Until a few weeks ago, lenders thought Archegos Capital Management was safe. Last week, they were holding a financial fire sale for its assets.
The simplest explanation is the banks didn’t hold enough collateral, and they wrongly assumed the shares they held could be easily sold.
The losses suffered by a handful of the world’s biggest banks came in their prime brokerage business, a relatively low-risk operation that trades for and lends to hedge funds and other sophisticated investors such as family offices in the case of Archegos.
The prime brokers that handled the Archegos account believed that risk was limited because the fund’s collateral was in the form of cash and because the fund was betting on the performance of large, public stocks, people familiar with the arrangement said.
But the Archegos mess has exposed one systemic issue with prime brokers: They typically don’t know what their clients are doing with their competitors, leaving them blind to some of the risks they face. Hedge funds don’t share that information because they don’t want banks or competitors trying to take advantage of their trade.