have to lose. get it and get it now. your body will thank you. (announcer) find out more at aerotrainer.com. that's aerotrainer.com. romaine: hello and welcome to a bloomberg special report -- wall street blow up. it's a deep look at what is rattling financials around the world. joining us here to talk a little bit more about it -- about what is going on. wall street executives realize they may be facing the biggest hedge fund blowup since the 90's. trader bills playing was tied --

trader billhwang -- traders sold huge chunks of shares or block trades. they may face significant losses after some trading positions moved against him. they were caught in hot water as prime brokers started demanding he provide more collateral. so let's talk about these block trades. they were massive. i was not here friday when it happened, but i heard about it and it rattled the markets. joe: everybody was talking about it. absolutely extraordinary volumes. moves you don't expect. we didn't realize when we did this show at 4:30 -- but look at the combined volumes in some of these names -- discovery that

one got clobbered, viacom -- it is seismic. extraordinary. carol: one of the things we are trying to figure out is there are still semi-questions out there. who's the individual behind all of this? he's not a well-known name on wall street. he's not someone you see in new york social circles. he someone with an mba from carnegie mellon and he's a tiger cub, so he's an elite hedge fund individual who created their own fund after working with julian robertson at tiger management. that happened in 2001 and then a few years later, the sec charging him with insider trading.

he pleaded guilty to charges of wire fun -- wire fraud. keep in mind they paid about $60 million in penalties for illegal trades with some of the chinese firms they were invested in. this is someone, not a known name to wall street, but he's facing his second major scandal. that's the person behind it, but there are stock names behind it. tim: you heard joe and romain mention some of these names and some of them got clobbered. numerous is down, credit suisse is down, viacomcbs finishing the day lower by more than 6.7 percent after being down 50% over the last week and 55% in the last five days. discovery finishing the day down , more than 45% over the last week. romaine: one thing that is

interesting is not everything that's unwound but everything we know about bill hwang and how this all unfolded. a great story on the bloomberg terminal was by erik schatzker who broke this story and worked on it over the weekend. he talks a lot here about not only who he was but his relationship with goldman sachs and these other primary ogres. he was on the outs for a long time. he got back on the inside and i'm wondering what transpired where goldman and some of these other brokers were willing to deal with him in ways that they were not a decade ago. tim: dollars and cents. in the case of goldman sachs, they were on the side that it was ok to do business with bill hwang. he pleaded guilty with charges to wire fraud and chinese bank stocks.

but morgan stanley, from what we understand, numeral, deutsche bank, they were comfortable dealing with him as a prime broker. goldman sachs, as late as late 2018, he was on the blacklist and they refused to do business with him because the compliance department said there's no way. there were efforts made inside goldman sachs to open an account on archegos, on behalf of his firm, and they were turned down. sometime in the last two and half years, goldman decided it was ok. there's only two reasons they would have made that decision. one is he spent enough time in the penalty box to cleanse himself or his record. romaine: can i guess number two? erika: bill -- he was whale.

spread among let's say half a dozen wall street firms. the executives inside the prime brokerage looked at that and said we are forgoing all of this business, can we please come to a decision that bill hwang is ok to deal with. eventually this decision yes was made and that's how they came to do business with them. carol: so here we are, i'm looking at the equity markets and it's not like we saw the financial markets fallout today. how do we explain that this is an important story, yet a lot of investors shrugged it off? erik: the simple answer is highly concentrated debt. bill hwang has up portfolio possibly north of $50 billion. it of the stocks that have been sold thus far, we are only talking about nine names,

incredibly, highly concentrated. so while the prices and those stocks have been blown to bits -- look at what has happened to viacom in the past five days, the rest of the market is absorbing it. it's not as though this liquidation came in the midst of a broader market bloodbath. this was highly confined to bill hwang and his positions. if you helped -- if you held viacom, far-fetched or discovery, you are collateral damage. but if you are not owning those stocks, there's little reason to expect something terrible is on the way. yes, we don't believe the liquidations are done yet. we understand the prime brokers are offering blocks, but they are blocks in the same names offered by other prime brokers. that helps to explain why there wasn't broader market fallout. joe: do you anticipate brokers to change policy about understanding the risk of their

