Archegos avalanche shows cracks are hidden under the surface

There are worrying pockets of bizarre price behaviour in the shadow banking world

Gillian Tett 

    © Efi Chalikopoulou


Financial markets experienced the equivalent of an avalanche last week. 

The trigger initially seemed innocuous: US media group ViacomCBS’s share price slid after the group decided (quite sensibly) to sell $3bn of stock, in response to a peculiar near-tripling of its share price in the past year.

That fall inflicted big losses on the portfolio of the Archegos family office, which was heavily exposed to Viacom. 

This in turn triggered snowballing margin calls and share sales, as its prime brokers tried to liquidate the Archegos portfolio to protect themselves. 

The rubble may create $5bn-$10bn of losses for prime brokers, JPMorgan Chase says.

The good news is that this avalanche does not appear to have created serious systemic risks, since the banks seem able to absorb the blow. 

That is a small victory for regulators who raised capital requirements after the 2008 global financial crisis.

But the bad news is that the episode exposes broader vulnerabilities in the financial system. 

After all, as any back-country skier knows, avalanches do not usually occur just because of an idiosyncratic shock, but because the underlying snowpack is unstable.

Last week’s debacle indicates that the system today is plagued with multiple half-hidden cracks. 

For one thing, there is alarmingly little transparency about family offices, even though these have recently exploded in size and influence. 

There is even less clarity about the derivatives that Archegos used to make bets.

Investment banks continue to struggle to judge their prime brokerage risks, partly because of internal silos. 

Years of loose monetary policy have left financiers so blasé about soaring asset prices that few questioned whether the counter-intuitive rally in the Viacom share price made sense, given the company’s mixed corporate fortunes. 

Most striking of all, Archegos was apparently operating with more than five times leverage. 

This is comparable to patterns seen before the 2008 crash and seems to have been “the very definition of insanity”, given the concentrated nature of its portfolio, as financier Mike Novogratz says. 

So was Archegos an anomaly? 

Or a trend? 

No one can tell for sure, given the lack of transparency in the shadow banking world. But I believe the latter. 

After all, family offices are not the only part of the financial sector to have escaped effective oversight; just look at what the recent Greensill scandal shows about supply chain financing. 

Viacom was certainly not the only stock displaying peculiar prices swings; gyrations in the GameStop price have been far wilder.

Indeed, if you scan the financial landscape, you can see multiple pockets of bizarre price behaviour — or froth. 

Take bitcoin: the price of a coin has had a ninefold increase in the past year. 

Crypto evangelists argue this makes sense given inflation threats to fiat currency, and increased mainstream acceptance of crypto assets. 

Possibly so. 

But the sheer scale of the rally suggests some big unseen speculative plays are at work too.

Or, for an even more colourful example, look at the sky-high prices being charged for “non-fungible tokens”, or unique cyber collectibles. 

The newly minted crypto gazillionaires currently diving into this sphere attribute these high prices to scarcity: NFTs are supposed to be unique. 

But the market is untested and if anyone cracks the code to replicate NFTs the entire investment thesis will implode.

Or for a more mainstream example, consider green stocks such as Tesla. 

The electric vehicle maker’s share price has risen about 600 per cent in the past year, amid hype (and bizarre projected valuations) by investment groups such as Ark. 

Some of that rally might be justified by the new White House support for electric vehicles. 

However, Tesla’s popularity also reflects a shortage of green assets last year, relative to soaring investor demand — and that could easily change if, say, car manufacturers produce more electric vehicles.

Or ponder the corner of tech known as software as a service. 

The SaaS companies with the most bullish projections for next year’s earnings are now being valued in the stock market at about 40 times earnings, on average, according to calculations shown to me by some venture capitalists. 

Before 2019, the average was nearer 11 times.

That might make sense if you think last year’s boom in digital services will be sustained indefinitely. 

Not so if last year’s coronavirus lockdowns simply brought forward future digitisation demand, which seems entirely likely.

Don’t get me wrong: I am not predicting imminent avalanches in all these sectors; nor suggesting these are the worst examples of speculative froth. 

