what's surprising about this tale is that while it might seem like it there is technically speaking no evidence that archagos did anything improper what happened with the bill Huang case is pretty reminiscent of the subprime mortgage crisis which occurred 16 years ago back.

 then just as with bill the main issue here was a series of increasingly irresponsible loans by big banks and as long as house prices kept rising and appreciating lenders ignored the growing risk levels but when homeowners stopped paying reality finally kicked in the banks had financed so much borrowing that the fallout had become uncontainable ultimately leading to the collapse of  2008.  the best thing that we can say about the archago's downfall is that it thankfully didn't cause a widespread market meltdown that being said what is really unfortunate about this story is that it was a completely preventable disaster an eventuality that was endorsed.

 once more by the greedy and profit-hungry big banks which had lent bill huang capital to fund his leveraged positions thus far the prime brokerage business had not been top of mind for regulators analysts and politicians but after the archaegos fiasco, this is no longer the case European rules, for instance, require the party bearing the economic risk of an investment to disclose its interest and had regulators imposed a limit on the bank's lending abilities or imposed more visibility into bill's trading activities across wall street he and archangels would perhaps have faced a  very different fate.

   maybe neither of them would have defaulted  I think that both banks and regulatory entities are to blame here as there still don't seem to be the necessary levels of transparency required to execute financial operations effectively nor the limitations required to protect investors and entities from major financial risk just think about the GameStop debacle in  January of last year and the trading restrictions imposed by Robinhood on certain stocks what a shambles that was just maybe that's why I'm such a  major proponent of blockchain technology and its open-source financial ecosystem.