Until a few weeks ago, lenders considered Archegos Capital Management safe. Last week they held a financial fire sale for their assets.
The simplest explanation is that the banks did not have enough collateral and mistakenly assumed that the stocks they held could easily be sold.
The losses that a handful of the world’s largest banks have suffered came from their prime brokerage business, a relatively low-risk business that trades and lends to hedge funds and other sophisticated investors such as family offices in the case of Archegos.
The prime brokers who managed the Archegos account believed the risk was limited because the fund’s collateral is in the form of cash and the fund relies on the performance of large public stocks, according to people familiar with the arrangement.
But the Archegos chaos has uncovered a systemic problem with prime brokers: they usually don’t know what their clients are doing to their competitors and are therefore blind to some of the risks they face. Hedge funds don’t share this information because they don’t want banks or competitors to try to take advantage of their trading.