What's up guys and welcome back to wall street millennial on this channel, we cover everything related to socks and investing about. One year ago, market observers started noticing unusual price activity in a number of media and technology stocks, for example, viacom's share price, more than double in a matter of a couple months, despite the company not reporting any meaningful news, as it turned out all this unusual price Action was caused by one man, billionaire investor bill, huang huang made his fortune by writing a successful hedge fund, which he eventually turned into a family office called archaico's capital management. His success as an investor came from both his stock picking acumen, as well as his willingness to take on excessive amounts of leverage. Archagos capital swelled from 1.5 billion dollars in march of 2020 to 35 billion dollars going into 2021..

He took on four and a half times, leverage to buy 160 billion dollars worth of shares in viacom, cbs discovery, baidu and a few other technology socks. This was enough for him to single-handedly pump up the prices of these massive companies. He was playing a high-risk game of jenga, with 160 billion dollars on the line. Eventually, the bubble, pops and the stocks that he pumped up all came crumbling down.

Archagos portfolio was completely wiped out. Its lenders suffered over 10 billion dollars in losses as well. These lenders were some of the largest banks on wall street, including credit suisse, morgan stanley and goldman sachs. At first people thought that this guy must have gone crazy.

It was as if a degenerate from wall street bets somehow got a hold of 160 billion dollars and tried to blow it up as spectacularly as possible. But now we have new information. Huang was not crazy. As a veteran of the hedge fund industry, he knew exactly what he was doing.

His pumping up of stock prices was no accident. According to a recently released criminal investigation. It was part of a highly sophisticated market manipulation campaign which lasted for almost a year. If he was just a little bit luckier, he could have stood to make tens of billions of dollars in unethical profits.

After conducting a year-long investigation, federal authorities have arrested huang along with three of his associates, and he now faces up to 80 years in prison in this video. We'll look at how huang was able to take on so much leverage how he allegedly tried to manipulate the markets and how it almost worked. This video was brought to you by privacy.com privacy lets. You buy things online using virtual cards instead of having to use your real ones.

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You might be able to take on 50 to 100 margin. If the stocks you bought go up, your gains will be amplified by the leverage on the flip side. If there's ever a market crash, you can be completely wiped out and your portfolio value can go negative. This hypothetical graph shows the performance of a leveraged portfolio.

Most brokers only allow you to take on at most 100 margin, which gives you 200 exposure. If your stocks fall by 25, your portfolio will fall by 50, which is pretty bad, but at least you're still positive. Huang took on 450 leverage a 25 drawdown in the underlying stocks would result in the portfolio losing more than 100 of its value. For this very reason no broker would give you such an obscene amount of margin.

So then, how was bill able to convince his brokers to let him do it? Archagos had nine different counterparties that he used to take on leverage. These counterparties were large investment banks, including goldman sachs, morgan, stanley, credit suisse and others. Each one made a risk assessment to decide how much they are willing to lend and how much collateral they required. Each counterparty only saw what positions archaegos held directly with them for the risk assessment they needed to know.

Archaeos total exposure across all of its brokers. Archaegos refused to disclose the positions held at other counterparties, but they reassured the banks by saying they were prudently managing the position sizes. Importantly, they said that their portfolio was highly diversified, which makes it less risky. For example, let's say they own 5 billion dollars worth of viacom stock at credit suisse.

They would say that their positions with the other banks were in different stocks. So maybe you use your credit suisse to hold your viacom shares. Goldman sachs to hold your discovery, shares morgan stanley to hold your baidu shares and so on. While positions at each bank were concentrated, the overall portfolio was diversified.

Of course, this was all an elaborate lie. They would hold the same stock at multiple different banks, so the total position was many times larger than each bank thought. They said their single largest position was equal to 35 percent of their capital. In reality, viacom account for 96 of their capital.

They also said that they would be able to liquidate the entire portfolio within two weeks if necessary. This is calculated by selling 15 of the average trading volume per day selling any faster than this would adversely impact the share price. This representation couldn't be farther from the truth. Their position in the chinese e-commerce company vipshop was so big that it would take 134 trading days to complete an orderly liquidation.

That means that if the bank had to liquidate the position quickly, the selling pressure would cause the stock price to collapse and incur catastrophic trading losses. And finally, they told ubs that their positions at other banks were in large, liquid mega cap stocks like amazon, apple or google. In fact, these mega cap tech stocks made up only a negligible proportion of their portfolio. Their misrepresentations successfully made a false impression that they had a well-diversified portfolio in large liquid stocks, which was the exact opposite of the truth.

However, there was one problem when you own more than five percent of any company's outstanding shares. This triggers a disclosure requirement at the peak archaegos owned more than 50 of viacom's free flow. If the bank saw this disclosure, they would see that the portfolio is far less diversified than he claimed so huang had to get more sophisticated with his deception. He used something called a total return, swap this gives rk ghost the exact same economic exposure that they would have if they owned the shares, but the bank owns the shares on their behalf, it'd be like if i gave you one thousand dollars and told you to Buy shares of apple at the end of the year you'll sell the shares and give me the proceeds of the sale for practical purposes.

I own the shares, but they're technically under your name in your account. If you look at the top holders of any given stock, you will often see investment banks like goldman sachs or morgan stanley, in many cases they're holding these shares on behalf of their clients. So you have no idea who actually owns it. That's exactly what archaegos did by the summer of 2020 huang successfully duped the banks into giving him an insane amount of leverage.