What is happening in parts of the sphere of special purpose acquisition vehicles and the junk bond world may be worse.

But the key point is this: the Archegos rubble shows that years of excessively loose monetary policy have not just left asset prices elevated but created half-concealed pockets of leverage, too. 

When the two collide, disaster can erupt. And the big headache today is that while price froth is visible, it is frustratingly hard to tell where the pockets of excessive leverage lie, or how exposures are interconnected, since the shadow banking sector is so untransparent.

It is thus a tragedy that the Trump administration so badly undermined the Office for Financial Research, the body created after the 2008 crisis to monitor interconnected risks. 

Doubly so, since if the Federal Reserve (and other central banks) keeps negative interest rates in place, this financial froth could soon outstrip anything seen in 2000 or 2007. 

As with snow, a sparkling market surface can conceal hidden, and widening, cracks. 

Covid-19

How Europe has mishandled the pandemic

What happened and what does it mean for the union?


Look around the world at the devastation wrought by the covid-19 pandemic and something odd stands out. 

The European Union is rich, scientifically advanced and endowed with excellent health-care and welfare systems and a political consensus tilted strongly towards looking after its citizens. 

Yet during the pandemic it has stumbled.

In the brutal and blunt league table of fatalities, the eu as a whole has done less badly than Britain or America, with 138 recorded deaths per 100,000, compared with 187 and 166 respectively—though Hungary, the Czech Republic and Belgium have all fared worse than either. 

However, it is in the grip of a vicious surge fuelled by a deadly variant. 

That underlines the peril of Europe’s low rate of vaccination. 

According to our tracker, 58% of British adults have had a jab, compared with 38% of Americans and just 14% of EU citizens. 

European countries are also behind on the other criterion of a covid-19 scorecard, the economy. 

In the last quarter of 2020 America was growing at an annualised rate of 4.1%. 

In China, which suppressed the virus with totalitarian rigour, growth was 6.5%. 

In the euro area the economy was still shrinking. 

A year ago Pedro Sánchez, Spain’s prime minister, called covid-19 the worst crisis to afflict the EU since the second world war. 

How has its response gone so wrong?

Part of Europe’s problem is demography. 

EU populations are old by global standards, making them more susceptible to the disease. 

Other less well understood factors, such as crowded cities, may also make Europeans vulnerable. 

The cross-border mobility that is one of the EU’s great achievements probably worked in favour of the virus, and no one will want to curb that when the pandemic eases.

But part of Europe’s problem is politics. 

Jean Monnet, a French diplomat who helped found the European project, famously wrote that “Europe will be forged in crisis.” 

When things are at their worst, those words are seized on to suggest the EU will snatch victory from the jaws of defeat. 

Sure enough, during the euro crisis the European Central Bank (ECB) eventually saved the day with new policies; likewise, the migration crisis of 2015 greatly enhanced Frontex, the EU’s border-security force.

However, Monnet’s dictum is also a source of complacency. 

The civil war in Yugoslavia in the 1990s led to the declaration that “This is the hour of Europe”. 

Years of carnage followed. 

Likewise, last year’s decision to give the European Commission sole responsibility for buying and sharing out covid-19 vaccines for 450m people has been a buck-passing disaster.

It made sense to pool the research effort of 27 countries and their funds for pre-purchasing vaccines, just as Operation Warp Speed in America brought together 50 states. 

However, the EU’s bureaucracy mismanaged the contract negotiations, perhaps because national governments generally oversee public health. 

The project was handled chiefly by the commission president, Ursula von der Leyen, who gleefully called the decision to expand her empire a “European success story”.

Hardly. 

Her team focused too much on price and too little on security of supply. 

They haggled pointlessly over liability should vaccines cause harm. 

Europe dithered in the August holidays. 

It was as if the Monnet-like forging of an ever-closer union was the real prize and the task of actually running vaccination a sideshow. 

Subsequent bickering, point-scoring and the threatened blockade of vaccine exports have done more to undermine faith in vaccination than restore the commission’s reputation. 

