Markets pass the Archegos test
The bubble didn't burst. That's the main lesson to be drawn from the failures of Greensill and Archegos — headline-grabbing implosions that were certainly bad for Credit Suisse, among others, but that did nothing to slow the broader market's surge to new all-time highs.
The big picture: Speculative financial bubbles tend to be self-fueling. Investors using cheap borrowed money invest in assets that go up in value, generating paper profits that in turn get levered up even further and invested even more aggressively.
- It's a strategy that works until it doesn't. When one or two big lenders or speculators go bust, that can cause the cycle to get thrown into reverse, with credit suddenly tightening sharply and a rush to the exits as investors realize the greater fool is no longer going to appear.
- The Archegos blow-up came on the heels of the bankruptcy of Greensill, a finance house based in London.
- The two collapses were unrelated except for the fact that Credit Suisse seems to have lost billions in both of them, and the fact that neither could have happened without a broader market environment of banks who are happy to lend freely to anybody who seems to be making money.
Background: Greensill stretched the definition of supply-chain finance well past its natural breaking point. Eventually it lost the backing of a key insurer, which meant that it could no longer access markets itself.
- Archegos, similarly, lost the backing of its prime brokers, who exercised their prerogative to sell the fund's holdings. While some of the banks were reportedly willing to try to sell the stock slowly, so as not to perturb the market, Goldman Sachs and Morgan Stanley announced enormous block sales before the market open, precipitating some massive declines.
- The episode is reminiscent of the movie "Margin Call" — except this time, the fire sale didn't cause the broader market to crash. Quite the opposite.