Archegos Blowup Likely To Draw SEC Scrutiny On Leverage

at Bloomberg dot com slash podcast. Well, the story of the morning certainly has been this Archegos Capital Management, the unwinding of this fund and the volatility that it's caused a handful of names, including some of those big media names like Viacom, CBS and Discovery, as well some tech names, and the in in fact it's had on some of the relationship banks. Let's get the latest with Shawnalie Bassek, Bloomberg Wall Street reporter fanale Thanks so much for joining us here.

It's really been the story over the last several days here about what happened. What do we what's the latest on Archaegas Capital Management. Yeah, well, first of all, it's the fallout we're seeing of the banks, but also what an ugly day for Viacom. I mean the share is

still dropping. You know, I've spoke to a bunch of investors today that playing these media stocks and obviously not so thrilled with the moves you're seeing in the market and really just the violent fundamentals, um, you know, the violent swings you're seeing underneath the surface. Y, especially among the investors that bought a secondary offering that Viacom issue. Just uh, I guess on March five dollars to share they bought stock and now the stocks stating at forty four.

So a lot of unhappy investors out there, I'm sure, yeah, absolutely, And I mean if we need to take a big step back, I mean a lot of this was bought on by this family office run by you know, of Bill Wong, who was embroiled in an insider trading a scandal and then was able to really get all of this exposure on leverage from multiple banks. UM. Really a huge family office, despite not many people having heard much

about him before, not since two thousand twelve. I mean, he's a family office, be because he um settled wire fraud charges, right, and it's interesting that he's even trading with Goldman Sachs and others because we know that um, the compliance uh people at Goldman Sachs on numerous occasions had told the their bankers, no, you can't work with

this guy anymore. Yeah, And ultimately that kind of moratorium ran out, and it was Goldman Sacks, it was Morgan Stanley, it was no Mura, it was Credit Sweets, even Deutsche Bank at one point. So you really had a range of banks show up and really enable the this um person really amassing humongous family office that has now a mass these major positions on leverage by means of the banking system that has supported him and Shinali, what do we know about the use of swaps in this transaction?

I guess one of the big issue for a lot of people's, you know, particularly investors of some of these names like Viacom, CBS and the Discovery, like why are these stocks going up so dramatically when the fundamentals do not support it? You even it prompted the company the issue stock, it prompted analysts that downrade the stock, and it was all because we didn't really know who the buyer was, and it was because of these swaps. What

do we know? Yeah, it's a great question. These swaps um you know, the arcane type of financial product called contracts for difference. And you know, big hat tip to Tracy Allaway on our team for really running through the issues here. It's very unclear as to you know, what the rules are around these swaps across borders. Right, We're not even just talking about a US story here, and the SEC did say they are in contact with the banks, they are looking at the issue here as a major

financial regulation nerd. I've got to say that Gary Gensler led SEC moving forward, I'd be pretty upset about what happened here, and I'd also be looking moving forward around why the leverage outside of the banking system has just gone so far and away such that we're seeing one of the biggest blow ups since LTCM. What does this mean for Wong? What does this mean for our gos?

Is is this the end for that family office? I mean, I want to see who banks with him again, Matt, And I mean after something like this, you know how, I think there will be much more to come in the coming days on exactly how this happened. That that that reminds me is there more to come in terms of unwinding? Do you think I do think that we have to be watching this closely I do think there's more to come. One sign of faith that was given by a hedge fund manager just this morning was, you

know the vix is still pretty low. Right, you're not seeing these uh this these massive swings go into the broader market and it's entirely But will you see a few more hedge funds lose a lot of money? Probably? Yeah. I mean first it was meme stocks and we could say, Okay, that's just a bunch of retailers playing around because the board, Uh, now we've got this issue. Um, have we heard anything from the regulators in general? It just feels like you

were mentioning shy. It just feels like if I were Gary Gensler coming in here, Um, I got some work to do here. There's a lot of things for me to look at, right, and let's let our memories be longer too, Because at the end of early before even the markets one hey, riot wire, we were seeing hedge funds trade at you know, like a hundred to one sometimes leverage when they were trading in treasury markets, to the point that it caused pressure on some of the

