Archegos Fiasco was one of 3 ‘near misses’ this year, says El-Erian

Mohamed El-Erian is generally not an alarmist. But he notes that the Archegos Capital Management mess is “the third near miss this year to date”. It means something that could have wrecked the entire financial system.

For El-Erian, Allianz’s chief economic adviser, the collapse of the Archegos Capital Management family office is “one-time”, but it can lead to a credit crunch as banks become more cautious.

On the plus side, it does not detect a “rapid contagion” that would move the entire stock market, and claimed in a video appearance from Yahoo Finance that “at the moment it seems contained.”

Let’s hope so. Remember the collapse of Bear Stearns in the spring of 2008? This foreshadowed the even more serious disintegration of Lehman Brothers the following September – a cataclysm that sparked the global financial crisis and the great recession.

In March, 13 years ago, the reassuring conventional wisdom was that Bear’s demise, along with the festering subprime mortgage mess that prompted him, would be “contained.”

That’s not to say El-Erian sees no danger this time around. He said investors should be wary of “slower contagion forces,” which could cause “financial conditions to tighten,” forcing banks to become more cautious.

“There has been so much liquidity in the system that there has been excess and we will have wing benders like this, but what we don’t want is a build-up, and that’s why it’s really important to watch these – contagions in motion, ”El-Erian said. He has already warned against a overvalued market.

El-Erian said he hoped the Archegos disaster would result in “better discipline in the market because we’ve lost a lot of discipline”.

The forced liquidation of Archegos marks three calamities that could have had widespread effects, he added. The failure at the end of last month in Archegos, a family office founded by investment manager Bill Hwang, rocked Wall Street. The firm’s bets prompted its lenders to issue margin calls, forcing Archegos to get rid of its positions in many stocks. These included ViacomCBS, Discovery, Tencent Music, and Baidu.

The other two near misses El-Erian cited were related: The GameStop stock meme crash in February, which devastated many retail investors, many of whom were Robinhood enthusiasts. And short selling hedge funds who ganged up on GameStop before that, when the stock was on a tear. They were severely criticized in January.

“We have seen it with hedge funds bypassing 140% of the free float. We’ve seen it now with a family office, ”El-Erian said. “This tells you that a lot of people are saying the best thing to do right now is to take advantage. Why? Because financing is so cheap and so available. “

The extent of the damage suffered by investment banks involved in the Archegos mess is still unknown. At this point, Credit Suisse would only say that it has suffered “significant losses”. Nomura is a little more specific, saying he has lost $ 2 billion, while Japan’s MUFG has indicated his hole could be $ 300 million.

According to JPMorgan, the total losses related to Archegos can range from $ 5 billion to $ 10 billion. The firm noted that this fall could be “well beyond normal business scenarios for the industry.”

According to El-Erian, “It was an accident waiting to happen and it happened.”

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