Were she still a member of a national government it is hard to see how Mrs von der Leyen could stay in her post.

Europe has also fallen short economically. 

Again, it has used the pandemic to make institutional progress, by creating a meaty new instrument known as the Next Generation EU fund, or ngeu. 

Worth €750bn ($880bn), this is targeted mainly at weaker countries that need it most. 

More than half the money is grants not loans, lessening the effect on national debt. 

It is also being paid for by raising debt for which the union as a whole is jointly liable. 

That is welcome, because it creates a mechanism which severs the link between raising money and the creditworthiness of national governments. 

In future crises that could protect euro-zone countries from capital flight.

As with vaccines, however, triumph at the ngeu’s creation belies its slow execution. 

The first money is still months from being paid out, as member states scrap with the commission over their individual programmes. 

By the end of next year, only a quarter of the fund will have been disbursed.

This lack of urgency is a symptom of a much bigger problem: the neglect of the underlying health of Europe’s economies. 

Even with its new money, the eu budget will account for just 2% of GDP in the next seven-year fiscal period. 

At the national level, where governments typically spend about 40% of GDP, Europeans have been culpably overcautious.

The consequences will be profound. 

By the end of 2022, America’s economy is expected to be 6% larger than it was in 2019. 

Europe, by contrast, is unlikely to be producing any more than it did before the pandemic. 

True, Joe Biden’s $1.9trn stimulus after nearly $4trn in the Trump era risks overheating the economy, but Europe lies at the other extreme. 

Its budget deficits for 2021 average perhaps half of what America is planning. 

After the combination of the financial crisis and covid-19, the EU’s output will be 20%, or €3trn, smaller than if it had kept up the growth it managed in 2000-07. 

The EU has suspended its deficit-limiting fiscal rules. 

Thanks in part to the ecb’s monetary activism, European governments have the fiscal space to do more. 

They should use it.

Ever-smaller union

Europe can take comfort from the fact that the vaccination programme will catch up over the summer. 

Across the continent, Euroscepticism has been in decline during the pandemic, and politicians who used to flirt with leaving, like Matteo Salvini or Marine Le Pen, have changed their tune. 

But, inexorably, the eu is falling behind China and America because it fails to grapple competently with each successive crisis. 

In a dangerous and unstable world, that is a habit it needs to change. 

Populism’s ride to victory in Peru spells trouble for Latin America

Voters across the region are venting their fury at political classes they believe have failed

Michael Stott, Latin America editor 

Pedro Castillo arrives on horseback to vote in the Andean town of Tacabamba: the far-left activist won the first round of the presidential election © Francisco Vido/EPA/Shutterstock


Populism has taken many forms amid the pandemic: in Peru, it arrived in a small Andean town on the back of a horse.

Pedro Castillo, the far-left activist who won the first round of Sunday’s presidential election, almost did not make it to vote at a school in Tacabamba: alarmed by crowds, his steed reared and bucked repeatedly, threatening to throw him off.

But Castillo clung on as helpers tugged repeatedly on the horse’s bridle and, after the ballots were counted, the scale of Peruvians’ disillusion with their politicians became clear.

Although voting was compulsory, nearly a third abstained; of those who did vote, over 17 per cent returned an invalid paper. “More people cast spoiled or blank ballots than voted for Castillo, who won first place,” said Cynthia Arnson, director of the Wilson Center’s Latin America programme. “That’s a deeply troubling sign.”

Best-known for leading a long teachers’ strike in 2017, Castillo barely figured in opinion polls until the final stages of the campaign. His advocacy of widespread nationalisation and calls to renegotiate state contracts and trade treaties have alarmed many Peruvians but they face an unenviable choice.

His likely opponent in a run-off election in June is Keiko Fujimori, daughter of former strongman president Alberto Fujimori, who is serving a long prison sentence for human rights abuses and corruption. Keiko is herself under investigation for allegedly taking millions of dollars in illegal campaign funding.

