The Wall Street Bets story was all about outsiders taking on Wall Street (Click here for our take on Wall Street Bets). The Archegos story is all about professionals inside Wall Street. The Archegos story has a Hedge Fund manager nailed by SEC for insider trading becoming a Family Office fooling the Prime Brokers aka the big banks – which is as inside Wall Street as you can get. That is the obvious difference. Today’s post looks at two similarities between these stories.
- Lots of stimulus money leads to huge betting action between bulls and bears. Stocks can rise 100% for very little fundamental reason, making lots of people think they are investing geniuses So the bearish short sellers get in and are “squeezed” as more bulls get into the action. If this feels more like a video game than accumulating dividends, welcome to the world of Wall Street Bets.
- Even the professionals inside Wall Street, the supposed “smart money”, can make dumb mistakes. The Hedge Funds betting short against GameStop were dumb to go short more than 100% of the stock. The Prime Brokers lending huge amounts to Archegos look equally dumb.
Who wins: Goldman Sachs looks like the smart insider who got out early ie smart risk management.
Who loses: Prime Brokers aka big banks lending to Hedge Funds. Credit Suisse, already reeling from Greensill looks like a loser again.
Likely outcome 1: Prime Brokers will share data about their exposure to Hedge Funds and other leveraged traders.
Likely outcome 2: some regulation to avoid using derivatives to hide how much leverage traders/investors use.
As I write, we don’t know if this will be like Melvin Capital ie a parking lot fender bender or like Lehman in 2008 ie a huge highway crash. How many more traders like Bill Hwang (Archegos) are out there, trading with lots of money borrowed from big banks? We will know in a few days – be careful out there, wear your mask!
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