All that was left was devising a trading strategy to 10x's money. In the past, artagos used a fundamentally driven investing strategy. They had dozens of research analysts who would analyze the financials of various companies. They had frequent meetings where the analysts would give buy and sell recommendations to build based on their research, but starting in 2020.

He completely changed his strategy. He identified about a dozen stocks with relatively low liquidity once he identified these talks. He went all in and didn't even consider new positions, as analysts recommended to him. The strategy was pretty simple.

He would start buying shares in these companies day after day flooding the market with buy orders, because he had so much leverage capacity from the banks. He could single-handedly pump up the prices which increased the value of his portfolio, at least on paper. He would be on the phone with his trading team pretty much all day every day, devising strategies to maximize the price impact they would buy heavily into the clothes and make the closing price high. When you look at stock charts, they often use the closing price for each day.

This adds to the illusion of the stock having positive momentum. He would also add buying pressure in the pre-market where volume is very low. With a relatively small amount of money, you can pump up the price in the pre-market other market participants, look at the pre-market strength and assume there's some sort of good news about the company. This is called setting the tone for the day and is one of the oldest tricks in the book.

Whenever there is bad news about one of his positions, he would instruct his traders to aggressively buy shares to prevent the price from declining too much. This creates a false impression that the news is not that bad. This was especially relevant for his position in the chinese online education company gsx, which became one of his largest positions in may of 2020. The famous short seller, carson block, came out saying that gsx was a near total fraud with 80 to 90 percent of its customers being fake.

Initially, the stock was down a few percent, as investors got scared and started selling. But within a few months of the short reports being released, bill huang started building up a multi-billion dollar position in the company, eventually owning more than 50 percent of the shares outstanding. This helped to pump up the price to over 100 per share at the peak. It's hard to speculate exactly why he did this, but, according to a recently released indictment, huang was already ignoring his research analyst by this time.

His reasons for going all in on gsx were likely more technical in nature. You might remember the epic gamestop short squeeze. That happened in early 2021 whenever you have a stock with very high short interest, an increase in buying pressure can cause a short squeeze which pushes the stock up towards the moon. Gsx was in a similar situation after carson block's short report, other hedge funds started piling in as well and the short interest increased significantly huang likely smelled blood in the water and thought that he could cause a squeeze while carson block always believed that gsx was a Fraud he says that he was forced to cover some of his position as the stock was skyrocketing in the summer of 2020..

He said it looked like a consortium of hedge funds were pumping up the price to profit from the eventual short squeeze. The indictment against huang does say that archaeo's conspired with another hedge fund, who is also buying, shares in gsx, while we don't know for sure, it's widely believed that this other hedge fund was tiger global run by fellow billionaire chase coleman. Interestingly, huang and coleman both worked for the legendary hedge fund tiger management back in the 1990s, so their connection goes back decades and based on regulatory filings. We know that tiger global was a major shareholder of gsx.

At the same time, that huang was buying his stake with 95 billion dollars of assets under management. Tiger global is one of the most successful hedge funds in the world. It would be interesting to see if the department of justice brings any charges against them in connection to bill huang's market manipulation. Huang's strategy of pumping up stock prices worked extraordinarily well.

In 2020. he increased archagos's equity value from one and a half billion dollars at the beginning of the year to 35 billion dollars by the end, that's more than a 20-fold increase and shows the power of leverage, at least when times are good, with an 11-figure net Worth huang was one of the richest people in the world for all practical purposes. It would be impossible for one man to spend this much money in his lifetime. He could have called it a day and retired, but that's not the type of person that bill is, if you 20 times your money in one year.

Why stop there a couple more good years and he could be the world's first trillionaire going into 2021. He used a higher equity value of his portfolio to get even more leverage from the banks. Ultimately amassing a 160 billion portfolio. Huang used this money to triple down on viacom cbs, which has since changed its name to paramount global.

He bought up 50 of the outstanding shares which, at the time, was worth tens of billions of dollars. The buying pressure pushed the share price up 160 percent in almost a straight line. Viacom senior management team had no idea why their stock price was skyrocketing. They thought it was highly unusual.

They decided to take advantage of the elevated valuation to issue three billion dollars of new shares, the stock sales signaled to the market that even the executives at viacom thought that shares were overvalued. Viacom shareholders started dumping their stock to take profits. Huang instructed his traders to use all the remaining cash and margin capacity to buy more shares of viacom to prevent the decline. Employees at archegoss grew concerned that they wouldn't have sufficient funds to pay for their trades and raise this issue with bill bill said not to worry about it and continue buying viacom.

This had always worked in the past, but by this point, viacom had gotten to be so outrageously overvalued that a huge number of investors wanted to take profits. Archagos withdrew all the money that they could from other banks to deposit into the banks which held by compositions, thereby putting every single one of their accounts in critical condition. But even this was not enough. They simply ran out of cash once they stopped buying the price started to free fall.

All of the banks immediately started liquidating all of his positions simultaneously, causing a massive crash in all their prices. In just a few days, 100 billion dollars of combined market cap was wiped out and archaegous was completely ruined. All of archaegos brokers lost money from the incident, but credit suisse was by far the hardest hit. They suffered a five and a half billion dollar loss, which is the single largest loss from a margin default in the swiss bank's 150 year.

History, credit suisse's share price has lost 50 percent of its value since arkaygos imploded investors now doubt their internal controls and risk mitigation procedures. The story of bill huang is a cautionary tale of greed. For some people, no matter how much money they have. It's never enough and they're willing to do just about anything to see the value in their bank account go up, alright, guys that wraps it up for this video.

What do you think about bill huang? Do you think he deserves jail time for his insane investment strategy? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.