Marta Lagos, director of Latinobarómetro, a regional polling organisation based in Chile, said Peru was an “extreme case” of the populism sweeping Latin America.

“You have two candidates reaching the second round who are totally outside the traditional political establishment,” she said. “It is also a magisterial example of a country which has gone from having a party system to having no [viable] parties.”

As Latin America goes through a big election cycle, with seven major nations holding presidential or midterm elections by October this year, voters are venting their fury at a political class that is seen to have failed.

The region is the world’s worst hit by the combined health and economic impact of coronavirus, according to the World Bank. This has exacerbated grave “pre-existing conditions” — glaring inequalities of income and opportunity, uncompetitive economies and inadequate public services.

Underlining the unpredictability of regional politics, Ecuador also voted last Sunday and chose as president Guillermo Lasso, a self-made millionaire and former banker, in a result seen as a repudiation of the leftist populism espoused by the losing candidate. As in Peru, the winning candidate is far short of a congressional majority, heightening the challenges of governing.

After Peru and Ecuador, the next Latin American nation to vote is Chile, where electors will in mid-May choose delegates to a special assembly to draft a new constitution. A few months later, they will pick a new president.

One of the region’s best economic performers, Chile lost its halo when riots erupted in October 2019 over costly public services, inadequate pensions and eroding living standards.

The Pacific nation had stood out for its consensus politics over the past three decades, with power alternating between the centre-left and centre-right. Now one of its most popular politicians is a former television presenter, Pamela Jiles, best known for promoting early withdrawals of pension savings.

Even though economists point out that repeatedly pulling out pension funds early will only make retirement finances worse, some lawmakers from the governing centre-right coalition are backing such moves.

Nicholas Watson, Latin America managing director at the consultancy Teneo, said this illustrated one of the biggest dangers of the region’s current wave of populists: their ability to panic established politicians into adopting ill-considered measures that they would normally have resisted.

“You get this sort of populist creep,” he said. “You don’t need even to be in power. The fact you exist and have traction with the population sways politics towards more radical policy proposals.”

Is Bitcoin Good for Business?

Following its rapid rise in value, Bitcoin is now being touted as an investment that legitimate businesses would be remiss to ignore. But business leaders should stay off the bandwagon, because the cryptocurrency revolution has already failed.

Willem H. Buiter


NEW YORK – In a recent commentary for the Financial Times, economist Dambisa Moyo makes a case for why business leaders should invest in Bitcoin. 

Her three main arguments are that Bitcoin is a way to mitigate company risk; cryptocurrencies can provide possible solutions for doing business in emerging economies; and digital currencies augur an exciting new future of “currency platforms.”

Is Moyo right? 

Let’s take her points in turn.

First, it is unclear how buying Bitcoin can mitigate company risk. 

The only risk Moyo identifies is that of missing out on what could be one of the greatest speculative bubbles of all time. 

True, a company that missed out on a continued Bitcoin appreciation could face dire consequences – including acquisition by a Bitcoin-invested rival. 

Obviously, investing in Bitcoin is one sure way to avoid missing out on capital gains on Bitcoin. 

But that hardly makes it a wise investment, especially when one weighs the potential returns against the high risk of material capital losses.

Equally far-fetched is the idea that cryptocurrencies could provide solutions to problems often encountered in emerging economies. 

It is true that, unlike conventional fiat money – which includes central bank digital currencies (CBDCs) – decentralized private cryptocurrencies like Bitcoin are not at risk of being “over-issued” by profligate governments. 

It is also true that the risk of over-issuance is greater in some emerging markets than in most advanced economies.

But over-issuance of currency is just one possible threat to emerging-market financial stability, and removing it does not suddenly make Bitcoin a reliable store of value. 

Quite the contrary: Bitcoin’s price volatility since its inception in 2009 has been staggering. 

On March 29, 2021, its price reached $57,856 – some distance below its all-time high of $61,284 on March 13 – with a market cap close to $1 trillion. 

According to a note from JPMorgan on February 17, its three-month realized volatility at the time was 87%, compared to just 16% for gold. 

