On The Archego Mess It's The Moms & Pops Not The Nomura's That Matter!

There is a big spectacle in the media about the billions of dollars of losses of personal wealth management firm, Archegos, but the media's focus is on the wrong aspect of the problem. The media is focused on the collateral billion dollar plus losses of investment banks like Credit Suisse and Nomura that provided financial services to Archegos. But that shouldn't be the focus it should be on the ordinary investors that got significantly hurt in unwinding Archegos accumulation of investment products as it went on the Mother of all speculative binges. What Archegos did is it took humongous positions in a few stocks but instead of buying these huge positions in stocks outright which would have triggered regulatory ownership restrictions to protect the value of the respective stock what Archegos did is it took these positions by buying investment products generically called swap contract that simulates ownership of the respective stock. More specifically a swap contract is just a contract between two parties that creates a duty on the contract parties to make a payout to the other party based on the price of something like a stock or a commodity so if the price of the stock goes up the seller of the swap contract, the investment bank, pays the buyer the increase if the price of the stock goes down the buyer of the swap contract pays the seller of the contract the amount of the decrease. Another point about these swap contracts is that the buyer of the contract only puts up like twenty percent of the initial value of the stocks at issue in the contract, the buyer's collateral. One critical point about these investment products is that the investment banks that sell them hedge against losses over the contract by actually buying a large portion of the number of stocks that is the subject matter of the contract so if the stocks go up in price and the investment bank has to make a payout it can get the funds by just selling the stocks that it purchased for the hedging so it doesn't lose much money if any at all.

The key part of this story is that when Archegos speculative strategy blew-up when it became obvious it was a losing investment strategy these swap contracts had to be ended or settled. So what these investment banks did is they just dumped into the equity market all the stocks they held in their inventory that were being held as a hedge against a loss for these contracts so as common sense would indicate the value of the respective stock took a nose dive in some cases falling twenty seven percent. Now all the big shots in the media are lamenting the situation and management lack of acuity of the big banks like Nomura and Credit Suisse that were slow to unwind their investment products with Archego and are selling their stock inventory in a price depressed market and taking a big loss. The spot light in this matter is on the wrong harm it should be on all the small ordinary investors who make investment to generate income to provide for themselves and their family many of these ordinary Americans took a major investment portfolio loss that they will not easily if at all recover from. What do I mean here? Many small investors, and I don't personally recommend this investment approach, invest on margin meaning that if they have saved fifty thousand dollars they can stick it in a stock brokerage account where they can purchase stocks on margin meaning for example instead of being able to just buy just fifty thousand dollars of stock they can borrow from their broker up to the amount of their investment so they can buy one hundred thousand dollar of stock and since stocks ordinarily go up in price every year that investor is juicing or multiplying their investment returns the glitch is if the stock goes down in value like ten or twenty percent the broker says I want my money I loaned you back so you have to sell a large portion of your stock position to cover the loan, selling that position in a depressed value state, so the investor takes a huge loss in their investment savings when this happens! I am sure small hedged investors in Viacom stock and Discovery stock that dropped over twenty-five percent when the investment banks dumped their inventory in the market faced margin calls and suffered significant financial losses. Congress should pass regulation to stop investment banks from crashing the market for an individual stock when they are unwinding a swap contract. A regulation like the following make sense to me that saying that when a financial institution sells a swap contract where the number of stocks that is at issue in the contract (the contract volume) is equal to or exceed a quarter of one percent of the outstanding float of that stock that institution cannot sell a number of that stock that is greater than five percent of that contract volume on a single day unless that institution is a market maker of the respective stock and they are responding to offfers to buy the stock in question. This would avoid this Archegos situation where the market sees just a massive dump of stock into the market which practically works like these investment bank sellers are just driving down the price of the stock because buyers of the stock are then put in control of pricing and they can just bid down the stock price and the American people see this unfairness toward ordinary investors taking place!

 

Maybe now democrats will understand how dangerous their incestuous relationship with the big banks is.... Nah.. who am I kidding. If they aren't there to benefit the banks...

 

That is a problem with derivatives. You have no idea how your "investment" (more like speculation) will do, since it is entirely dependent on prices in the market that could be swayed by all sorts of other factors, like certain big investors dumping large volumes of stock.

As for the individual investors who own the stock, they have no right not to have the price drop down because someone else decided to dump lots of stock. Yes, it's unfortunate for them, their stock price went way down, but they didn't have a right for that not to happen.
In addition to that, I believe this is more a short-term phenomena. Prices of stock will not permanently go down due to shares being dumped. It's just temporarily going down because someone is unloading faster than the market has an immediate appetite to buy that particular stock.

I think it's going to set a dangerous precedent if regulatory agencies start applying some of these stricter regulations to individuals and investor groups that are independent, and not offering investments to the public.

The argument I am seeing from the media here seems to be that these investments need to be regulated simply because they are big and could create indirect fallout towards the rest of the market, not because the actual investors directly investing in this need to be protected.
I disagree with it.

It's just a pretext for more control and regulations.

I believe this is a case where it should be left up to the free market.

If people/investors don't like that, then publicly traded companies could voluntarily submit to their own rules, and require buyers of their shares to agree to certain things related to trading, if they think that would make their stock price more appealing to buyers.
Government intervention would be okay only if all involved parties voluntarily consented to that future intervention in a contract.

Sometimes the Libertarian argument is the correct one, and this is such a case.