own clients holdings? erik: that's a good question. i would expect regulators are going to make that decision for the prime brokers. what happen here is a number of different firms allowed this individual to lever up on the same names. did they know what the other prime brokers were doing? it's reasonable to assume probably not until last wednesday or thursday when this became a serious issue, when he was blowing through margin limits and they began to realize they were going to have to default and realized we have levered up on the same names. if you are morgan stanley or goldman sachs, and it appears those firms have been able to escape this fiasco without any losses, then there isn't a good reason to change your risk-management practices because they worked. you were able to unload the stock in time ahead of credit suisse, head of numerous, head

of deutsche bank, head of others, wells fargo is another name out there offering blocks. those other firms may have to examine their risk-management practices and say are we going to allow any individual or family office or private investment firm to lever up to this degree because we've have demonstrated we can't manage it properly. tim: how does one entity build up such a concentrated position and in equity without notifying anyone? erik: this is a good question. he was not a hedge fund and did not have reporting obligations. all the stock was owned or held by the prime brokers. they engaged in total return swaps with bill hwang. he would either owe them money or he would pay profits or a share of the investment profits. that is how he never had to report anything to the ftc or

any other regulators and was allowed to amass all this leverage and a portfolio in the tens of billions of dollars under the radar, leaving hardly a footprint. carol: there's so any questions here and we have a lot to get to, but erik schatzker, thank you for laying it out for us. erik schatzker winning is there. we are going to continue our coverage. go anywhere. lots more to come, including a continuation of our special coverage of this incredible ♪ ♪ block trade blowout. ♪

>> it does reinforce that there is risk out there, you have to understand the leverage they are utilizing. carol: that was keith banks on bloomberg television earlier. the block trade blowup -- i'm here with romaine bostick, joe weisenthal and tim stenovec. we want to welcome our next guest, the cofounder and ceo of virtue finance. great to have you with us. we set the stage for what has been going on. what jumps out that you think our bloomberg audiences need to be aware of? doug: thanks for having me on. we notice this friday as a market maker. we see the ripples on a giant rockets thrown into the marketplace. that is what happened, as eric just discussed. it was limited to a certain number of names. the damage wasn't severe but the

good news is that market recovered. there's a number of issues around how this firm conducted itself in the marketplace. a number of u.s. security laws, section 13, section 13 g come around disclosures, section 13 f -- should they be filing these as a family office? perhaps they are not legally required to do so. carol: should they be filing so there's more transparency? doug: we are all in favor of transparency in the marketplace. the difference between a hedge fund at a family office if they are managing over 100 million dollars, the marketplace is entitled to understand what they are doing. we have this rule called section 16 which is intended to limit short swing profits from insiders. if you own more than 10% of a public company, i am as a shareholder and officer of a public company, i can't just buy

and sell my stock without the possibility of recapture of profits. the fcc will look to see if there was intentional avoidance and it's pretty significant. tim: we are hearing from some people here who are saying the way these trades were structured isn't exactly uncommon. they may be uncommon with regard to the scale, but the idea folks have been using these equity swaps to disguise some of their positioning has started to become a little more common. i'm curious as to whether you are aware of that and if so, whether you think there is some sort of regulatory action that can be done? doug: there's nothing unusual about a total return swap. it's a common execution tool used by large institutions. we don't do it here. we act as a broker. it's a way of providing

execution capabilities and there's nothing wrong with that. the issue is whether they were intentionally avoiding u.s. security laws. more significantly, section 16 rules by dividing up what they were doing between a number of different prime brokers. that should be illegal and if not, i'm sure the fcc will address that. joe: the stock that caught everyone's eye was viacom. it's fallen 50% in last weekend just got destroyed on friday. what does it say about market liquidity, market depth that with no actual real catalyst, the blowup of one investor can send a stock down 50% and no recovery today. nothing change, just one person out of the game and whole companies by ua she gets cut in half. is that assigned there are other air pockets out there that can't be sustained without leverage? doug: an air pocket is one