Similarly, a recent study finds that Bitcoin’s price volatility is almost ten times higher than that of major fiat currencies (such as the US dollar against the euro and the yen).

Moyo also suggests that Bitcoin could facilitate remittances to low- and middle-income countries. 

But this ignores the fact that Bitcoin transactions are notoriously inefficient. 

Because its block size is capped at one megabyte and the block-discovery process takes approximately ten minutes per block, only seven transactions can be completed per second. 

By contrast, Visa executes an average of 1,700 transactions per second, and could feasibly handle more than 65,000 transaction messages per second. 

By design, Bitcoin is simply too inefficient ever to become an effective medium of payment.

Similarly, the fact that Bitcoin’s supply is fixed at 21 million units is more of a drawback than a selling point. 

A proper currency should be able to undergo a massive expansion in supply when circumstances demand it, such as in the case of a financial crisis or a shock to aggregate demand. 

There can be no lender of last resort or market maker of last resort capable of systemic rescue operations with Bitcoin and other decentralized cryptocurrencies.

Finally, is Bitcoin really the vanguard of a new digital-currency infrastructure that wise investors cannot afford to ignore? 

No, because the CBDCs under development in China and elsewhere have nothing in common with Bitcoin and other decentralized private cryptocurrencies. 

There is no blockchain or other distributed ledger technology (DLT) involved, nor is proof of work required to establish the validity of a transaction.

Rather, CBDCs function as straightforward digital versions of conventional bank accounts. 

In principle, they could be implemented as individual accounts with the central bank for every consumer and business in its jurisdiction. 

Alternatively, those accounts could be guaranteed by the central bank, but held with a wide range of private financial institutions.

CBDCs represent nothing new. 

They are not a revolutionary development like decentralized, DLT-based cryptocurrencies. 

But that revolution has already failed, because Bitcoin and similar cryptocurrencies are extremely unattractive as stores of value. 

No sensible investor should go near them (unless she has very deep pockets and extremely low risk aversion).

Moreover, Bitcoin’s extremely high energy demand is another nail in its coffin. 

Bitcoin transactions are verified through proof-of-work “mining” operations that require exorbitantly energy-intensive computational efforts. 

The Cambridge Bitcoin Electricity Consumption Index estimates annualized consumption at 139.15 terawatt-hours – more than that of Argentina.

Simply put, Bitcoin and other proof-of-work cryptocurrencies are an environmental disaster. 

Worse, cryptocurrencies can be replicated without bound, further amplifying the environmental damage. 

As of March 29, 2021, CoinMarketCap listed 4,490 cryptocurrencies, starting with Bitcoin (with a $1.08 trillion market cap) and followed by Ethereum (with a $204 billion market cap).

The bottom line is clear: Bitcoin is an excessively risky and environmentally undesirable investment. 

It is not a sensible solution to any emerging-market problem, and it cannot possibly serve as a store of value or reliable medium of exchange. 

The sooner it and other DLT-based cryptocurrencies are relegated to a footnote in economic history, the better.


Willem H. Buiter is Visiting Professor of International and Public Affairs at Columbia University.

U.K. Vaccination Puts U.S. to Shame

American authorities rejected advice to delay the second dose. Britain shows that approach’s wisdom.

By Marty Makary

      ILLUSTRATION: MARTIN KOZLOWSKI



The U.S. will soon achieve herd immunity against the novel coronavirus, but the U.K. will get there sooner. 

That’s because medical leaders across the pond put the priority on first-dose vaccination, delaying booster shots so that more people could get the initial shot. 

Fifty-nine percent of British adults are now vaccinated with one dose, vs. only 38% in the U.S.

Far more Americans are fully vaccinated—21% have received either a booster or the single-dose Johnson & Johnson shot. 

In the U.K., where the only options are two-dose vaccines, only 8% of adults are fully immunized.

In both countries, the number of daily deaths peaked in January—3,352 on Jan. 12 in the U.S. and 1,248 on Jan. 23 in the U.K. 

Since then, the U.S. count has declined 72%—which sounds impressive until you put it up against Britain’s 96%. 

