If any of you have ever played live poker with me, you are bound to hear a specific joke of Santa Banta -- slipping over a banana peel. The joke goes like this: Once Santa slipped over a banana peel and fell. Later he saw another banana peel and groaned, “Oh no! I have to slip again”. I say this joke aloud whenever I see a repeated dumb play from a poker player where he ends up gifting most of his stack.

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The week before last, many investment banks burned a hole in their pockets after they were forced to liquidate stocks held on behalf of Bill Hwang-owned family office Archegos Capital Management, through a swap transaction. To cut a long story short, Archegos had structured similar deals for the same set of stocks with multiple investment banks, without the bankers being aware of it. When the stocks faltered and Archegos failed to pony up the additional margins, the investment banks rushed to dump them all at once, causing prices to nose dive and ending up with red ink in their trading books.

Nomura has said that it will incur losses of around $2 billion, Credit Suisse’s losses are estimated to be around $5 billion. Other investment banks say they haven’t lost money, but one can’t say for sure. The reason I see the losses of Credit Suisse, Nomura and other bankers as an act of dumbness is Bill Hwang’s track record. In 2012, Bill Hwang had pleaded guilty to insider trading and agreed to a $44 million fine to SEC.

Also read:

Why regulators failed to spot the ticking time bomb at Archegos

The SEC said Hwang and his business had short-sold three Chinese bank stocks based on inside information—borrowing the shares, selling them high, and aiming to buy them back low and pocket the difference. There are a lot of crooks in financial markets, but based on the SEC’s description of Hwang’s actions, he was less a garden-variety fraudster than a triple-crown winner of financial cheating: an insider trader who got unfair market discounts and tried to manipulate prices through other means.

Goldman Sachs had blacklisted Hwang until 2018, given his dubious record. By then, Hwang had become too big to ignore, especially since he was shoveling millions by way of commission in the direction of Goldman's rivals. The greed among market intermediaries and investors is so high that they somehow always forget very recent history at the first chance of making what they think to be easy profits. There are no records of any wrongdoing here prima facie, but I am pretty sure that risk management rules may have been loosely interpreted, or just followed in letter and not in spirit.

I have seen a very similar behavior among Indian investors supporting companies which are known to short change investors. There were enough people backing companies like Deccan Chronicle and Manpasand Beverages despite enough data of wrongdoing.

I wish someday people can learn from Santa’s mistakes and not slip again. But that would take the fun out of markets, wouldn’t it?

(Edited by : Jerome)

First Published:Apr 6, 2021 3:48 PM IST