FINANCE BRIEFING: Banks Briefing Regulators After Hwang’s Blowup

Wall Street banks grappling with the implosion of Bill Hwang’s investment firm spent yesterday briefing U.S. regulators as Washington starts to dig into one of the biggest fund blowups in years.

The Securities and Exchange Commission summoned the banks for hasty meetings on what triggered the forced sale of more than $20 billion of stocks linked to Hwang’s Archegos Capital Management, said people with knowledge of the matter who asked not to be named in discussing private conversations. The calls also involved the Financial Industry Regulatory Authority, with officials quizzing brokerages about any impacts on their operations, potential credit risks and other threats, said one of the people.

Hwang’s brokers included Credit Suisse Group, Nomura Holdings, Goldman Sachs Group and Morgan Stanley. The speed at which Archegos ran into trouble and Wall Street’s swiftness in liquidating its positions shocked traders, while prompting a race at U.S. agencies to keep up with events.

“We have been monitoring the situation and communicating with market participants since last week,” an SEC spokesperson said in emailed statement. A Finra spokesman declined to comment.

The banks either declined to comment or didn’t immediately respond to requests for comment.

Credit Suisse and Nomura warned investors earlier yesterday that they may face “significant” losses after an unnamed U.S. hedge fund client defaulted on margin calls. Goldman told investors and clients that any impact from Archegos is likely to be immaterial, a person familiar with the matter said.

Oversight Questions: The blowup has prompted questions about oversight, particularly because Archegos amassed tens of billions of dollars in stock bets without disclosing its positions to other market participants.

Hwang’s family office did so by entering into derivative transactions with banks that gave him exposure to companies without buying actual shares. He also maximized his wagers by borrowing significant amounts of money from his brokers, increasing risks to banks.

The episode has rekindled fears of earlier hedge fund failures that blew holes in lenders’ balance sheets. Still, the industry is arguably much better equipped to handle such meltdowns because of rules implemented after the 2008 financial crisis that forced banks to hold significantly more capital as a buffer against losses.

The fallout reached the highest corridors of power in Washington, with White House Press Secretary Jen Psaki telling reporters that the Biden administration was monitoring the situation. Read more from Jesse Westbrook, Sridhar Natarajan and Matt Robinson.

Hwang’s Insider-Trading Shackles Were Loosened by SEC Last April Eleven months before his Archegos Capital Management blew up, Bill Hwang quietly got U.S. regulators to remove some of the shackles that had been placed on him years earlier as part of an insider-trading settlement.

Last April, the Securities and Exchange Commission lifted a ban on Hwang working at or running a securities firm. Though the ruling was little noticed at the time, it raises questions about whether the one-time star hedge fund trader was plotting some sort of comeback — an effort likely derailed by the forced liquidation of more than $20 billion of stocks held by Archegos.

Hwang had been prohibited from associating with brokerages after his former firm, Tiger Asia Management, pleaded guilty in 2012 and paid more than $60 million in penalties for trading on illegal tips about Chinese banks. Read more from Matt Robinson and David Voreacos.

More Headlines:

• One of World’s Greatest Hidden Fortunes Is Wiped Out in Days
• Banks Feel Brunt of Archegos Fallout With Credit Mostly Intact

Happening on the Hill

Senate Democrats Want Capital Gains Tax at Death: Heirs receiving more than $1 million in capital gains upon the previous owner’s death would no longer be able to avoid tax on them under a proposal from Senate Democrats. When someone dies, the growth in value of assets they pass down is free of tax due to what’s known as a step-up in its basis, which is generally the assets’ initial cost and the value of any investment in the property. Any growth in inherited assets’ value over $1 million while the deceased person owned them would be subject to capital gains taxes under yesterday’s discussion draft. Read more from Lydia O’Neal.

• Read more: Democrats Weigh Capital Gains Tax Hike for Millionaires at Death

Toomey Calls Fed’s Climate Research Mission Creep: Sen. Patrick Toomey (D-Pa.) said the San Francisco Federal Reserve’s research into topics including climate change and racial justice is “politically charged” and could result in “mission creep” from the independent agency into policy matters usually left to elected officials. Toomey, the ranking member of the Senate Banking Committee, addressed the letter to San Francisco Fed President Mary Daly, asking for records pertaining to the bank’s seminar on climate economics, racial-justice research and its research and community development expenses from the last 10 years.

The San Francisco Fed said it had received the letter and looked forward to discussing the contents with Toomey’s office. Read more from Catarina Saraiva and Craig Torres.

• Fed’s Bostic Says Merit to Reparations: Meanwhile, Federal Reserve Bank of Atlanta President Raphael Bostic said there’s merit to considering reparations as a way to counter the impact of racism and inequality in the U.S. “There are definitely merits to it in the sense that, if people have been harmed by laws, then there should be a discussion about redress,” Bostic told CNN Business in an interview published on its website. Read more from Steve Matthews.

Push to Revive Key Muni-Refunding Tool Gains Steam in Congress: Efforts are heating up in Washington to address a small provision of Republicans’ 2017 tax legislation that has had big ramifications in the $3.9 trillion municipal-bond market. The law eliminated the tax-exemption on so-called advance refunding bonds, a refinancing tool that at one point accounted for nearly a third of all issuance in the state and local-bond market. For years, lobbying groups and lawmakers have sought to reverse the change, and now a bipartisan group of lawmakers has made another push to do so. Yesterday, Reps. Dutch Ruppersberger (D-Md.) and Steve Stivers (R-Ohio) reintroduced a bill that would reinstate tax-exempt advance refundings. In February, two senators made a similar push, citing the need to help municipalities financially during the pandemic, Amanda Albright reports.

