By Pam Martens and Russ Martens: April 9, 2021 ~
Yesterday, Senator Sherrod Brown, the Chair of the Senate Banking Committee, released the content of letters he had sent to Goldman Sachs, Morgan Stanley, Credit Suisse and Nomura regarding their interactions with Archegos Capital Management. Archegos is the hedge fund styled as a “family office,” that is making headlines around the world for blowing itself up within a week’s time while inflicting billions of dollars of losses on what are supposed to be heavily supervised global banks.
The letters to Goldman Sachs, Morgan Stanley and Nomura were addressed to their CEOs while the letter to Credit Suisse went to its General Counsel. All four of the letters contained the same ten questions, with only minor variations.
Questions five, six and seven of Brown’s letter open some very thorny subjects that could have serious legal ramifications for the banks involved.
Question five asks this:
“Identify the broker-dealer, bank, and other entities, directly or indirectly, involved in transactions with Archegos and that participated in the margin call and resulting stock sales.”
This question is going to produce beads of sweat on brows across Wall Street. The trading accounts that at least some of the banks arranged for Archegos were structured as derivative contracts where Archegos was able to obtain leverage of more than 6 times the cash it was putting up as collateral. The contract allowed the banks to claim they owned the stocks despite the fact that Archegos selected the stocks, directed the trading in the accounts and got the upside as well as the downside in the account. In exchange, the bank collected fees.
By asking whether this trading was occurring at the broker-dealer subsidiary or the federally-insured banking unit of the financial institution, the Senate Banking Committee can quickly zero in on what laws may have been violated and whether the safety and soundness of a federally-insured bank was put at risk with 6 to 1 leverage provided to a hedge fund run by Sung Kook (Bill) Hwang, who was previously charged by the SEC with insider trading and stock price manipulations.
The question also allows the Committee to know which federal regulators to call if it holds hearings on the matter. The Securities and Exchange Commission is the federal regulator of broker-dealers and stock trading while the Federal Reserve, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) oversee banks. (In the case of the Federal Reserve, it oversees the bank holding company.)
Question six gets into the highly debatable question as to whether the banks could legally shift the ownership of this account (“economic interest”) back and forth between itself and Archegos like a ping pong ball. It asks this:
“Describe any policies or procedures relevant to the entities in item 5 that address providing to U.S. based entities total return swaps or similar transactions referencing publicly traded stocks that provide an economic interest that would be subject to regulatory reporting with the SEC or other regulators if the referenced stocks were directly held.”
According to reporting in the New York Times, one of the stocks held by Hwang’s Archegos was “$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.”
If the New York Times report is correct, by the middle of last month Archegos held approximately 208 million shares of ViacomCBS, or a stunning 34 percent of its total outstanding shares. But because the global banks were claiming technical ownership of the shares for reporting purposes, Archegos was able to avoid making SEC filings that would have alerted both public investors and ViacomCBS itself that a hedge fund had acquired this huge stake.
Question seven is a real humdinger and invokes thoughts of criminal investigations by the Antitrust Division of the Justice Department. It asks:
“To address news reports regarding the Archegos margin call, please explain [name of bank] participation in, or consideration of, any coordination with other banks to sell, or to refrain from selling, stocks related to Archegos transactions.”
This question includes a footnote to a March 30 article that appeared in the Financial Times, which carried this eyebrow-raising tidbit:
“Before the troubles at the family office burst into public view at the end of the week, representatives from its trading partners Goldman Sachs, Morgan Stanley, Credit Suisse, UBS and Nomura held a meeting with Archegos to discuss an orderly wind-down of troubled trades.”
If this report is correct – and other news outlets have also reported that such a meeting did occur – it raises a host of serious legal issues.
At the top of the list of concerns is that no federal regulator was called in to preside over this negotiation, thus raising antitrust concerns about these banks coordinating their actions in secret.
Another concern is that when a customer breaches industry rules on maintenance margin, there are set, non-negotiable actions required, like providing a prescribed period of time to meet the margin call and, if it is not met, then selling out the account. If these banks rewrote industry rules on initial and maintenance margin with their bespoke (customized) derivative contracts, or if they simply thought they could contain losses by negotiating in secret, these are serious legal issues.
This potential antitrust issue with the global banks comes after years of felony charges against global banks for coordinating their actions to rig the Libor interest rate benchmark and foreign exchange trading. In 1996 the Justice Department settled charges against 24 Wall Street firms (including Goldman Sachs, Morgan Stanley, and Credit Suisse) for rigging the Nasdaq stock market. The conduct was so pervasive that as part of the settlement the Justice Department required the firms to “monitor and tape record telephone conversations of their Nasdaq traders” going forward.
But the Justice Department has for decades stood down on other outrageous antitrust behavior on the part of global banks.
In 2016, Bloomberg News reporters Greg Farrell and Keri Geiger broke the story that Wall Street’s top in-house lawyers for the mega banks had been meeting in secret for two decades with their counterparts from foreign global banks. The 2016 meeting took place at an exclusive luxury hotel in Versailles.
At the secret 2016 meeting, the following lawyers attended: Goldman Sachs General Counsel, Gregory Palm; Morgan Stanley’s Eric Grossman; Romeo Cerutti of Credit Suisse Group AG; Stephen Cutler of JPMorgan Chase (a former Director of Enforcement at the Securities and Exchange Commission); Gary Lynch of Bank of America (also a former Director of Enforcement at the SEC); Citigroup’s Rohan Weerasinghe; Markus Diethelm of UBS Group AG; Richard Walker of Deutsche Bank (again, a former Director of Enforcement at the SEC); Robert Hoyt of Barclays; David Fein of Standard Chartered; Stuart Levey of HSBC Holdings; and Georges Dirani of BNP Paribas SA.
The fact that so many former Directors of Enforcement at the SEC don’t think they have anything to fear from the Justice Department when Wall Street’s top lawyers meet in secret with their counterparts from other global banks, tells you a lot about how antitrust law has been eroded in the U.S. There were no public announcements about these meetings, no published minutes and no press in attendance.
With the perpetual revolving door between Wall Street’s law firms, the U.S. Department of Justice and the Securities and Exchange Commission, it may be impossible to meaningfully root out corruption on Wall Street without a major overhaul of existing law. But it would take only the restoration of the Glass-Steagall Act, separating federally-insured commercial banks from the Wall Street casino’s trading houses, to prevent another catastrophic economic collapse like 2008. (See Only Glass-Steagall Can Save the U.S. from Another Epic Crash.)