safest funding markets in the world. So you know, it's not even just game stop or you know this this issue that we've seen with archegos. How is it that you see so many issues in the hedge fund industry in regard to borrow money in in just a year and a half. Yeah, so leverage is definitely give me a point. Um the gnsler is going to focus on in terms of regulation, is there anything else? Is there

anything else? Well yeah, well yeah, yeah, Well there's Jenny Yellen, there's f stock, right, I mean, are they going to be clamping down on the non bank financial system in a big world? And also disclosure? Right, Remember Gary Gansler was former CFTC that was the main overseer swaps market. That's exactly what I'm thinking in shale. When you see the words secret um in regards to assets then in a headline, then you know that there's gonna be at

least one or two Congressmen thinking this is a problem. Yeah, exactly. It's the most read story on Bloomberg today, so it's got to be in the back of everybody on Sunday and Saturday and Friday. It's been the eight of the top ten most dread stories over the weekend. So definitely, UM, a fascinating scoop there, and uh, who we all props to is this Eric Shatsker with Eric Schrie, Sophia Horte coast to Tracy Alloway Bay who we have a whole team on this one, all right, and remember, you know

it's interesting. We're gonna have you know, a return, a story and a show on four thirty Wall Street time on Bloomberg Radio and television, really diving into this issue, so make sure to tune in for that. There was recently a really cool deal done by a Canadian electric vehicle manufacturer. Electro Mechanica had UM from the beginning, done all of its production in China, but now the company

is opening a location in Arizona. And we've got the guy who did that deal for b d O on the air, Tom Stringer, Corporate real Estate Advisory Managing Director UM running site selection and incentives there. And Tom, let's talk about before we did the back to work, UM, you know, back to school uh discussion, let's talk about Electro Mechanica, UM, how you got them into the US, into Arizona and why they're building there instead of another

plant in China. Well, good morning, guys, thanks for having me back. Really appreciate it. Very interesting story. Um, certainly it's a it's one that's part of a frothy ev market it right now. But you know, we started looking at the project a couple of years ago. UM, the market for evs was still really just emerging. Obviously Tesla had had established itself, but other players were really just sort of coming up to bat at that point in time.

And we were in the midst of the tarif from the trade discussions, UM, which caused right a lot of ripples and people were having to make adjustments for that. So access to the North American market, solidifying the supply chain were really kind of strategic decisions that the company was making early on. And by the time we got through the project and COVID had read its ugly head and then market demand and awareness really poor EVS in

the US really just surged dramatically. It was looked like a very strategic decision that was made two years ago. Now these these a lot of these sites are going up in Texas, California, Arizona. Does the sun have something to do with that? Well, I don't think anybody dislikes warm weather. Certainly into the winner that we've had here, in the northeast. So that's checked on for those locations.

But I think if you look at the states that are really emerging as EV powerhouses and you hit the nail on the head, I would say, you know, you Texas, Arizona in particular, which had really no automotive manufacturing industry prior to too Lucid, to Nicola now electro Mechanic and

some others. Um, you're looking at southern states that are aggressive in economic development in terms of corporate recruitment, job training, UM, aggressive tax and incentive policy, terrific utility rates, and frankly, with warm weather and good tax rates from a first lincome standpoint, places people in talent really want to go. So those have been very attractive kind of benchmark points

for those locations. Hey, Tom, you mentioned earlier, you know, the push for some companies to bring their supply chains um maybe on shore in the US UH, and that was certainly a big discussion point during the Trump administration. Where are we now that we have a new administration. Are companies still moving that way or they reassessing? No, I think it's a it's a good bit of continuity

between the administrations. You know, anytime you can get Republicans and Democrats degree on anything, watch out, it will probably happen. But this one seems to be um really taking hold because the markets and commercial industry and and frankly consumers were driving it more so than any policy decisions. So here we have the policy decision makers chasing the markets, which usually makes for very good policy. Um. So there's

a lot of continuity. I think you saw great investment also again in Arizona with Intel just last week with the twenty billion dollar chip fab facility, and that was facilitated by both administrations, both the Trump administration starting it and the Biden administration coming on and taking hold to help the state of Arizona drive that home. So, UM, some good continuity in in the kind of will will say, um resetting of supply chains. Uh, that's that's really going on.

