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The story is based on real events. About how a hereditary Christian from Korea, having arrived in the USA, became a criminal on an especially large scale.
His spectacular fall was described by a fellow financier at the investment bank Goldman Sachs as “one of the greatest personal wealth collapses in history.” The organizations that believed in him lost even more. The Swiss Credit Suisse lost almost $5 billion, the Japanese Nomura – $2 billion, the American Morgan Stanley – $1 billion.
The capitalization of the companies involved in the scandal caused by this trader decreased by $100 billion. The most striking thing is that the majority of market participants, Wall Street tycoons and specialized journalists did not even suspect its existence. But at the end of March 2021, everyone finally learned about it. The collapse of the Archegos company brought attention to this good Christian, an emigrant from South Korea, who led a modest lifestyle, but loved to take risks. Meet Bill Hwang, the invisible billionaire who lost everything overnight.
Without a face
The organizations he managed occupied the 38th floor of a featureless modernist skyscraper at 888 Seventh Avenue, New York. On one side of the corridor were the offices of Archegos Capital Management, one of Manhattan’s countless investment firms involved in wealth management.
Opposite were the offices of the Grace and Mercy charity. The fund, whose name translates as “Grace and Mercy,” gives money primarily to Protestant Christian organizations. Compared to similar firms, where obscene language is the norm among brokers and traders, this 38th floor looked like a black sheep.
Swearing was strictly prohibited, workers behaved with decorum and nobility, and participation in meetings where the Holy Scriptures were discussed was virtually obligatory. The founder of both tenants was named Bill Hwang, and his name meant something only to the most seasoned specialists in the New York financial market. But in vain, because this man managed $35 billion at the peak of his success.
Son of an emigrant
Hwang’s name wasn’t actually Bill. He was born in 1964 in South Korea, and at birth he was given the name Sung-guk. His father was an evangelical pastor (there are quite a lot of Christians of different denominations in this country), and his mother at one time worked as a missionary in Mexico.
His childhood was not rich, but Hwang was lucky with his parents. He grew up in an atmosphere of love, and, as he himself said, they never even raised their voice at him. After the early death of his father, while still a teenager, the future trader moved to the USA and there he became Bill from Sung-guk: the Korean name sounded too complicated for Americans.
Somehow, the newly minted Bill gets an excellent education. Unlike his parents, he chose a path in America in the 1980s that was not related to religion, at least not directly. Hwang received his bachelor’s degree in economics from the University of California at Los Angeles, the famous UCLA, and his MBA (master of business administration) from the East Coast, from Carnegie Mellon University of Pennsylvania.
These are very respectable American universities, where dozens of Nobel Prize laureates have worked. Bill’s first job was in the New York office of Hyundai Securities, the financial division of the South Korean industrial giant. It was easier to get a job there with the surname Hwang. Well, then the hero met billionaire Julian Robertson and went to work for his Tiger Management fund.
One of the “tiger cubs”
By the time they met, Julian Robertson was already considered a Wall Street legend. He founded Tiger Management in 1980 and initially managed just $8 million, raised from family, friends and acquaintances. For almost two decades, the fund showed phenomenal profitability, and by 1998, $8 million turned into $22 billion. However, then Robertson’s intuition began to falter.
A lot of clients’ money was lost during the 1998 default in Russia and during the game on the Japanese yen exchange rate. Serious problems also arose at US Airways, a quarter of whose shares belonged to Tiger Management. Therefore, the founder of the organization did not delay and did what was unthinkable for gambling stock players. He closed the fund, returning all funds to investors.
After that, Robertson invested only his own accumulated capital and again did it extremely successfully, predicting the collapse of the “dot-com bubble” in 2001 and the collapse of the American real estate market in 2008. His fortune grew almost fivefold – to $4.8 billion, and at the same time he gave away another $2 billion to charity. Mentoring became a separate hobby of the investor. He gave initial capital to his former employees and simply young daring traders who managed to inspire with their ideas.
They were nicknamed “tiger cubs” (after the name of the Tiger Management fund). Dozens of “tiger cubs”, one of which was Bill Hwang, are now respected people themselves We’re on Wall Street with billions of dollars.
Short Game
For his Tiger Asia Management, Hwang received $25 million from Robertson. A native of Asia interested the experienced teacher in the idea of investing only in companies from Japan, China and his native South Korea, and operating only in the domestic market.
