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The Stock Market Is Just One Hedge Fund Blowup Away from a Crash. Here’s the Ugly Math.

Courtesy of Pam Martens

According to the most recent 13F filings made with the Securities and Exchange Commission, the biggest banks on Wall Street are each sitting on hundreds of billions of dollars of stock positions – which we are now learning include highly leveraged stock positions for hedge funds called family offices.

The purpose of the SEC’s 13F filing is to provide transparency to the public as to the beneficial owners of publicly-traded stocks. Institutions holding more than $100 million in assets are supposed to file the 13F. But as the public learned to its horror over the past month, a reckless family office hedge fund called Archegos Capital Management built up stock positions estimated at $100 billion by borrowing about $90 billion of that from a handful of the largest Wall Street banks.

Archegos had been in operation since 2013, but had never filed a 13F list of its holdings with the SEC because these banks had cooked up a contract (which they are dubiously calling a derivative swap agreement) that allowed the banks to lump Archegos’ stock positions into the banks’ own 13F filings, making it appear to the public as if the banks actually owned these positions.

The highly questionable contract magically did three other things as well: it allowed the banks to avoid the Volcker Rule barring them from owning a hedge fund while still allowing them to loan out their balance sheet to a hedge fund; it allowed them to ignore the Federal Reserve’s Regulation T, which would have limited them to an initial margin loan of no more than 50 percent of the purchase price of the stock; and it allowed them to ignore their own internal broker-dealer rules on loaning against concentrated stock positions. Exactly who was, or wasn’t, paying the capital gains taxes on these stock trades is also an open question — raising the question of a tax avoidance maneuver.

When Archegos blew up in March and couldn’t meet its margin calls, hefty losses were reported by some of these banks.

Archegos is clearly just one roach in a large roach motel. There are thousands of other family office hedge funds out there and not one federal regulator seems to have any idea of how many more such contracts have been written between the hedge funds and the Wall Street banks.


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