Biden Signs Law Extending Debt Cap for Small Business Bankruptcy: President Joe Biden signed legislation to extend the expiration date of a temporary measure that allows more small businesses to take advantage of a streamlined bankruptcy process. The COVID-19 Bankruptcy Relief Extension Act (H.R. 1651), which Biden signed into law March 27, gives small businesses with up to $7.5 million in debt another year to file under Subchapter V of the bankruptcy code, Leslie A. Pappas reports.

Jayapal Calls for Oust of SSA Officials: Social Security Commissioner Andrew Saul and Deputy Social Security Commissioner David Black should be fired after stimulus payments were delayed, Congressional Progressive Caucus Chair Pramila Jayapal (D-Wash.) said. Jayapal said the IRS first sought data for automatic payments from the Social Security Administration two weeks prior to the signing of a $1.9 trillion relief plan, but the SSA refused to provide those files until March 25, Megan Howard reports.

Regulation & Banking

Goldman Investor Suit Prompts High Court to Signal Narrow Ruling: The U.S. Supreme Court signaled it is headed toward a narrow ruling on shareholder lawsuits as the justices grappled with accusations that Goldman Sachs misled investors in the lead-up to a 2010 Securities and Exchange Commission fraud lawsuit against the firm. Hearing arguments yesterday by phone, the justices suggested they might tell a lower court to revisit whether Goldman Sachs shareholders could press a class action suit. But several justices also indicated they had only minor quibbles with the reasoning of the appeals court decision to let the suit go forward.

The clash is the court’s first over shareholder lawsuits since former President Donald Trump appointed three justices and created a 6-3 conservative majority. Corporate advocates are looking to take advantage of that majority to put tighter limits on shareholder lawsuits. Read more from Greg Stohr and Robert Schmidt.

SBA Launches Tool for PPP Hold Codes Stalling Applications: The Small Business Administration rolled out a tool to clear much-aggrieved “hold codes” that have barred Paycheck Protection Program applicants from submitting applications. The new tool uses machine learning technology to sort through which applications may be fraudulent. Read more from David Hood.

Fed Requests Information on Use of AI: The Federal Reserve and other agencies are gathering information on how financial institutions use artificial intelligence. The Fed, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of the Comptroller of the Currency issued a joint statement announcing the request. “The agencies seek information from the public on how financial institutions use AI in their activities, including fraud prevention, personalization of customer services, credit underwriting, and other operations,” the statement said, Alister Bull reports.

More Headlines:

• Beam App Banned From Mobile Banking Under FTC Settlement
• DOL Unwinds Trump Rule That Upped Union Financial Oversight

What Else to Know

Biden Seeks to Reverse Decades of Disparity in Next Economy Move: More than a half century after Lyndon Johnson’s war on poverty, Biden is planning to take on the nation’s enduring challenge of inequality with a mass expansion of government spending and a revamp of the tax code. The effort, which Biden will start to detail in a speech tomorrow in Pittsburgh, is already proving just as divisive among economists as it is among lawmakers. While right-leaning economists warn about damage to overall growth from higher taxes on companies and the wealthiest Americans, liberals say the “trickle-down” approach of recent decades has failed and it’s time for a new strategy. Read more from Christopher Condon and Payne Lubbers.

Treasury Official Joins Think Tank: Former Trump administration official Justin Muzinich has been named a distinguished fellow within the David Rockefeller Studies Program at the Council on Foreign Relations, where he’ll be focused on national security and economic policy-related issues. Muzinich most recently served as deputy secretary of the Treasury Department, where he also managed the portfolios of the undersecretary for terrorism and financial intelligence and the undersecretary for domestic finance.

During the Covid-19 pandemic, he helped lead the U.S. government’s response to the economic crisis, earning him praise from Sen. Amy Klobuchar (D-Minn.). “Justin worked effectively with both sides of the aisle on the bipartisan Cares Act, helping millions of Americans and small businesses in a time of need,” she said in a statement.

He served as counselor to then-Treasury Secretary Steven Mnuchin from 2017 to 2018 and helped juggle the competing interests in the Republicans’ tax overhaul that was signed into law in 2017. Prior to joining the administration, Muzinich worked as policy director for Jeb Bush’s 2016 presidential campaign, but most of his private-sector career is in finance, including serving as president of Muzinich & Co., an international investment firm founded by his father, Megan R. Wilson reports.

Ex-SEC Chairman Clayton to Advise Brevan-Backed Firm on Crypto: One River Asset Management, a $2.5 billion firm whose cryptocurrency funds are backed by hedge fund titan Alan Howard, brought on former Securities and Exchange Commission Chairman Jay Clayton as an adviser, lending credibility to an emerging asset class that still lacks comprehensive regulation. Clayton will be one of three advisers to One River founder and Chief Executive Officer Eric Peters. The other two are Kevin Hassett, who served as chairman of the Council of Economic Advisers under Trump, and Jonathan Orszag, an economic consultant who previously worked in the Clinton administration, Erik Schatzker reports.

Disabled Student Borrowers to Get Debt Canceled: Tens of thousands of disabled student borrowers will have $1.3 billion in student loans wiped out after the debt was added back to their balances during the coronavirus pandemic. The Education Department also said that it would waive requirements for another 190,000 disabled borrowers to prove their incomes for the duration of the coronavirus pandemic. Read more from Andrew Kreighbaum.

More Headlines:

• New York, London Winning Finance Hubs’ Race for Vaccinations

With assistance from Megan R. Wilson

To contact the reporter on this story: Brianna Jackson at bjackson@bgov.com

To contact the editors responsible for this story: Zachary Sherwood at zsherwood@bgov.com; Giuseppe Macri at gmacri@bgov.com; Michaela Ross at mross@bgov.com