Archegos collapse: $20 billion in losses, but a win for compliance

Late in March, a fund managed by Bill Hwang, Archegos Capital, was unable to meet margin calls, leading to colossal sell downs of stock and, ultimately, the loss of billions for some banks. There are ongoing reviews, assessments, and investigations into what happened, though there is currently no suggestion Hwang or Archegos undertook any unlawful activity or breached any regulations. Regulatory action is likely, but I assure you it is not all bad news.

On the contrary, I believe this will be yet another episode that champions the importance of the voice of the compliance professional.

The fact is, failure is good for the compliance profession, because it causes others to ponder how losses could have been avoided. When shareholders learn compliance professionals protested and sought to resist prospective customers and/or transactions, they become frustrated, even angry.

Here is where I find the positive in a $20 billion loss: It could and should have been avoided had compliance professionals been listened to. Most readers will now be familiar with Hwang’s backstory, but many did not know of him before this collapse. In 2012, Hwang was running a hedge fund called Tiger Asia when the Securities and Exchange Commission accused him personally of crossing a wall and subsequently using information regarding pending share offerings for two Chinese banks. Hwang settled the case without admitting any liability, and Tiger Asia paid a penalty for wire fraud.

Of course, these circumstances had an adverse impact upon Hwang’s reputation, and notwithstanding the extensive range of business relationships he held with major banks and prime brokers on Wall Street, some viewed him as high risk. Surely, some compliance professionals determined he presented an unacceptable level of risk. While Hwang and Archegos had successfully cultivated relationships with some of the biggest names on Wall Street, it took years for the firm to woo Goldman Sachs after someone at the bank saw the red flags.

Yes, those protests were ultimately in vain, but they were voiced, registered, and acknowledged. It should not be a case of, “We told you so,” but instead, “Next time, you may want to listen to us and act accordingly.”

It has been reported Goldman Sachs suffered minimal or no losses as a result of the collapse of Archegos, whereas the losses at Credit Suisse are estimated to have exceeded $4.5 billion.

All of this raises the importance of the voice of compliance and suggests we are winning the argument. Shareholders will once again suffer because businesses operated beyond the boundaries of reasonable controls; risks were not properly assessed or managed; and risk factors were ignored or not discovered. This increases the value of sound risk management, which includes robust compliance.

It is rarely possible to identify instances where compliance and risk professionals won the argument and rejected the proposed business and the potential losses. Meanwhile, when the reverse happens, the wrong kind of headlines are made. The fact is, failure is good for the compliance profession, because it causes others to ponder how losses could have been avoided. When shareholders learn compliance professionals protested and sought to resist prospective customers and/or transactions, they become frustrated, even angry.

Increasingly, shareholders want to hear the voice of the compliance professional, and damned is the executive who ignores them. Yes, many of our conversations are difficult, because commonly they involve the rejection of short-term business gains, benefits, and profits. In a world driven by quarterly figures, there are many who strongly argue for the short term; it is cases like this that strengthen the position of the compliance professional and enable banks/firms to avoid long-term losses.

Collectively, we have a lot to thank our courageous, outspoken peers for. Kudos to those of you that win the arguments.