Here is the Ugly Math

By Pam Martens and Russ Martens

Wall Street on Parade

April 23, 2021

 

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According to the most recent 13F filings made with the Securities and Exchange Commission, the biggest banks on Wall Street are each sitting on hundreds of billions of dollars of stock positions – which we are now learning include highly leveraged stock positions for hedge funds called family offices.

The purpose of the SEC’s 13F filing is to provide transparency to the public as to the beneficial owners of publicly-traded stocks. Institutions holding more than $100 million in assets are supposed to file the 13F. But as the public learned to its horror over the past month, a reckless family office hedge fund called Archegos Capital Management built up stock positions estimated at $100 billion by borrowing about $90 billion of that from a handful of the largest Wall Street banks.

Archegos had been in operation since 2013, but had never filed a 13F list of its holdings with the SEC because these banks had cooked up a contract (which they are dubiously calling a derivative swap agreement) that allowed the banks to lump Archegos’ stock positions into the banks’ own 13F filings, making it appear to the public as if the banks actually owned these positions.

The highly questionable contract magically did three other things as well: it allowed the banks to avoid the Volcker Rule barring them from owning a hedge fund while still allowing them to loan out their balance sheet to a hedge fund; it allowed them to ignore the Federal Reserve’s Regulation T, which would have limited them to an initial margin loan of no more than 50 percent of the purchase price of the stock; and it allowed them to ignore their own internal broker-dealer rules on loaning against concentrated stock positions. Exactly who was, or wasn’t, paying the capital gains taxes on these stock trades is also an open question — raising the question of a tax-avoidance maneuver.

When Archegos blew up in March and couldn’t meet its margin calls, hefty losses were reported by some of these banks.

Archegos is clearly just one roach in a large roach motel. There are thousands of other family office hedge funds out there and not one federal regulator seems to have any idea of how many more such contracts have been written between the hedge funds and the Wall Street banks.

Every American should be up in arms over this because the banks involved with Archegos also own federally-insured, deposit-taking banks. If those banks blow up again because of their casino culture and tricked-up derivatives, it will be the American taxpayer that once again has a gun put to their head to come to the rescue — in a replay of the bailouts of 2008.

Here’s the math on what we’re talking about. As of their most recent 13F filings for the quarter ended December 31, 2020, this is how much in stocks the following banks are holding for either themselves or secretly for unnamed hedge funds: (Everyone of these Wall Street trading houses own federally-insured, deposit-taking banks.)

Bank of America: $776.2 Billion

JPMorgan Chase:  $680.6 Billion

 

Morgan Stanley:   $647.47 Billion

Goldman Sachs:    $388.6 Billion

Citigroup:              $169.39 Billion

That’s just five banks out of the more than 5,000 that exist in the U.S. and they are holding $2.66 trillion in stocks and the public has no idea if the stocks are actually owned by these banks or by overleveraged, reckless hedge funds which have a history of blowing themselves up.

Three of those five banks (JPMorgan Chase, Bank of America, and Citigroup’s Citibank) are the three largest federally-insured banks in the U.S. Together, the insured banking units of these three financial institutions hold more than $4.8 trillion in deposits.

To get a snapshot of just how widespread the Archegos roach motel problem is to America’s largest banks, we decided to take a sampling to see which other large family office hedge funds are not reporting their stock holdings in a 13F filing with the SEC and, thus, might have a similar type of derivative swap contract with the banks, as did Archegos.

We found that billionaire Michael Bloomberg’s Willett Advisors family office hedge fund hasn’t filed a 13F since 2014 and that filing showed only $273,000 in assets. According to CaproAsia, Willet Advisors is the seventh-largest family office in the world with $25 billion in assets. (Thus, when Bloomberg News’ editorial board tells you that Archegos was “No Big Deal” and that “there’s little regulators need to do,” you might want to take that with a grain of salt.)

The public has also learned recently that the SEC doles out requests to file 13F forms on a confidential basis quite frequently.

According to CaproAsia’s list of the top 10 family offices, billionaire Jeff Bezos’ Bezos Expeditions family office has $107 billion in assets. But the SEC has no 13F filing at all for the entity in its public records.

Then there is billionaire James Simon, founder of Renaissance Technologies, one of the world’s largest hedge funds. (See Did Archegos, Like Renaissance Hedge Fund, Avoid Billions in U.S. Tax Payments through a Scheme with the Banks?) Simon’s family office is called Euclidean Capital. It's 13F filing for the quarter ending December 31, 2020, shows $472 million in assets. But CaproAsia indicates that it manages $21 billion in assets. Are the rest of those assets hiding out on some bank’s balance sheet? Under the SEC’s current, billionaire-friendly, a dodgy system of reporting, it’s all just one big guessing game as to whom owns what.

Another example is billionaire Bill Gates’ family office, Cascade Investment LLC. According to CaproAsia, it ranks number 3 among the world’s largest family offices with $51 billion in assets. Cascade Investment LLC hasn’t filed a 13F form with the SEC since the quarter ending September 30, 2008 (coincidentally, the same quarter that Wall Street blew itself up, taking the stock market along with it). At that point in time, Cascade Investment showed $4.32 billion in stock positions. Its only filings since that time simply show what stocks it’s acquired and sold, but not the 13F which would show the full positions in its portfolio and their value.

We could go on and on, but you get the picture.

 

 

 

 

 

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  • Thank you for sharing another interesting post Enrique. Looking forward to your next posts.

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