It was a great idea, and by 2008, Tiger Asia already managed $5 billion, owned by investors who believed in the Eastern miracle. But, finding himself his own boss, the “tiger cub” prodigy began to use the style of trading that would destroy him in the future. In 2008, Tiger Asia clients unexpectedly discovered that this fund was shorting Volkswagen shares.
Shorting means playing for a fall. In simple terms, Hwang borrowed a bunch of shares of a German automaker and sold them at the current price with the expectation that in the near future their value would fall and he could buy them back cheaper, return the shares to the broker, and pocket the difference. Instead, the value of Volkswagen securities rose sharply. Hwang was forced to record losses, which amounted to 23% for clients.
But this is not even what infuriated investors, forcing many of them to leave Tiger Asia: this happens, because trading on the stock exchange involves a lot of risk. They were infuriated that Hwang secretly, without informing anyone, began working with European assets, although Tiger Asia was supposed to invest other people’s funds only in Asia
Family office
Having survived such a fiasco, which, although it was offensive, remained within the law, in 2012 Hwang crossed the line for the first time. The US Securities and Exchange Commission, the most important market regulator, accused him and Tiger Asia of insider trading. This meant that Bill used his contacts in Asian banks to obtain confidential information about upcoming stock issues, which allowed him to play on their prices.
Criminal prosecution was avoided, but Tiger Asia received a fine of $60 million and a ban on trading on the Hong Kong Stock Exchange. Against this background, the entrepreneur chose to completely close his “tiger fund” and found a new organization in the “family office” format. Family offices are those companies that manage funds not of many individuals or legal entities, but of one specific family. In this case, we were talking about Hwang’s personal funds, because he managed to “get” approximately $200 million of his own money from Tiger Asia.
What was good about this format? It was limited in the scope of its activities, but with regard to family offices, the regulator’s requirements for disclosing information about their transactions were more liberal. The manager of such an office could not indicate in the reports his partners and even the exact amount of money he manages. This allowed Hwang to keep not only the SEC, but also the banks with which he subsequently began working, in the dark about many aspects of his activities.
Birth of Archegos
Bill Hwang named his family office Archegos Capital Management. The American Korean spied the Greek word Archegos in the Bible, the study of which he devoted a lot of time. In the Epistle to the Hebrews it is used to mean “leader” who can save all people (by which, naturally, Jesus Christ was meant).
And this was Hwang’s paradox. He was an exemplary family man, a regular churchgoer, spent millions of dollars on Christian initiatives (for example, on the Museum of the Bible in Washington), and led an extremely modest lifestyle (of course, with a discount for his profession).
He did not live on Long Island, but only in New Jersey, in the good, but not luxurious, neighborhood of Tenafly, populated mainly by wealthy Asians. He had a beautiful home, bought in 2008 for $3.5 million, but it didn’t hold a candle to the Manhattan multi-level penthouses typically favored by big New York investors. There was nothing provocative even in the choice of car: Hwang drove a black Mercedes CLK.
His daughter graduated from the good private Fordham University in the Bronx, but not Harvard, Princeton or Yale. And with this exemplary private life in business, it was as if he had been replaced: he was playing all-in.
Life on borrowed time
To work within the family office, Bill Hwang used a scheme that, combined with his chosen investment strategy and factors that developed largely by chance, ultimately led to his collapse. He used so-called total return swaps. This completely legal but risky financial instrument involved the owner of the shares (in Hwang’s case, the world’s largest investment banks) giving the trader access to the shares they owned in exchange for a fixed interest rate.
In fact, the investment bank lent them on a fairly small collateral, while remaining the owner of the securities. The trader was betting on, in fact, other people’s shares and bore the risks associated with this decision. Can you guess the dynamics? Okay, then the bank will receive its fixed rate, and the difference will be into the trader’s pocket. Can’t guess? The trader will have to pay, and it’s good if he has enough assets for this.
At first, everything went well for Hwang. He invested mainly in IT companies: Amazon, Facebook, LinkedIn, Expedia (housing booking service). Quite early, he saw a promising future for Netflix, which allowed Archegos to immediately earn $1 billion on their shares.
By 2017, the family office’s capital had grown to $4 billion, but the trader’s appetites were growing. Partner banks also stimulated excitement: seeing its success, they were happy to continue cooperation, because it also brought them profit. Each of the banks received tens of millions of dollars a year in commissions from Hwang for using their shares.
Highly Concentrated Portfolio
Several factors destroyed Hwang. Since his time at the Tiger empire, he has favored highly concentrated stock portfolios. This means that he invested a lot, but in a very limited set of companies. The professionalism of a trader was determined by correctly identifying these several targets with the potential for big growth (or fall, if we were talking about a bearish game).
