The names of the key players are different, but the lessons similar. The spectacular implosion of hedge fund Archegos Capital Management, much like the GameStop saga earlier this year, serves as a reminder of the dangers posed by extreme leverage, secret derivatives, and rock-bottom interest rates.
ViacomCBS (VIACA), Discovery (DISCA), and other media titans’ stocks crashed Friday as Wall Street banks that lent to Archegos forced the firm to unwind its bets. The epic firesale wiped out more than half of Viacom’s value last week alone. Major banks face billions of dollars in losses from their exposure to Archegos.
Both Credit Suisse (CS) and Nomura tumbled Monday after warning of significant hits to their earnings. The most startling part about the tale of Archegos is that it is a firm that few people had ever heard of before this weekend. And yet in this era of easy money, Archegos was able to borrow so much that its failure created shockwaves large enough to ripple across Wall Street — and impact everyday Americans’ retirement accounts.
It’s a wake-up call. With leverage, comes risk,” said Art Hogan, chief market strategist at National Securities Corporation. “This is the second time we’ve learned a lesson this year about leverage.”
In January, another hedge fund, Melvin Capital Management, nearly collapsed after its massive bets against GameStop (GME) were blown up by an army of traders on Reddit. Investors were surprised to learn about the sheer size of the short positions anticipating the video game retailer’s stock price would fall.
When GameStop shares instead went to the moon, Melvin Capital suffered staggering losses and was forced to reach a $2.8 billion bailout with larger rivals.“We saw it on the short side when GameStop blew up. Now we are seeing it on the long side,” Hogan said.