U.K. deaths now average 47 a day. 

The U.S. figure, 938, is 20 times as high in a country less than five times as populous.

Many public-health experts thought the U.S. should take the “one dose is better than none” approach, including Ashish Jha of Brown University, Robert Wachter of the University of California and Christopher Gill of Boston University. 

Even Michael Osterholm of the University of Minnesota, a member of President Biden’s Covid task force known for speaking his mind, suggested delaying second doses. 

“We could get more of our over-65 age group vaccinated,” he told the Star Tribune. 

“I think the data will support that actually is a very effective way to go.”

But Anthony Fauci publicly disagreed. On one occasion, Dr. Fauci warned of “the danger” that could come from focusing on the first dose. 

And at a Feb. 19 White House briefing Dr. Fauci played down a single-dose study from Israel. 

White House senior adviser Andy Slavitt chimed in, telling reporters, “We’re not going to be persuaded by one study that happens to grab headlines.”

The Israeli study demonstrated that the first Pfizer dose was 85% effective at two to four weeks. 

But it isn’t the only study. Moderna’s phase 3 trial included 2,000 people who received only a single injection of either a placebo or the vaccine. 

In that group, the efficacy of the single vaccine dose was 80% to 90%. 

A Feb. 17 New England Journal of Medicine letter notes that first doses of Pfizer and Moderna had an extraordinary 92% effectiveness at three to four weeks. 

The authors concluded: “A scarce supply of vaccine could be maximized by deferring second doses until all priority group members are offered at least one dose.” 

I agree. 

Why use half the nation’s vaccine supply to boost immunity by 3% to 15% in the short-term when we could give lifelines to more vulnerable Americans during a vaccine shortage?

But this week, in response to a new Centers for Disease Control and Prevention study showing a first-dose efficacy of 80% at two to four weeks, Dr. Fauci said that it isn’t known whether the protection drops “off a cliff after two weeks or three weeks.” 

That doesn’t happen with other vaccines. 

Why dismiss data and real-world U.K. experience with an untested hypothesis?

Regulators also shot down the idea of delaying the second dose. 

In January the Food and Drug Administration issued a statement rebuking those “suggesting changes to the FDA-authorized dosing or schedules,” claiming they are “not rooted solidly in the available evidence.” 

The FDA warned that delaying the second shot could make people “assume that they are fully protected when they are not, and accordingly, alter their behavior to take unnecessary risks.”

The scientific rigidity and paternalism of health officials sidelined a smart policy that would have resulted in more Americans being vaccinated faster, including in minority communities. 

A January Annals of Internal Medicine study estimated that delaying the second dose could have averted up to 29% of Covid-19 cases over an eight-week period.

The U.K. not only reduced Covid-19 deaths more quickly but beat out a contagious new variant as the U.S. lags behind. 

Some may argue that the U.K.’s rapidly declining death and hospitalization numbers are really due to their lockdowns, but Germany has had near-identical lockdowns and cases there have doubled over the past four weeks. 

That’s because only 11% of the total German population is vaccinated (vs. 45% in the U.K.).

The second dose is important. It creates more-durable immunity and better protection against variants. 

Spacing the doses further apart may also help. 

With other two-dose vaccines, a longer spacing interval usually results in a stronger immune response. 

That was true for the only Covid-19 vaccine formally studied with two different dosing intervals. 

The study of the Oxford/ AstraZeneca found that a “higher vaccine efficacy is obtained with a longer interval” of 12 weeks instead of six.

On March 1, Senate Democrats Chris Van Hollen of Maryland and Martin Heinrich of New Mexico sent a letter to the White House urging the administration to consider the “one dose is better than none” approach. 

It isn’t too late. 

Refusing to think outside conventional wisdom may be the norm in politics, but it isn’t how science is supposed to work.


Dr. Makary is a professor at the Johns Hopkins School of Medicine, Bloomberg School of Public Health and Carey Business School. He is chief medical adviser to Sesame Care and author of “The Price We Pay.”