So we're an implementation now, it's not just policy anymore thought process. I just want to jump in and I'll tweet out a picture of the Electro Mechanica solo car. It's so cool. It's a little three wheeler with an awesome trunk. I recommend googling it, but again I'll send it out on Twitter. Tom let's get to the bank news, which is, you know a lot of our listeners obviously working in banks, tired of being at home with their kids or in the case of the younger workers, with

mom and dad. They want to get back to the excitement of the office, or maybe they don't. What are you hearing, Hey, great question, I think all of us now. A year in UM, it was super positive. At first, it was unbelievable how quickly corporate America, financial institutions, government really shifted gears and and kept productivity up and shifted

to it to working at home. UM. I think we've certainly realized there's some advantages to it, but there's certainly some limitations, and those limitations are starting to kind of pray the edges of it. I think people are excited to get back. I think it's gonna look a little different. That's one thing that's been consistent. You hear that term hybrid thrown out there are probably a thousand times today every leader that gets asked this question. That's because it's right.

We've proven our cost effect that it is to allow people to work from flow from home and have flexibility, and that access to talent really means you can recruit somebody to work in New York, but they could be in Iowa or across the other side of the world. And that's a huge advantage for companies and a challenge for jurisdiction. So I think as we start to come back,

flexibility is going to be extremely important. Probably less square footage in the central business district is something that's definitely emerging, and that's the challenge that's going to have to be addressed. In those higher cost jurisdictions, They're gonna have to get into economic development a lot more aggressively because all those

jobs won't come back. Um, there was a great static in that from the Journal the other day that office occupancy physical occupancy in New York City, for example, is down eight four from last year, and I mean that is just a devastating when you think of the number of turkey sandwiches and bagels that are not consoled and how that affects right the rest of the region. Yeah, we'll have to see how people come back, certainly in some of these urban markets. Tom Stringer, thank you so

much for joining us. Tom Stringer's corporate real Estate Advisory Managing director for Site Selection and Incentives at the firm b DO based in your giving us some thoughts about how the supply chain coming closer to home for a lot of US companies and what that means for infrastructure

time for Bloomberg Opinion. We rejoined today by Chris Anderson, CEO and co founder of three D Robotics based in San Diego, and the topic really is some of these big tech companies, are they media companies that are responsible for the content or are they simply technology platforms uh and sourcing and hosting user generated content therefore uh not liable for that content. Chris, thanks so much for joining

us here. We we just had some of those big tech CEOs Facebook, Google and others in front of Congress. Yet again, I don't think anything of substance was achieved. What's your view on how maybe some of these you know, big tech copies should be thinking about the content that's on their platforms. Yeah, you're you're right. There was nothing of substance achieved in there, and there never is and

these sort of things they're largely theater um. The problem is that there's a, you know, a fundamental disconnect between the role of the platform, which is really what they call common carrier. They you know, there's the user created content is impossible to uh to to edit the way um, you know, professionally created content is um. And then then then the their power which is now you know, greater than than the newspapers um. And so the you know, the question is is it's is it going to be

some sort of oversight board like Facebook you're creative? Well, that doesn't scale. Is it going to be you know, actually imposing requirements on them that they responsible for all the content? Well, that doesn't scale. Is it breaking them up like an antitrust? Well, that doesn't really solve the problem. And we recommend that actually a um, you know, a concept from the new paper ages is the best one.

So what's the what's the concept? Well, back back when in when newspapers were the dominant cultural force for politics and and and and and news in America, newspapers took their responsibilities pretty seriously, and they were considered the fourth the state, you know, after the after the three states of government, the fourth the state was like the gate keeper that rather the the the you know, the the overseer, the you know, the people of the institution that kept

them honest and so newspapers have created the role of om Boozman and on Woodsman is an independent UM and you know, person and employee often whose job it is to not only respond to complaints from the public, but also to examine the institution from the inside, UM a little bit like for example, an inspector general might be UM within government. And most newspapers had on Boodsman, and you know, and they just they just kept an eye on you know, they watched the Watchman if you will, UM.

