Sizing, Leverage and Survival

On Monday 22 March 2021 ViacomCBS announced an offering of about $3 billion of common and mandatory convertible preferred stock; the common was priced at $85 (reported). Companies sell shares when their price is high, and ViacomCBS's was near a record. What its board did not know was that much of the recent buying had come from one family office in Midtown Manhattan. Archegos Capital Management, the vehicle of the former Tiger Management analyst Bill Hwang, held ViacomCBS and a handful of other US media and Chinese internet stocks through total return swaps with about ten prime brokers. The swaps gave Archegos the stocks' returns without legal ownership, so it filed no ownership disclosure, and as a family office managing its own money it was not registered with the SEC as an adviser.

The shares fell. During that week the banks' margin calls on Archegos rose to "over $13 billion" (CFTC release 8520-22). Archegos could not pay, and on Friday 26 March 2021 it defaulted. The banks that sold their hedge shares first, Morgan Stanley and Goldman Sachs among them, lost little; those that sold late lost most. Total bank losses exceeded $10 billion, including about $5.5 billion at Credit Suisse and about $2.9 billion at Nomura. Hwang was convicted on 10 of 11 counts in July 2024 and sentenced to 18 years in November 2024.

The numbers that matter for this chapter come from the SEC. Archegos had grown from about $1.5 billion of capital with about $10 billion of exposure in March 2020 to "more than $36 billion" of capital with "$160 billion" of exposure at its peak in March 2021 (SEC press release 2022-70). That is about 6.7 times exposure in 2020 and about 4.4 times in 2021 (companion arithmetic): high, but not extreme by hedge-fund standards. What made it fatal was elsewhere. The CFTC alleged that Archegos's largest position was about 70% of its net assets while it told banks it was 35%. Several positions were large multiples of the stocks' daily trading volume (reported). And each bank saw only its own slice. Credit Suisse had agreed in 2019 to cut Archegos's standard swap margin to 7.5% after Archegos said rivals offered better terms (Paul Weiss report to Credit Suisse's board, 29 July 2021, as summarised in the press); at 7.5% initial margin, a position is levered about 13 to 1 and a 7.5% fall in the stock uses up the margin (companion arithmetic, stylized). Credit Suisse's revenue from the client in 2020 was reported at about $16–17 million (verify). That bought a loss of about $5.5 billion. Whatever the jury's view of the fraud, the trading lesson does not depend on it: a large share of the buying in a stock produces mark-to-market gains that are partly the buyer's own price impact, and they