Wall Street was effectively giving 85% margin loans on concentrated stock positions — thwarting the Fed’s Reg T and its own margin rules.
The short version on what the collapse of the Archegos Capital Management hedge fund signifies is that it was one more in a long series of Wall Street’s maniacal wealth extraction schemes for the one percent that blew up in its face.
Let’s start with press reports that major Wall Street firms were making 85 percent margin loans to purchase stocks against 15 percent cash collateral put up by Archegos. The Federal Reserve’s Regulation T (Reg T) is codified in 12 CFR § 220.12 and spells out margin requirements on stock trades as follows:
“50 percent of the current market value of the security or the percentage set by the regulatory authority where the trade occurs, whichever is greater.”
Under the seeming law of the land, broker dealers on Wall Street could not have loaned Archegos more than 50 percent to make its stock purchases. But to get around this, the banks did not open a margin account for Archegos. According to the press reports, the banks instead structured derivative contracts where they loaned 85 percent of the money to Archegos to make the trades while, technically, retaining ownership of the stock themselves.
By not following federal regulatory rules for margin accounts and stock trading, the Wall Street firms fell into a number of traps.
Every prudent brokerage firm on Wall Street has far stiffer requirements than 50 percent margin if the customer is loading up on the same stock. That’s because the customer is concentrating his risk in one name (that could receive a negative credit rating or other negative news) as well as concentrating his risk that he will be able to exit that position without driving down the share price.
According to reporting in the New York Times over the weekend, Archegos owned “$20 billion in shares of ViacomCBS, effectively making him the media company’s single largest institutional shareholder. But few knew about his total exposure, since the shares were mostly held through complex financial instruments, called derivatives, created by the banks.”
Let’s pause here for a moment and do the math. The Times’ report indicates that the $20 billion value held by Archegos in ViacomCBS shares occurred “mid March.” Using an average price between March 15 and March 19 of $96, that would mean that Archegos owned 208,333,333 shares of ViacomCBS. According to the most recent April 2 proxy filing for ViacomCBS, as of March 26 it had 605,267,057 Class B shares outstanding, meaning that Archegos owned a stunning 34 percent of the outstanding shares without anyone being the wiser…