Leverage, Lamborghinis and Less Machismo

One of the largest margin calls of all time caught the upper echelons of Wall Street by surprise. Ken Moelis, the investment banker who started his career at Drexel Burnham Lambert, was sounding the alarm on leverage for some time. “It’ll all comes down to leverage, it always does,” he told us in February.

Here’s the back story of how the largest global investment banks got blindsided by Archegos Capital Management, a whale of a client that most people had never heard about, by Bloomberg’s Erik Schatzker, Sridhar Natarajan and me.

After Bill Hwang’s hedge fund settled civil claims of insider trading without admitting or denying wrongdoing in 2012, Morgan Stanley was among the quickest to work with him again, and Deutsche Bank was also one of his early backers. Goldman came around in more recent months. None of them knew the extent to which his family office, Archegos, piled into a concentrated set of stocks with leverage from about a half dozen-firms.

Watchdogs are now signaling they are ready to crack down on hedge funds and family-office firms that have operated so quietly for so long. Regulators are seeking to find ways to crack down on excessive borrowing, and SEC officials have telegraphed to banking executives that they are looking for ways to increase disclosures, our sources tell us.

Treasury Secretary Janet Yellen said this week that the Financial Stability Oversight Council has revived a task force to keep an eye on hedge funds, which have shown during the pandemic that they can amplify market stress.

Goldman Sachs and Morgan Stanley each unloaded billions worth of stock to escape real damage from Archegos. Wells Fargo and Deutsche Bank were also able to walk away quite cleanly. Nomura is facing steep losses, while Credit Suisse is at risk of being downgraded -- its outlook cut to negative by Fitch and S&P -- as it deals with the fallout that could bleed into the billions. “The incident raises questions about the quality of risk management, the group’s risk appetite, and adequacy of the risk return profile,” S&P said.

David Herro, whose firm is one of Credit Suisse’s largest shareholders, told my colleague Jonathan Ferro that the incident should be a wake-up call. Here’s his interview on the debacle, which comes after hundreds of millions of dollars in losses for the bank tied to York Capital and even more damages tied to Greensill.

It’s also worth reading Julian Robertson’s interview with my colleague Max Abelson. “I’m a great fan” of Hwang, the billionaire said. “It could probably happen to anyone. But I’m sorry it happened to Bill.”

Lamborghinis, Bugattis

The CEO of crypto exchange Kraken is waiting patiently as one of his biggest rivals goes public. Bitcoin is in boom times and Coinbase was recently worth $100 billion in private markets, and it’s on the verge of a listing. Jesse Powell of Kraken is plotting his own listing in the second half of next year, and is in talks to raise more money in a funding round as he considers acquisitions. Big companies like PayPal, Morgan Stanley and Visa are coming around to crypto.

But what should a Bitcoin be worth, anyway?

“It might be easier to understand if we measure it in terms of Teslas, right, one Bitcoin for one Model 3,” Powell told me and my colleague Emily Chang in a television interview. “By the end of the year I think it’ll be one Bitcoin per Lambo, and probably by the end of next year it’ll be on one Bitcoin per Bugatti. So to me, and to the crypto community, I think those kinds of assets make it easier to measure Bitcoin against, because you never know where the dollar’s going to be.”

With speculation abounding everywhere from stocks, to SPACs and even the lesser-known cryptos, there are real worries about fragilities in markets. Coinbase’s direct listing on Nasdaq is planned for April 14th, people familiar with the matter told Bloomberg. The SEC has been inundated with IPOs and SPACs, though there are signs that the blank-check market is starting to thaw.

Getting Back to Work

Some in finance are yearning for flexibility. Others can’t wait to get back to the power lunches, during which they won their business. Here’s a great read by Abelson and my colleague Hannah Levitt. “The macho-ness definitely will go away,” one industry veteran told them.

Burnout is at all time highs, Jonathan Lister of LinkedIn told me this week during our work-shifting summit at Bloomberg, where we heard from executives across different industries. Lister expects a fair bit of attrition at many firms. At Carlyle, they’re encouraging staff to take summer vacations, as they expect to have people back in offices by September. Even then, there will be a wide range of people who may still work from home for two or four days a week.

“By the fall, we’ll be able to sort of open all of our offices in a more fulsome way,” Reggie Van Lee, Carlyle’s chief transformation officer, told me during the event. “We are hoping for the fall and being agile in the meantime.”

We have a big slate of interviews lined up for Bloomberg Television next week as people come back from the holiday, and we will be closely following the shifting culture of work, any jitters in the market and the Archegos fallout. I hope you join us, and please send all tips and ideas my way in the meantime at sbasak7@bloomberg.net.