If a trader, thanks to his ability to fundamentally analyze markets, was able to choose these goals, then investing in them all the funds at his disposal would bring him billions. But the risk of error in this format could also have potentially disastrous consequences. At first, Hwang focused on the IT giants that allowed him to get on his feet. He then swapped Silicon Valley companies for a more eclectic mix of assets.
Before the crash, he worked on shares of media conglomerates ViacomCBS and Discovery and four Chinese companies: GSX Techedu, Baidu, Iqiyi and Vipshop. At first everything went great. ViacomCBS shares, which cost $13 in March 2020, were valued at $97 a year later. Discovery shares soared from $20 in October 2020 to $77 five months later. Hwang was jubilant: he felt everything was right.
If he had “reset” everything at the beginning of March 2021, he would have become a confident billionaire. The value of the Archegos portfolio rose to $35 billion. And then the fairy tale ended.
The collapse of the “Leader”
Amid the coronavirus pandemic, various streaming services have become a window into the world for people locked in their homes. Their number grew and grew, more and more companies that had at least some kind of media library launched such projects. The conglomerate ViacomCBS, which owned the CBS television channel and the film company Paramount Pictures, decided that it was no worse than its competitors.
To finance this new streaming service, the corporation announced the sale of a large block of its shares. At the same time, the same thing happened to Discovery, which owned the TV channel of the same name, Animal Planet and Science Channel. However, stock investors decided that media corporations were late and they would not be able to catch up with Netflix, Apple TV+, Amazon, Disney+ and HBO Max.
ViacomCBS shares at the end of March 2023 fell by more than 50% from $77, Discovery’s securities fell from $77 to $42. Hwang would probably still be able to cope with the collapse of one of his major assets. He could not stand the simultaneous fall of two. Each of Hwang’s partner banks knew full well that they had begun to lose money, because the shares of the media giants actually belonged to them, and they began to demand higher collateral to insure their risks.
Hwang was unable to service all the demands at the same time. The banks could have been patient, the shares would most likely have bounced back, but it was enough for one to falter and the rest to see a large sale for panic to begin and a chain reaction to begin. The failed billionaire was unlucky: Morgan Stanley could not stand it and brought down Archegos assets totaling $5 billion on the stock exchange, and even at a discount to their current price.
What are Hwang’s crimes?
“I’m a big Bill fan and this could probably happen to anyone. I’m very sorry that this happened to Bill,” Julian Robertson said after the death of Archegos. If this could happen to anyone, why was Bill Hwang and several top family office executives arrested in April 2022 and charged with, among other things, conspiracy, securities fraud, and wire fraud? The problem was not Hwang’s total return swap scheme or highly concentrated portfolio trading strategy.
All this is a risky business, but legal. The crimes of the Archegos management were that, using the status of a family office, which allowed it not to disclose the details of its activities, it lied to partner banks without reporting each other’s existence.
Yes, Goldman, Deutsche Bank AG, Morgan Stanley, Wells Fargo, Credit Suisse and Nomura did not know (at least according to them) that Bill Hwang was working with them all at the same time and, moreover, investing their funds in the same same assets. At the recently launched trial against Hwang, the manager of one of the affected banks said:
“All the information he shared with us was made up. If we knew the real state of affairs, what he took funds from so many investors and invested in such a portfolio, we would have pressed the panic button.”
Write off as expense
Wall Street became aware of Archegos’ existence on March 26, 2021, when the family office announced a multibillion-dollar default. Banks also lost billions. Some of them, who sold assets to Archegos first, lost less. For losers such as Credit Suisse and Nomura, the losses became very significant and led to the dismissal of responsible persons. The capitalization of companies whose shares, managed by Hwang’s office, were urgently disposed of, decreased by approximately $100 billion.
“Bill Hwang was a billionaire, but he risked everything because he wanted more: more money, more success, more power. He wanted to become a Wall Street legend by increasing the value of his assets through manipulative trading and turning Archegos into a criminal enterprise,” Alexandra Rothman, the prosecutor, said at the trial. Bill Hwang is charged with 11 counts, each with a maximum sentence of 20 years in prison.
Hwang did not admit his guilt.
References & Contacts
- Reference movies: “The Wolf of Wall Street” and “The Big Short”.
- Explanation of the title picture: Hwang here somehow says: “lost 5 billion because of our speculation? – no problem, you have a gift from our establishment – free Korean-American pizza!”
- Idea by Igor Davydov © 2024 About me, Contacts
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