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Illustration: Eniola Odetunde/Axios

There's so much exuberance and speculative fervor in markets that it's beginning to be hard to trust them. As a major investment firm implodes and the UK reckons with the collapse of a major lender, the U.S. Securities and Exchange Commission is investigating U.S. markets to try to determine what might be amiss here.

Why it matters: Markets that only go up aren't working properly. Any regulator charged with keeping markets efficient has prima facie reason to be concerned that they're not behaving the way they're meant to.

Driving the news: Archegos, a large but obscure fund, imploded last week, sending share prices of certain stocks plunging and causing multi-billion-dollar losses across various banks.

  • The Archegos blow-up came on the heels of (but was unrelated to) the bankruptcy of Greensill, a finance house based in London.

Background: Greensill was active in the normally sleepy backwater of supply-chain finance — basically, lending companies money to tide them over until they get paid on the invoices they've sent customers.

  • Go deeper: Greensill, armed with a $1.5 billion investment from Softbank, 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.
  • A lender that can't borrow will invariably go bust — which is exactly what happened. The institutions that lent money to Greensill, including small German towns, stand to lose about $5 billion. All the equity investors in the company, including Softbank, have been wiped out.

The big picture: Greensill dressed itself in the trappings of normal and understood markets, and used those markets to take on a dangerous level of risk. Meanwhile, Archegos used its status as a family office to avoid standard regulatory disclosures.

The SEC's job is to worry that these might not be isolated incidents.

  • Softbank is reportedly the subject of an investigation into its foray last year into options trading in U.S. technology stocks — a trade so big that some people consider it to have been market manipulation.
  • The SPAC craze is also being investigated. Special-purpose companies designed to take private companies public have been around for decades, but the sheer number of them has soared in recent months, and they have often become the locus for stock-market speculation.
  • The frenzy in GameStop and other meme stocks is being looked into "from a number of different angles," the SEC said last month.
  • The Archegos affair is now being monitored, too.

The bottom line: There's undoubtedly a lot of frothiness in markets right now, and where there's frothiness, there's generally also fraud. It behooves the SEC to keep a close eye on potential excesses.

Go deeper

Felix Salmon, author of Capital
Mar 29, 2021 - Economy & Business

Markets brace for the Archegos test

Expand chart
Data: YCharts; Chart: Axios Visuals

Has the stock market gotten ahead of itself? That's the question traders are asking heading into Monday's session, in the wake of a dramatic fall-off in a handful of stocks owned by a hedge fund manager named Bill Hwang.

Driving the news: Hwang was making highly leveraged multi-billion-dollar bets on companies including U.S. TV networks ViacomCBS and Discovery. When those stocks started to fall, Hwang's fund, Archegos, was forced to liquidate the positions at any price, and both companies ended up losing about half their value as a result.

Top general: Calls to China were "perfectly within the duties" of job

Gen. Mark Milley. Photo: Andrew Harrer/Bloomberg via Getty Images

Joint Chiefs Chairman Mark Milley told the Associated Press on Friday that calls with his Chinese counterpart during the final months of Donald Trump's presidency were "perfectly within the duties and responsibilities" of his job.

Why it matters: In his first public comments on the calls that have prompted critics to question whether the general went too far, Milley maintained that such conversations are "routine," per AP.

The consumer's massive "war chest"

Illustration: Megan Robinson/Axios

Economists expect the pace of economic growth to cool off now that government transfer payments like stimulus checks and emergency unemployment benefits are in the rearview mirror. But evidence suggests that the U.S. consumer is sitting on a lot of financial firepower that could be a key driver of growth in the quarters to come.

Why it matters: U.S. consumer spending is massive, representing about 70% of GDP.