Why did Wall Street loan billions to alleged fraudster Bill Hwang?

Bill Hwang secured billions in dollars in financing from leading Wall Street banks with lies that ranged from assurances he could quickly exit his positions to claims he had large holdings of easily traded stocks like Apple and Google, according to US authorities.

The banks apparently took Hwang’s words at face value as they entered into leveraged derivatives trades with Hwang’s family office, Archegos Capital Management. These deals enabled him to hide the size of his enormous positions in a half dozen US stocks from the broader market and the banks themselves before the scheme collapsed in March 2021.

Following Hwang’s arrest on Wednesday on federal racketeering, fraud and market manipulation charges, Wall Street faced renewed questions about how sophisticated trading desks and compliance departments fell for his alleged misrepresentations — and lost more than $10bn in the process.

“Systems used to keep track of the risk were not kept up to date, in terms of technology,” said Darrell Duffie, a Stanford finance professor. “There were gross lapses in common sense about how much risk of loss was too much for one customer, and an apparent unwillingness by some managers to confront Archegos with hard questions.”

Archegos’s alleged deceptions were detailed in an indictment filed by the US Department of Justice and in complaints issued by the Securities and Exchange Commission and the Commodity Futures Trading Commission.

“These deceptions induced Archegos’s counterparties to continue to transact with it and extend leverage beyond what the counterparties’ risk tolerance would have otherwise permitted had they known the truth,” the SEC said in its complaint.

Hwang pleaded not guilty during an arraignment in Manhattan federal court, while his attorney said the indictment “has absolutely no factual or legal basis”.

Archegos kept a low profile in part by using derivatives that shielded it from public scrutiny. While the investment group would typically first purchase the stock of a company it wanted to bet on, it shifted tack once its ownership approached 5 per cent of the business — a threshold that would trigger regulatory disclosures in the US.

Instead, it would increase its positions through instruments known as total return swaps. That meant Archegos could win or lose money depending if a stock rose or fell, but that the bank it struck the agreement with was the actual purchaser of the shares.

Hwang’s derivatives deals enabled him to inflate his assets from $1.6bn to more than to $36bn in just 12 months. At one point, Archegos owned or had derivative exposure to more than 50 per cent of outstanding shares in media company ViacomCBS, now known as Paramount Global.