The Block Trade Saga

The problem with the showdown at the O.K. Corral is that everyone had a gun and no one was afraid to use it.

Even as the banks which had enabled Bill Hwang’s family office Archegos Capital to take massive amounts of leveraged bets on stocks were discussing among themselves how to facilitate an orderly unwinding of those positions, their traders were rapidly dumping positions behind the scenes.

And when efforts to co-ordinate between Archegos Capital’s lenders failed to materialize, days of chaotic trading ensued, leading up to last Friday’s massive fallout of shares from Chinese firms like Baidu, to embattled U.S. media companies ViacomCBS (-6.68%) and Discovery Communications (-1.60%).

Yet before the troubles at Archegos Capital had burst into public view, like mafia dons, trading representatives from the biggest banks on Wall Street, including Goldman Sachs (-0.51%), Morgan Stanley (-2.63%), Credit Suisse (-13.83%), UBS Group (-3.90%) and Nomura Holdings (-1.04%) met to discuss an orderly unwinding of the troubled and highly-levered trades.

Each of the banks had allowed Archegos Capital to take on billions of dollars of exposure to volatile stocks through swap contracts (off market contracts that are a type of contract for difference) while Hwang was struggling to deal with margin calls triggered by a plunge in ViacomCBS shares due to a fresh analyst downgrade.

An orderly unwinding of Arhegos Capital’s positions could have limited the market impact and the hit to the banks’ own balance sheets as they worked to sell down stakes in companies that Hwang had amassed through the derivative instruments.

But it soon became apparent that while the banks’ representatives were discussing that possibility of an orderly exit, their trading desks were trying to get ahead of the rest of the market by dumping those positions.

By last Friday, it was every bank for itself, with Goldman Sachs firing the opening salvo, pitching global investors on billons of dollars of Archegos-linked stocks, even as it knew that the shares were likely to dive and with Morgan Stanley doing the same just hours later.

The prime brokers who weren’t as fast, including Credit Suisse and Nomura Holdings were left holding the can, with the Japanese lender warning that its losses could hit US$2 billion.

But while some of the banks may have got out ahead of this episode, there will almost certainly be regulatory blowback and greater scrutiny, with bankers already being summoned by the U.S. Securities and Exchange Commission and the Biden administration monitoring the situation.