A subject near and dear.
From The Baffler, No. 66, December 2022:
In This House We Prey
Indicted on insider trading charges and barred from investing other people’s money, erstwhile hedge fund manager Bill Hwang turned to investing his own. In 2013, he established a private firm, Archegos Capital Management, with the $500 million or so he had left after paying over $60 million in fines and disgorgements. Hwang, who, in his own words, invests “according to the Word of God and by the power of the Holy Spirit,” hoped to continue “God’s work” of helping companies “establish an appropriate market price.”
Hwang quickly leveraged himself to the hilt by simultaneously borrowing from multiple investment banks and purchasing large derivative stakes in public companies. When share prices fell in early 2021, each of these banks individually called in their loans, apparently unaware that Hwang had obligations to multiple other brokers. Archegos had no choice but to default on its margin calls, leaving six banks with a total of $10 billion in losses and tumbling stock prices. Credit Suisse alone reported a $5.5 billion hit—equivalent to five years of pre-tax profits in its investment banking division. One reason why Hwang’s risk-taking was invisible to both regulators and brokers was because Archegos operated as a “family office”—a vehicle wealthy families use to manage, protect, and pass on their asset holdings. As such, it was covered by special privacy protections that were reaffirmed by the Dodd-Frank Act of 2010.
With Archegos’s thunderous collapse, this once-secretive method of dynastic wealth management came crashing into public view. It has become de rigueur for the very rich—of new and old extraction—to channel their personal and family assets into a family office, thanks to the stupendous inflation in asset prices induced by the Federal Reserve’s unconventional monetary policy following the global financial crisis of 2008. As wealthy households watched the value of their assets soar into the billions, they found they could rely exclusively on their newly inflated family fortunes to stake out independent positions in the private investment market. They have since become a disruptive force on Wall Street, pursuing deals that were once reserved for private equity firms and hedge funds.
Fearful of losing their regulatory privileges in the wake of the Archegos debacle, family office associations rushed to erect a cordon sanitaire between themselves and Hwang. As congressional reformers held up Archegos as a cautionary tale of well-heeled hubris, insider lobbying groups disavowed all affinity with their prodigal brother. Archegos, they claimed, was a hedge fund in disguise; and Hwang was just one of many hedge fund managers who had converted to family office form as a matter of regulatory expediency in the wake of Dodd-Frank. Traditional family offices, it was implied, were inherently conservative investors who would never have countenanced the kind of high-risk swap deals undertaken by Hwang.While each of these claims were plausible, none of them were mutually exclusive.
Many of America’s newly minted billionaires come from the world of alternative asset management, so it is hardly surprising that in looking to manage their wealth, they would deploy the same cutthroat methods they had honed as hedge fund managers or private equity partners. Hwang’s history of fraud may be a red herring here, as it distracts from the more significant fact that alternative asset managers as a class are turning into dynasts before our eyes. It is not only regulatory expediency that has led the most successful private equity and hedge fund managers to set up family offices but the fact that so many of them now dispose of fortunes liable to long outlast them.
The lesson to be drawn from the Archegos drama, then, is not that the genuine family offices are to be separated from the pretenders, but that dynastic wealth holders have become a danger to us all. Archegos has been compared, with good reason, to Long Term Capital Management, the hedge fund whose collapse in 1998 posed such acute danger to the financial system it had to be bailed out under the auspices of the New York Federal Reserve to the tune of $3.6 billion. Today, family offices are estimated to hold at least $6 trillion in assets—more than the entire hedge fund industry. If one little-known family office is capable of wiping billions off the balance sheets of six investment banks, how long before the Federal Reserve and Treasury step in to prop up a single family fortune?
Billionaire Protection Racket
The early twenty-first century has been kind to billionaires. The decade following the global financial crisis witnessed the largest spike in wealth concentration in postwar America, most of it the result of asset price gains accruing to the already rich. During the peak months of the pandemic, between 2020 and mid-2021, surging asset prices catapulted almost one hundred new billionaires onto the Forbes list of richest Americans.Just as significant as the scale of this wealth is its distinct organizational form—private, unincorporated, and often family-based, as opposed to corporate, publicly owned, and managerial. Inflating asset prices have released the richest Americans from the grip of outside investors, turning personal and family wealth holders into standalone economic and political forces, at least as powerful (if not more so) than the old elite of corporate CEOs, investment bankers, and party factions.....
....MUCH MORE
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