This scandal demonstrates that the regulatory architecture of family offices architecture is flawed and creates a refuge for those, like Bill Hwang and Steve Cohen who should have been banned for life. Penalties for white collar crime are virtually on non-existent and enforcement is extremely poor. Dodd-Frank did nothing to solve this: it altered regulation on family offices, removing the previous SEC 15 client threshold registration exemption but allowed entities that primarily managed their own “family” money to exempt themselves from regulation. Bill Hwang had been fined $44m to settle illegal trading charges in the US and banned from trading in Hong Kong – why was he allowed to continue trading in the US? $10bn of assets seems a lot to be the personal money of someone who was not seen as a prominent hedge fund manager.
Family Office relationships with Wall Street need to be revisited and further interrogated. To have premier tier Wall Street investment banks acting as prime brokers to entities that have exhibited adverse behaviour in the past demonstrates that know your customer policies are either becoming too lackse or being improperly enforced so soon after recent multi-billion dollar fines. After 1MDB, banks should have been more wary to deal with suspicious pools after capital both from a client-take-on as well as leverage perspective.
To have $10bn plus pools of capital sitting armed amplified with vast leverage in unregulated, opaque family offices which have systematic repercussions will give regulators awkward reminders of the Long Term Capital Management debacle.
To quote Warren Buffett, “A bull market is like sex. It feels best just before it ends”. Low interest rates, amplified leverage, seemingly calm markets are a cocktail of ingredients that most likely will end in tragedy for other unregulated pools of capital.
To quote Warren Buffet, “It takes 20 years to build a reputation and five minutes to ruin it”. In this instance, Wall Street banks should have been more careful both in terms of how much money they lend and to whom.
One question that Archegos for Family Offices raises is the extent to which individuals who have been censured for unscrupulous behaviour (alongside Steve Cohen from Point72) should then be allowed to revert back to running private vehicles without external capital. The same patterns of behaviour that led to earlier fines persist.
Credit Suisse in particular will be asking questions about their risk management policies to have the Archegos Capital losses so soon after Greensill has inflicted both reputational and financial losses on the firm and their clients.