The Archegos Capital controversy: Can the Indian market see another Lehman moment?

As constant witnesses of a number of economic collapses, ranging from the global financial crisis to the global sub-prime crisis and to the now global slowdown due to the pandemic, we are always looking out for one or the other advancing threat. And how can we not? We’ve seen way too much to not be sceptical. Even though history doesn’t repeat itself very often, it sure rhymes time and again. If you give a good look at the title, you can see so much going on and so much that needs explaining. But, for the question that the title asks, the answer, as suggested by most experts, is likely a no. let’s figure out why.

The Lehman brothers’ moment, The Archegos Capital and the Indian market– these three chapters made their appearance in three different eras of history, but their link is not so hard to find, as we’ll discuss moving further. Let’s start with the one moment that became a life lesson for the entire world- the Lehman Brothers’ collapse. Being in the market as a provider of investment banking, trading, investment management, private banking, research, brokerage, private equity, and associated services for about 158 years, the bankruptcy of the then fourth-largest investment bank- Lehman Brothers- accelerated what the world now remembers as the subprime crisis. This is one of the most recent crises, the impact of which can still be felt on a lot of global markets, especially the Indian market that hasn’t really recovered from the sub-prime and the corresponding global financial crisis as of now as well. Lehman Brothers’ bankruptcy in September 2008 was the result of the Subprime meltdown, the blame of whom is awarded on the heads of mortgage brokers and investment firms that offered loans to people traditionally seen as high-risk, as well as credit agencies that proved overly optimistic about non-traditional loans. To summarise the Subprime meltdown, note only the fact that as the housing bubble of the real estate sector burst in the United States of America (USA), recession found its way with increasing unemployment only aiding the problem. Mortgage defaults were at the peak in the 2008-09 periods and banks suffered losses so large that they went out of business, while some were bought by other banks. Lehman brothers, however, went bankrupt due to the meltdown, closing doors after 150 years of business. Once investors in the markets saw that Lehman Brothers was allowed to fail by the federal government, it led to massive repercussions and sell-offs across the markets. As more investors tried to pull money out of banks and investment firms, those institutions began to suffer as well. Although the subprime meltdown began with the housing market, the shockwaves led to the financial crisis, the Great Recession, and massive sell-offs in the markets. This gave the world a lot to learn and to save the world from any forthcoming global crisis.

Now, the question is- why are we discussing the Lehman moment again? The answer is The Archegos Capital. This New York-based family office that primarily invests in stocks was recently forced into a fire sale of securities worth around USD 20 billion after some of its stocks witnessed a significant price fall. Note the word ‘family office’ used in the last sentence. Family offices are firms that manage the money of wealthy families and hence, the name. Consider the fact that family offices are outside the regulatory scrutiny of the SEC and most of their information is not in the public domain. This especially highlights the fact that regulatory bodies cannot maintain them and any unannounced incident in them could lead to structural discrepancies in various sectors, as has been witnessed before. The fall in market prices of Archegos Capital’s portfolio stocks triggered margin calls and the failure to bring in additional margins forced marquee banks including Nomura, Credit Suisse, UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley to liquidate the holdings of Archegos. Further, while the quantum of potential losses for the banks would differ, it will be significant, to say the least. I hope you’re able to connect the dots between Archegos Capital and the Lehman moment. With this collapse, the real question is- how significant would be the impact of Archegos Capital’s collapse on other portfolios and thus, industries?

Well, let’s just suffice to say not much. As mentioned, the world has learnt its lesson with the Lehman Brothers’ incident and it can be safely said this event wouldn’t turn into it. It is because the debacle of Archegos Capital is thematic in nature, in the sense that the deleveraging consisted more of the Media and Entertainment stocks. As a result, the impact would be limited to the thematic industry and many impacts on diversified portfolios aren’t expected. “There will be portfolios/accounts where these stocks may be part of, but would that not impact diversified portfolios much. Indirect impact, too, as of now, is confined to quarterly profits getting wiped off for banks under consideration,” Siddarth Bhamre, Director, Alternate Investments & Research, InCred Capital. “If this collateral was US treasuries, this unwinding can lead to the sell-off of treasuries which can widen bonds, and, hence, deflate equity prices in India, but this impact is limited in my opinion. This is an evolving story, and we might be surprised as more facts come out,” Abhishek Banerjee, CEO, Lotusdew, told Moneycontrol. “India has strict margin requirements. We track margin reported as an aggregate across all brokers and scripts that have been purchased on margin. Currently, we see margin outstanding of about $1.5 billion across all brokers in India for a total market size of over $2 trillion,” he said. Well, let’s just say the world isn’t going to witness another collapse and for right now, that’s more good news than we’ve heard in a long time.