In 2012, he was accused by the U.S. S.E.C. of insider trading and manipulation in two Chinese bank stocks
He settled that case and pleaded guilty to a U.S. Department of Justice charge of wire fraud
He paid $60 million in fines and his mother told him to think of it as a tax
He had to close the fund after this incident
In 2013, he started Archegos Capital as a family office
Despite his investment scandals and huge bets, Hwang was mostly unknown in investing circles
He was familiar to his fellow churchgoers and former hedge fund colleagues, as well as a few bankers
He wasn't the usual billionaire hedge fund manager
• No fancy penthouses
• No hillside mansions
• No private jets
He has said:
"I confess to you, I could not live very poorly
But I live a few notches below where I could live”
He spent his time between his three passions:
• Family
• Business
• Charity via the Grace & Mercy Foundation
"I try to invest according to the word of God and the power of the Holy Spirit
In a way, it’s a fearless way to invest
I am not afraid of death or money"
He said that God loved Google because it provided the best information
"God also cares about fair price, because the scripture said God hates wrong scales
My company does a little bit, our part, bringing a fair price to Google stock
Is it important to God? Absolutely"
So how did someone so devoted to God became entangled in a $20 billion mess?
Hwang used swaps, a type of derivative that gives an investor exposure to the gains or losses in an underlying asset without owning it directly
This asset allowed him to hide his identity and the size of his positions
While the client gains or loses from any changes in price, the bank shows up in filings as the registered holder of the shares
That’s how Hwang was able to amass huge positions so quietly
Even the banks that provided loans for his investments were not fully aware
Since the banks had details of his deals with them, they couldn’t know he was using leverage to buy the same stocks via swaps with other banks
The banks were eager to provide millions of credit despite his past scandals and failures, due to the hefty fees he was paying
Archegos was paying more than $100 million in fees per year
It invested most of the money it borrowed into a few stocks like
• ViacomCBS
• GSX Techedu
• Shopify
By March 2021 the leverage was 5x
On March 22, ViacomCBS announced a $3 billion sale of stock and convertible debt
The stock plummeted by 9% on Tuesday and 23% on Wednesday
Some bankers asked Hwang to sell shares, take some losses, and avoid a default
He refused, forgetting the lesson his mentor Julian Robertson taught him
The banks that provided the loans faced a difficult dilemma
1. Wait for the stocks in his swap accounts to rebound
2. Sell his positions before other banks do it, further plummeting the stock prices
Credit Suisse wanted to wait
But Morgan Stanley didn't
They quietly unloaded $5 billion of their Archegos holdings
On Friday morning, before the market open, Goldman started liquidating more than $10 billion in Archegos holdings
Goldman, Deutsche Bank AG, Morgan Stanley, and Wells Fargo managed to avoid losses
Credit Suisse lost $4.7 billion with several top executives, including the head of investment banking, being forced out
Nomura Holdings Inc. faced a loss of about $2 billion
Luckily, these losses didn't spark a domino-like sell-off in the markets similar to the collapse caused by mortgage swaps in 2007
However, this story is a useful lesson on what happens when excessive risk meets unlimited leverage
Everyday investors may not be able to get billions in loans to invest in stocks
But there are still valuable lessons to be learned from this story
1. Never become greedy 2. Never chase your losses 3. Never take excessive risks 4. Never overestimate investing skills 5. Never chase last year's stock winners 6. Never use leverage or margin to invest 7. Never overconcentrate your investment portfolio
History may not repeat itself, but it rhymes
Learn from the mistakes of others to avoid a similar fate
/END/
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