Courtesy of Pam Martens
By Pam Martens and Russ Martens
On May 26 Bloomberg News reported that the U.S. Department of Justice had opened an investigation into Archegos Capital Management and its bank lenders. Archegos is the family office hedge fund that had blown up in late March, causing a total of more than $10 billion in losses to mega banks including Credit Suisse, UBS, Morgan Stanley and others.
Archegos had obtained leverage of as much as 85 percent on its heavily-concentrated stock trades from some of its banks, in brazen violation of the Federal Reserve’s Regulation T which sets margin for stock trading at a maximum of 50 percent on opening trades. In addition, the banks were holding the stocks in their own names (while shifting losses and gains to Archegos under a derivatives contract called a swap) thus denying the public the knowledge of the true owners of these stock positions under 13F public filings with the SEC.
This kind of tricked-up derivative contract accomplished two other things as well: it allowed the banks to avoid the Volcker Rule that bans them from owning a hedge fund while still letting them loan out their balance sheet to a hedge fund and collect lucrative fees along the way. It also allowed the banks to ignore their own internal broker-dealer rules on making margin loans against concentrated stock positions. There is also the riveting question as to just who was paying the capital gains taxes on these stock trades. (See Did Archegos, Like Renaissance Hedge Fund, Avoid Billions in U.S. Tax Payments through a Scheme with the Banks?)
In late March, when Archegos couldn’t meet its margin calls with the banks, the banks had to panic sell the stocks they were holding, pushing down the prices of the stocks in some cases by as much as 50 percent.
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