Thread by @globalhlthtwit

Remember the global financial crash? Packaged mortgage securities? The Big Short? This time the problem may be hedge funds borrowing to gamble on stocks, using the same stocks as securities.(1)

The hedge fund industry has borrowed a reported $814 billion in the past year, to gamble on stocks, a 49 per cent increase since Feb 2020. The true figure is likely much higher, into trillions. (2)

Gambling on stocks using borrowed money pushes up share prices which can then be sold. But some hedge funds may get the timing wrong, leading to big losses if the market smells a rat. This is what happened with Archegos, a relatively small family hedge fund. (3)

In turn banks that give these 'margin loans', like Credit Suisse, can lose a fortune and destabilise the banking and credit system. The regulators say these loans should never be for more than the value of 50% of assets bought. In Archegos case it was 85%. (4)

Archegos owned about 209 million shares of Viacom CBS and 609 billion class B shares ,in total worth $20 billion bought opaquely through derivatives so no one knew. That amounted to 34% of all Viacom shares. (5)

Yet Fed rules are that once you own 5% of a company you must declare this publicly. The share price soared and other investors didn't know why. The online financial press encouraged retail investors to buy ViacomCBS! (6)

But Archegos didnt have an exit plan because if they tried to sell large amounts of stock in a hurry the share price would plunge. So when the banks called in loans to Archegos, savvy banks rushed to dump their Viacom stocks. (7)

The share price fell by 50%. Credit Suisse was last to sell and lost £4.7 billion. This is deeply destabilising to credit markets, almost like a Lehman's moment. If the market cannot discover price quickly because the media are tricked, a lot of people suffer. (8)

The banks shd not be lending huge amounts for hedge funds to gamble. Central banks should stop it. Otherwise we shall soon have a repeat of the sub-prime mortgage disaster, another case of mispricing of assets, which led to the collapse on the US and much of the world economy.(9)