Goldman Sachs and Archegos Reveal a Blind Spot for Fed

Throughout the uncertainty of the Covid-19 pandemic, investors have at least taken comfort in knowing the global financial system was more or less on solid ground. Sure, risk assets plunged briefly in March 2020, and even U.S. Treasuries experienced the highest volatility in more than a decade, but central banks calmed that turbulence quickly.

“This time around, the regulated part of the financial system held up very well,” Federal Reserve Chair Jerome Powell said after the central bank’s decision on March 17. “We actually monitor financial conditions very, very broadly and carefully. And we didn’t do that before the global financial crisis 12 years ago. Now we do. And we’ve also put a lot of time and effort into strengthening the large financial institutions that form the core of our financial system.”All was well — or so it seemed.

Now less than two weeks after Powell’s remarks, Bill Hwang’s Archegos Capital Management has reminded the world just how fast things can unravel in the financial system during periods of acute stress, particularly for those institutions that aren’t the absolute largest. According to Bloomberg News, market participants estimate the former protege of Julian Robertson’s Tiger Management had built up assets of anywhere from $5 billion to $10 billion in recent years, and total positions may have topped $50 billion. That kind of money might not be enough to create a huge domino effect around the globe, but it should put investors on high alert for another episode that could.