In the aftermath of the Archegos implosion we’re seeing a revival of that old mistake about markets. If only there were more regulation then things would be better. Here it’s that hedge funds won;t blow up if only there’s more openness about positions:
The blowup of Archegos Capital Management is spurring calls for tougher regulation of the shadowy swap trades that fueled billions of dollars of losses at global investment banks.
Former regulators and financial-reform advocates say one rule change, in particular, could have prevented the debacle: requiring greater disclosures of the bets that investors such as Archegos place on companies using swaps.
What killed Archegos wasn’t secrecy so openness wouldn’t have saved it. Taking large – and bad – bets with leverage is what killed it. As the proposal isn’t to restrict leverage – nor, of course, bad bets – then this suggested more regulation wouldn’t have changed things.
Total return swaps are brokered by Wall Street banks. They provide investors with exposure to the profits or losses of stocks or other assets, without the investor actually holding the underlying shares. Archegos’s strategy backfired in recent weeks after ViacomCBS and other stocks sold off. Mr. Hwang’s firm was unable to meet its obligations to its banking partners, which in turn liquidated large chunks of stock they had amassed to underpin the trades. Among the banks now facing steep losses are Credit Suisse Group AG and Nomura Holdings Inc.
By using swaps, sophisticated investors can sidestep requirements to disclose big stakes in companies.
So? The bankers to Archegos already knew that they were making such large and leveraged bets. They were financing them after all. Further, if swaps can’t be used the futures can be, plain old trading on margin can be. I can probably get 5 times leverage just on Robin Hood and no one seems to be saying that Archegos was much more leveraged than that.
What we’re really seeing here is that old delusion that regulation can make markets either perfect or less volatile. You know, especially if we put the right people in charge.
Doesn’t work that way, just doesn’t.