Archegos Fiasco Was One of 3 ‘Near-Misses’ This Year, Says El-Erian

Mohamed El-Erian customarily is not an alarmist. But he notes that the Archegos Capital Management mess is “the third near-accident this year so far.” Meaning something that could’ve trashed the entire financial system.

To El-Erian, Allianz’s chief economic adviser, the collapse of family office Archegos Capital Management is a “one-off,” but it may lead to a tightening of credit as banks become more cautious.

On the plus side, he doesn’t detect a “fast-moving contagion” that will tank the entire stock market, and contended in a Yahoo Finance video appearance that “for now, it looks contained.”

Let’s hope so. Remember the collapse of Bear Stearns in spring 2008? That presaged the even more serious disintegration of Lehman Brothers the following September—a cataclysm that touched off the global financial crisis and the Great Recession.

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Back in March, 13 years ago, the reassuring conventional wisdom was that Bear’s demise, along with the festering sub-prime mortgage mess that prompted it, would be “contained.”

That’s not to say that El-Erian doesn’t see any peril this time. He said investors should be wary of “slower-moving contagion forces,” which might cause a “tightening in financial conditions,” forcing banks to become more cautious.

“There’s been so much liquidity sloshing around the system that there has been excesses and we’ll get fender benders like this one, but what we don’t want is a pile-up, and that’s why it’s really important to look at these slow-moving contagions,” El-Erian said. He previously has warned about an overvalued market.

El-Erian said he hoped the Archegos catastrophe would result in “better discipline in the marketplace because we’ve lost a lot of discipline.”

Archegos’ forced liquidation marks three calamities that could have had widespread effects, he added. The failure late last month at Archegos, a family office founded by investment manager Bill Hwang, rattled Wall Street. The firm’s wagers provoked its lenders to issue margin calls, thus forcing Archegos to dump its positions in many stocks. These included ViacomCBS, Discovery, Tencent Music, and Baidu.

The other two near-misses El-Erian cited were linked: the crash of meme stock GameStop in February, which devastated many retail investors, a lot of them amateurs at Robinhood. And the short-selling hedge funds that were ganging up on GameStop before that, when the stock was on a tear. They got slammed hard in January.

“We saw it with the hedge funds shorting 140% of the float. We’ve seen it now with a family office,” El-Erian said. “It tells you a lot of people have been saying the best thing to do right now is to leverage. Why? Because financing is so cheap and so available.”

The extent of the damage to investment banks involved in the Archegos imbroglio is still unknown. At this point, Credit Suisse would only say it suffered “significant losses.” Nomura is a little more specific, saying it lost $2 billion, while Japan’s MUFG indicated its hole may be $300 million.

According to JPMorgan, total losses related to Archegos may be anywhere from $5 billion to $10 billion. The firm commented that this plunge may be “well beyond normal unwinding scenarios for the industry.”

In El-Erian’s view, “This was an accident waiting to happen and it happened.”

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Tags: Archegos Capital Management, Baidu, Bear Stearns, Bill Hwang, Credit Suisse, Discovery, GameStop, Hedge Funds, Lehman Brothers, Liquidity, Mohamed El-Erian, MUFG, Nomura, Tencent Music, ViacomCBS

The University of Michigan has committed to reducing the carbon footprint of its $12.5 billion endowment to net-zero by 2050, and said it will immediately realign its portfolio toward sustainable investments and put an end to investing in companies that produce fossil fuels and greenhouse gases.

The move, which was unanimously approved by the university’s board of regents, calls for the endowment to immediately shift its natural resources investments to focus more on renewable energy. It will also stop investing in funds that are focused on certain fossil fuels and discontinue direct investments in publicly traded companies that are the largest contributors to greenhouse gases.

Specifically, the plan calls for discontinuing direct investments in the top 100 public coal companies and top 100 public oil and gas companies as compiled in the Carbon Underground 200 list. However, the university said it currently holds no direct investments in those companies. The endowment also pledged to discontinue investing in funds whose primary focus is oil reserves, oil extraction, or thermal coal extraction, and to continue a strategy of not investing in companies that extract thermal coal or extract oil from tar sands.

Michigan joins a small but growing list of university endowments that have pledged to become carbon net-zero by 2050 at the latest. Last April, Harvard University’s $41 billion endowment committed to achieve net-zero greenhouse gas emissions from its investment portfolio by 2050. And shortly after Harvard’s announcement, England’s Oxford University pledged that its $3.7 billion endowment would ban fossil fuel investments. In June, Stanford University announced that its $28.9 billion endowment would reach net-zero greenhouse gas emissions by 2050.

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Along with Michigan’s net-zero pledge, the university’s board of regents also approved a $140 million investment in three funds dedicated to renewable energy development and sustainable infrastructure development.

The investments include up to $30 million to solar and wind developer D. E. Shaw Renewable Investments; up to $50 million to Aplomado Partners, which partners with solar developers to gather the land rights needed to develop large solar projects; and up to $60 million to Cresta Energy Sustainable Infrastructure, which invests in US energy infrastructure and will focus on investments to reduce carbon emissions and support renewable power.

“A net-zero endowment strategy considers the greenhouse gas emissions from all of the university’s investments,” University of Michigan President Mark Schlissel said in a statement. “Substantial greenhouse gas emissions occur outside of the energy sector, and net-zero applies broadly rather than targeting a single industry.”