And now, over time, as newspaper industry has declined, the role the om Boodsman has gone away. The New are Times, for example, which called there's a public editor. They got rid of their last one in two thousand and seventeen. And yet and so, and that's appropriate as as newspapers became less of a central figure in our you know, our public discourse. But Chris, it's also in a newspaper, you can't Paul and I can't write in and say whatever we want in the New York Times the addition

coming out tomorrow, right. They they really are in charge of their own content. Whereas Facebook is more like Speaker's Corner in Hyde Park. Anybody can go there with a soapbox and spew whatever kind of lies misinformation he or she wants, and they often do. That's the problem, right exactly what the analogy is that that a newspaper, you you know, the writers the words are our subject, your control, their employees. For social media, what you have instead is

policies and algorithms. The you know, they can't control the words, they can control their algorithms and how they promote the words to other people. And they control policies about what moderation rules will be applied to take words down if they're considered hate, speecher or whatever. And so the ambutsman role here is more technical and and sort of policy oriented.

So in this case, for example, let's say that there's a intrinsic bias in in Facebook's algorithms, Well, you know, an ambutsman could spot that from from both inside and outside. They not only can see the damage on the outside, but they can see what's causing it, the root cause on the inside and recommended change. Non botsman would then have the ability to make public recommendations. The company would be obligated to respond to those um those recommendations with

a certain time period etcetera. So that's something that that an outside institution which doesn't have access to the algorithms, can't do, and an inside, a purely inside institution might have a conflict of interest from doing themselves, such as an internal ethics group. Non Buosman states straddle the two worlds and has perspective on both. It's interesting, this is the seriousness of this issue here is getting ever more

apparent here. Uh, it impacted presently the election. In fact, we're having a guest coming up later in the show this morning, Jack Divine, former chief of ci CIA's worldwide operations. He's actually written a book about what a threat Russia poses in the cyber world. Uh, and again calling to mind the election. So, Chris, the question is, can we really depend upon these platforms to self police given how serious this issue is? What the answer is by themselves?

You know? No? And And the reason is is not just that they're you know, might have conflicts of interests or financial you know, reasons to do this. The answer is that this is really their DNA. They're they're all about growth, you know, They an engagement and the problem is that growth and engagement sometimes leads to toxic behavior. As a matter of fact. You know, as we know, we're sort of driven to negative, negative news, and so

you know, newspapers have the same problem. They sort of you know, push negative news because it was more if it leads, it leads, If it bleeds, it leads, exactly. So we can't count on them to do it themselves. We do need some sort of independent oversight at a certain scale. Obviously every little startup doesn't doesn't need this, but a certain scale you're considered in the big leagues. Call it million, you know, active users or a hundred millions. You know, we know it when we see it at

that scale. There's a public responsibility, but there's not a competence. We can't assume they have a competence to themselves. We you know, we're looking for different methods. Congress doing it for them isn't gonna work. Antitrust isn't gonna work. You know, Facebook's oversight board is completely overwhelmed. They had two d and twenty thousand complaints over the last three years and they've resolved and they've looked at seven of them. But Chris,

your idea is a good one. I mean, is there any possibility that it gets traction and ombudsman that straddles both worlds and controls the algorithms and you know, uh watches the watchers. Well, it's clear that Congress wants to do something. They want to pass the law. Um, you know, getting rid of the two thirty protections is like an

an H bomb. It's it's not gonna work. So you know, they can need to bring up you know, Mark Zuckerberg gonna tie every every three months, and they know, have that little that little circus, or they can pass a while requiring them to have this independent board member called non budsman called you know, a public editor. Whatever they want, and that seems structural, It seems easy to do. And then you know what the experiment play out. Is there

appetite in Washington for that? Is there appetite for for action? Yes? Is it an non budsman per se. Let's hope far our o edit hasment influenced there. And I wonder if there's appetite and Silicon Valley, because on the one hand, they want to get rid of this problem, then they don't have to deal with the idea that they would have to break up our to thirty. On the other hand, they want growth and engagement exactly. I think it's an appetite to get to I mean, they want to do

the right thing. They're just not really set up to do the right thing, and all the incentives are wrong. So if they could have a a a surgical you know, um effective solution, which is to say, one of the board members have to be independent, has to be responsible for this, has to be accountable to the public, but a visible internally, I think they'd love it. It reminds me of when Google decided they needed an adult in

the room and they brought in actual Eric Schmitt. Chris, thanks so much for joining us, real pleasure're talking to you. Fascinating stuff. Chris Anderson, CEO and co founder of three D Robotics, also writing one of our pieces on Bloomberg Opinion. If you want to see the work of our opinion people, just type in O, P, I N GO on your

