Steve Sosnick, Interactive Brokers chief market strategist, joins Yahoo Finance to discuss the market impact of the Archegos debacle.
Video Transcript
JULIE HYMAN: Let's bring in Steve Sosnick to talk more about this. He's Interactive Brokers' chief market strategist, and, of course, he watches a lot of the action and has a front-row seat to all of this that has been going on. So Steve, how important, how material is this gonna be to the market?
STEVE SOSNICK: Well, first of all, good morning, Julie. Good morning, Brian. I think this is going to be material, but not-- but still somewhat of a sideshow. I guess the biggest question, as you alluded to, is who else looks like this? How many other funds look like this? I think this is-- I'd be shocked to find that this was a unique structure among heavily-levered hedge funds, family offices, et cetera.
And so we don't really know. I mean, I think there'll be some attempts to try to fact-find what happened. I do think a lot of it had to do with the fact that Viacom and Discovery, particularly, went parabolic over the last month. And then, you know, to think that what potentially ended this was the fact that the Viacom board did what they should have done, which is raise a stock offering when it was about $100 a share.
But the way the stock fell Apart so quickly, really, I don't think anybody anticipated that. I think people anticipated it would fall, but you know, you have to think, were these banks-- first of all, how did a bank with 5 to 10-- how did a person, literally a person; it's a family office-- with $5 to $10 billion end up with exposures that are gonna cost the banks way more than that, potentially?
And what was this guy doing? Was he continuing-- let's assume he had Viacom the whole way. You have a stock that's been in the 40s for years, and all of a sudden, it gets up to 100. Are you continuing to use the excess margin that's created from buying the stock, from the stock appreciation, are you then just using that to continue to lever up? And did all the prime brokers allow this? And what did one broker know about the other?
This is gonna be, in many ways, a lot like the-- you know, a lot like the inquiries after GameStop, although this is gonna be a more interesting one, because it's not the public. It's a very opaque area and a very profitable area of the market.
BRIAN SOZZI: Steve, isn't the other problem here that we could see this year more whale blowups like Bill Long? Because the reality is, a lot of these levered trades have been made about, made caused by, I would argue, low rates. Well, you know what? That is starting to incrementally turn around. So all these trades could have, in effect, go the wrong way of other whale accounts, no?
STEVE SOSNICK: Oh, absolutely. I mean, think about it. We saw SoftBank have problems. Now, they're bigger, but you know, even in August and September, when things were going more smoothly, when you didn't have this rate issue, you saw them get into a little bit of trouble in terms of their options playing.
You know, one of the first adages that I like to think about is never confuse brains with a bull market. And I think right now, you've got a lot of people, you know, who are smart people, but who are doing-- you know, who are getting to be inordinately smart in terms of their own thinking because of the amount of easy money that's out there, amount of the leverage that's available. And I've gotta believe that among-- if I'm a prime broker now, I'm really determining who might have this kind of exposure.
You know, the other problem is by using swaps-- well, let me use a little anecdote. On Friday, so another reporter called me and was like, who could be doing all this selling? And I was kind of looking through holders lists, and it's not clear whom. You just knew it was, you know, these names in this kind of size were held, according to the holdings list, by Goldman Sachs, by Morgan Stanley, by Credit Suisse, by Nomura. But you didn't-- you couldn't tell who it was, because he was using-- because, as you guys, mentioned before, he was using swap trades.
And you know, what that allowed him to do was effectively, because the shares were on the books of Goldman and Morgan, et cetera, they were held in street names, not in his own name. So A, you had the leverage from the swaps. B, you basically got around all the reporting requirements that a fund would normally have if they had positions of that size. So you didn't know who was out there, you didn't know where the risks were. I'm going to throw the Buffett quote out there, you know, going back to your original question-- you don't know who's swimming naked until the tide goes out. And I think there-- we'll see how many naked swimmers there are over the next few weeks.
JULIE HYMAN: You know, Steve, this also brings me flashbacks to the financial crisis, right? This amount of leverage that this guy was allowed to take on, you know, dare I say the phrase "shadow banking." Like what-- you know, how many other people-- what is the leverage that's out there right now? What does this reveal about how many other risks there could be? And is there a way-- because it's so opaque, is there even a way of understanding it and getting our arms around it?
STEVE SOSNICK: It's very tough. I wish I could-- you know, I wish I could give you a numerical answer, Julie, and say, you know, this is the risk that's out there. We don't know. And you know, the problem is you've got-- the amount of leverage that was allowed via these swap mechanisms.
You know, you can get a handle on what's out there if somebody is using Reg T margin. You can get a sense of what's out there if they're using portfolio margin. But in this case, these were opaque holdings with private contracts. And you know, and as I think Goldman has learned the hard way, is if you stop doing business with somebody for moral and ethical reasons, it's probably a good reason to continue that. Deutsche Bank has learned that lesson in other regards, and yet they're somehow affiliated in this one, too.
This is what I mean. We're gonna be hearing about this kind of thing for some time, because there's so many aspects of this that I think we just don't know. And right now-- but my first order of business, if I'm the risk manager at a bank that engages in this type of activity, is figure out who else is out there, who else have we lent money to in this manner, and, you know, perhaps, is it is an appropriate time to cut back some of that risk?
But that would mean, if you're starting to force people to de-lever, that's never a pretty sign either. I actually allude this a bit more to Long-Term Capital, you know, if we want to go through our history of market-- you know, market blowups. You know, the amount of leverage that they had, that they were given by their banks, you know, proved to be proved to be enormous and, you know-- and it threatened the whole system.
In this case, we're not anywhere near that, as far as I know. But the fact that the banks will continue to just throw leverage on strategies, and-- you know, especially when it's a good commission-payer-- that's-- you know, these are the types of reckonings that you have to go through periodically as an industry.
BRIAN SOZZI: Steve, 30 seconds left on the clock here. Based on what you're seeing in the markets here in the pre-market, is another blow-up like we saw on Friday likely in today's session?
STEVE SOSNICK: Not really, Brian. Because remember, we've just-- as far as the futures go, we haven't even given back the last 15 minutes of what happened on Friday. We could spend another hour talking about how insane that close was, too, and the possible causes for that. We discussed gamma squeeze and gamma smash, you know, as we were talking before.
But I think today is-- you know, we're gonna be giving-- it's gonna look ugly because we're giving back an insane rise that we saw in the last few minutes of the day, but then we'll start to unravel all the other elements of this story, which are probably not gonna be pretty.
JULIE HYMAN: Steve Sosnick, always good to get your perspective on these types of matters. Interactive Brokers' chief market strategist. Be well, Steve. Thanks.