Finance

Bill Hwang's High-Stakes Bet: A Financial Drama Unfolds Amid Market Manipulation Allegations

(Bloomberg) -- In a dramatic crossroads event that unfolded on the eve of March 25, 2021, the financial industry was a spectator to the shattering silence of Bill Hwang's banks, who were anticipating explanations as the sun set over the New York skyline. Facing margin calls from his privately-owned Archegos Capital Management, banks awaited repayment for multibillion-dollar wagers that were rapidly disintegrating. Assurances made by the staff of Archegos remained unfulfilled, leaving its lenders hanging in uncertainty.

The gravity of the situation dawned on the banks' representatives as they gathered on a hastily arranged conference call after 8:20 p.m., with Hwang himself on the line. It was then that the magnitude of Hwang’s predicament fully came to light.

UBS Group AG's risk manager Bryan Fairbanks participated in the tense discussion. In a New York courtroom testimony delivered on Tuesday, Fairbanks unveiled his biggest fear: Hwang had gambled away his $36 billion wealth on a select number of stocks through several financial institutions that were unaware of the overlapping trades. Among those involved were major players like Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, Nomura Holdings Inc., and UBS.

Hwang projected an aura of confidence to the assembly, declaring his belief in his ability to offload positions and meet margin calls with just "a little more time." His assertion that his firm’s equity capital stood "strong" between $9 billion to $10 billion, however, left Fairbanks in disbelief.

"It implied he lost more than half of his portfolio in a single day," Fairbanks recollected, describing the revelation as extraordinarily disturbing. The dire scenario at the heart of the allegations set forth by prosecutors was one of market manipulation and deceit, where favored stocks' prices were artificially inflated. It was insinuated that Hwang, in conspiracy with CFO Patrick Halligan, deliberately misled the banking institutions about the inherent risks as they pursued financial backing for Archegos' hefty speculations. Fairbanks' narrative to the jury marked the commencement of a trial against the backdrop of Archegos' notorious collapse, an event that inflicted at least $10 billion in losses upon its lenders and expedited the downfall of Credit Suisse.

Fairbanks had testified the prior day that Archegos had furnished UBS with nothing but fabrications. If he had the slightest indication of how concentrated the investment firm's portfolio truly was, he "would have hit the panic button." UBS had lost $860 million in trading with Archegos, a significant financial hit.

During the pivotal conference call—a recording which was played in court—despite his seemingly steadfast tone, Fairbanks sensed mounting tension. Hwang disclosed that he managed a "very concentrated book" consisting of roughly a dozen stock names, which confirmed Fairbanks’ concerns about Archegos' repeated dealings across the consortium of banks.

Hwang's claim that he could reduce gross exposure by 15% using both long and short positions further raised alarms; it suggested to Fairbanks that Hwang's losses were accruing at a more rapid pace than his ability to liquidate his portfolio. In the wake of this realization, Fairbanks noted that the subsequent day saw UBS begin the process of unwinding Hwang's precarious positions, a task that took a grueling six to seven weeks. This coincided with other banks attempting to offload the same stocks, resulting in the swift collapse of Archegos and a spiraling increase in their individual losses.

Challenges and Assertions in Court

As the legal representatives of Hwang took the reins of interrogation, they endeavored to assert that the banks had willingly engaged with Archegos, lured by potential fee revenues while blatantly overlooking the accompanying risks. They suggested that the testimonies from such financial counterparts were inherently biased, aimed at diverting blame away from themselves.

Acknowledged by Fairbanks was the stark reality that Archegos represented a "big number" in potential revenue for UBS, but he defended his integrity by referencing instances where he had severed ties with clients of similar stature. When questioned about possible reprimands received from UBS due to the debacle, an objection from the prosecution successfully prevented Fairbanks from responding.

A Tangled Web of Risk and Decision

Fairbanks, no longer employed at UBS, revealed that one of his initial tasks upon joining the bank in 2010 was to close the account of Hwang’s former hedge fund, Tiger Asia Management. The inception of Archegos as a family office in 2013 followed Hwang's departure from Tiger Asia after the firm's guilty plea in an insider trading case.

Despite the cautionary tale of Tiger Asia, UBS resolved to conduct business with Archegos. Fairbanks expressed his initial apprehension due to the baggage associated with the account, using the term "hair on it" to describe its problematic history.

Archegos' trading activity first raised red flags for Fairbanks during the summer of 2020, particularly with its substantial stake in GSX Techedu (now Gaotu Techedu Inc.), a Chinese educational software entity prone to volatility. However, the bank's decision to expand its exposure to $10 billion from $8 billion came after Archegos indicated that their equity comprised more than 30% cash.

The revelation of a grim reality came into focus at the end of March 2021 when UBS flagged Archegos about a looming margin call north of $500 million, scheduled for the following day. Fairbanks held on to a belief that Archegos would honor this financial obligation, bolstered by the firm's reassurance about their swift capacity to liquidate assets for cash.

The ensuing morning, when a $640 million margin call was issued, Archegos' bleak position became increasingly clear. The head trader at Archegos, William Tomita, disclosed that their largest holdings were in companies like ViacomCBS, Discovery, and Tencent Holdings — this starkly contradicted Fairbanks' prior belief that Archegos had diversified into leading tech firms like Apple Inc.

"A sinking feeling" was how Fairbanks described his gut reaction. The prospect of UBS enduring substantial financial loss was, at that point, inevitable.

In a later communication that day, Fairbanks informed Tomita about the "frustration" brewing within UBS senior management due to Archegos' evasive approach in addressing the margin call. The demand for a direct dialogue with Hwang was explicit.

Fairbanks summed up the stance of the Swiss banker with restraint: "hope for the best," but ultimately "prepare for the worst." This cynical yet pragmatic perspective encapsulated the feverish anticipation and looming catastrophe that would eventually engulf one of the most significant players in the financial industry.

The court case continues to unravel the complexities and decisions that lead to one of history's largest financial implosions, with Fairbanks' testimony casting a long shadow over the practices and oversight of major banks and their relationship with investment firms like Archegos.

Read More

For further insights and understanding of the intricate dynamics that led to the predicament of Bill Hwang, Archegos Capital Management, and their involved banks, readers can explore more in-depth coverage by following this link: Ex-UBS Employee Points Finger Squarely at Archegos ‘Lies’.

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