Bloomberg terminal. Let's talk about weed a little bit, because New York lawmakers are agreeing to legalize recreational marijuana and we could see dispensaries opening up as early as next year. Let's bring in Keisha Cluki. She's a government reporter out of Albany. Keisha, Um, so this is really going to happen. Yeah. Yeah,

it's a long time coming. Lawmakers have been pushed in it the last few years, but they managed to push it through and we're expecting a vote on the bill any day now and Governor Cuomo has already staid he's ready to sign it. Alright, So what does this mean from I mean, how did that? Did think? Why? Now?

I guess how did this get done? Now? Keisha? Yeah? Well, I think Um, Like I said, lawmakers have been pushing it for the last few years, and they've really just been stuck on a certain number of issues within the bill and they weren't able to pass it through and the last few years and sessions, UM. Last year they said we've got it figured out, we're going to go through and do it, and then the coronavirus pandemic hit,

so it was really delayed an additional year. Um. And I think there's really this additional push because there's we're surrounded New York day is surrounded by states passing UM and legalizing recreational adult youth marijuana. New Jerseys on on track to do it in a in two years. I believe in New York is used to being first, and I think here, uh, they've really been waiting and looking at what's been going on nationally and they want to get out there and get get their hands on some

of that tax revenue. So funny to think of adult use marijuana because I feel like people quit smoking pot when they're twenty one or older. It's like a it's a high school thing. But this is do a lot of people in New York smoke pot? Well, it's it's actually expected to be. We we have a large marijuana medical marijuana market right now, but this is gonna be anywhere from a four point to to six billion dollar industry depending on on what your what business outlooks you're

looking at now. So it's gonna be one of the largest markets in the US, maybe I think even second to second in the nation to California. Alright, how about for the folks that may have been convicted of a marijuana related crime, what happens to them and their records

and so on. Yeah. So one of the main things that lawmakers have been pushing to do in this legislation is to help people who help both people and the communities who were hindered by previous drug laws and UH, the bill which came out this the details came out this weekend, is going to have an automatic expungement of records for people with previous convictions who UM for activities

that would no longer be criminalized. So as soon as UM, marijuana would be legal for people ages twenty one and older, UM, and they're going to reduce the amount of UM. The there's still a certain amount of marijuana that you can have on your person. It's not you know, a free for all. UM. There's still rules. They want to make sure that they're keeping the market legal, people aren't selling it on the black market, and really trying to keep it safe. But they're also trying to make sure that

individuals aren't targeted for this. Has it been unsafe before? We've seen danger problems with pot. Yeah, I mean when when people are buying it on the black market. And this is just talking to lawmakers. UM, it can really contain anything. There's no guarantee of what's in it. So just like alcohol. Way back in the day when alcohol was UM, they they started a labeling system. Actually with

Bourbon was the first labeling system. Thats wired you to put exactly what was in it, because people were putting anything in it, and it'll be the same with marijuana, so theoretically it'll be safer controlled. You know, the dosage that you're getting, um, you know exactly what's been it. A Keisha, thank you so much for joining us. We appreciate a. Keisha Kluki, government reporter for Bloomberg Government Weed legalized,

weed coming to New York State. Here in New Jersey, it has been legalized, although I don't think it's actually been implemented yet. They're kind of working some things out, but it's coming and it's interesting. You know, it doesn't appear math that there's going to be a federal law anytime soon, but the boy, the states are moving very aggressively, and so when you get a big state like New York,

that really makes a statement. Of course, California, Colorado, some of the other western states have had it, but it's been really it's a big statement here when uh, you know, state as large as New York does it. Of course with New York City, so it's a big move forward for the cannabis business. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller.

I'm on Twitter at Matt Miller three. On Fall Sweeney, I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio