In lower Manhattan, a jury is now weighing a case against a little-known investor who made it big, lost everything, and briefly brought Wall Street to its knees.
But the story of Bill Hwang and his trading firm’s colossal failure is more than a rags-to-riches-to-rags tale. It is a giant red flag about the vulnerabilities of the financial system that persist more than 15 years after Wall Street’s everyday dark arts ravaged the global economy.
The Archegos Saga: A Brief Overview
In March of 2021, as most of us were lining up for Covid vaccines, Bill Hwang’s so-called family office — an unregulated firm that works like a hedge fund — imploded in a matter of days, sparking a brief but acute freakout in financial markets.
Seemingly without anyone noticing, Hwang had managed to amass huge positions in a handful of companies — including ViacomCBS, Tencent, and Discovery (now Warner Bros. Discovery, CNN’s parent company). His positions were so large that when the stocks started falling, it had a seismic effect on the market.
The Financial Fallout
According to prosecutors, the collapse of Archegos (pronounced ar-KAY-gos) cost shareholders $100 billion and left major banks with $10 billion in losses.
Hwang and his CFO, Patrick Halligan, were later charged with racketeering conspiracy and securities fraud. On Tuesday, after a two-month trial in New York federal court, the case was handed over to a jury that will decide their fate.
What Happened?
There are two official versions of the Archegos saga that emerged from the trial.
Prosecutors’ Version:
- The firm used financial instruments called “total return swaps” to gain exposure to stocks without actually owning them (a legal but controversial strategy).
- They allegedly lied to the banks they were borrowing from to conceal their massive positions and artificially inflate the stocks’ value.
Hwang’s Defense:
- Archegos’ aggressive trades were commonplace and perfectly legal.
- Hwang believed in the stocks he was buying.
- The collapse was an aggressive bet that went south due to a perfect storm of market movements, leaving the firm unable to meet margin calls from its lenders.
If found guilty, Hwang and Halligan could face up to 20 years in prison under federal sentencing guidelines.
The Bigger Picture
The details of the Archegos trial may appear arcane to outsiders. Even the judge admonished prosecutors for “boring the jury to tears,” according to Bloomberg.
But the Archegos episode is one of the more significant white-collar cases to emerge since the financial crisis.
The Two Giant Market Risks
The case has shown the world, once again, what happens when two giant market risks collide in a novel way. Before Archegos, market watchers knew unregulated family offices were a problem, and they knew that swaps going unreported was a problem. But no one had put two and two together to realise you could just use these two and light a dumpster on fire.
Regardless of the verdict, the case also underscores the massive risks that Wall Street megabanks like Goldman Sachs and Morgan Stanley continue to pile on.
The Under-Regulation Issue
Even if Hwang is convicted, there’s another culprit in the saga getting off easy: the taxpayer-backed banks that enabled the trading in the first place.
Dennis Kelleher, CEO of the non-profit Better Markets:
- “Fifteen years after the global financial crash, we still have gross under-regulation of non-banks.”
- “Wall Street megabanks engage in high-risk activities that aren’t properly regulated.”
- “We still have a long, long way to go.”
Conclusion
Bill Hwang’s case is a glaring reminder of the persistent vulnerabilities within our financial system. While the jury’s verdict will determine the immediate fate of Hwang and Halligan, the broader implications for financial regulation and market stability remain critical points of discussion.