thing, this was a massive movement because of a number of institutions, as the press reported, wanted to liquidate positions in this name very quickly. nobody would knowingly and willingly, intelligently want to sell $10 billion of any name over the course of a day. the market reacted the way the market should. is there any information or is this a forced liquidation and that is what it was. i wouldn't read too much into it in that regard. in fact, the marketplace kind of worked because there were prices all the way through. you might not have liked the prices but the stock traded and settled and cleared in the market functions the way it should. it's very disconcerting because there are a number of unhappy investors who bought those names over the last couple of weeks that will be unhappy when they look at their statements. tim: to that end, is the fallout

from this done? doug: we saw a big tremor on friday and ripples today, so i would imagine there are some pieces that need to come off the balance sheet. it would be great if there is more transparency so investors would have more idea, but think there will be some regulatory scrutiny, as there should be. not whether the total return swap makes sense. whether there should be more transparency and disclosure by a family office as opposed to a hedge fund and to make sure institutions like this can't effectively circumvent the federal securities laws. romaine: a lot of questions need to be answered. we appreciate you coming on and talking about this. coming up, we will speak to nick dunbar about risk management. was there rick management -- was there risk management?

this is bloomberg. ♪

romaine: we want to welcome back all of our television viewers and radio listeners for our expanded coverage of the block trade blowout. all joining forces today like a superhero alliance. during this right now is nick dunbar, founder and editor of risky finance to talk a little more about what's going on. right to have you. there is a lot of concern as to how banks, particularly banks of this size could be caught holding the bag or at least some portion of the bag in this case. nick: pleasure to be with you tonight. it's incredible. you should have seen the emails i've been getting today from

some of the employees at these banks. romaine: forward them. nick: people are really upset. we are talking about half a year worth of income and that's going to hurt everybody. there's going to be a lot of anger at the failure of risk management and a big postmortem going on. joe: low ups in the industry happen from time to time, but we are not used to them in just someone got over their skis long equity too much. it's not typically the source of a lot of volatility like this. what does it say to you about risk management practices at some of these banks that lost a lot of money and the degree to which prime brokerage's need to know more about their clients position? nick: there are a lot of things,

but this tension between the desire to make profits and the necessity to reduce risk. it keeps having to be relearned. you have this single thing and to each of the individual banks, those trades looked in line. they convinced themselves that they were innocuous trades and morgan stanley, credit suisse, but it's an elephant. it's a definite risk factor. a fairly humdrum thing being traded by lack rock every day. they think they know these but don't see all the pieces that come together and there is a

failure there in the risk models because they don't catch these risk factors. tim: this is part of the game. this is risk management. does anything actually change on the others of this or is it just part of the way it works? nick: after the financial crisis, it kind of got elevated. but then when everyone's making a profit, let's look the other way, give the risk management job -- the board is not going to put pressure to reduce the profits coming in, they were all trying to chase each other. credit squeeze which is chasing number a, which is chasing goldman, which is chasing everyone. regulation is left behind as

well and they are looking flat-footed. carol: as long as there's money involved, won't we always run into these kinds of problems? nick: yes. pretty much. you say you can't do stuff, the risk manager in the bank has to take the punch bowl away from the prime brokerage desk. they have to do that by putting in capital to these businesses to say there is a shareholder's money here at risk. i will give a really brief example. when you look at credit suisse, they produce these regulatory filings and say at the end of last year, they had 300 million swiss francs of exposures to other institutions and hedge funds. they also had 230 billion in

equity securities collateral. clearly they got something wrong. carol: what are you going to be watching the next couple of days coming off of this? nick: we need to see some reorganization at these banks. there needs to be management changes that have to happen to really get people's assurance up again. carol: we are going to leave it on that note. thank you so much. we appreciate you joining us with your thoughts on rick -- on risk management. that's going to do it for our cross-platform coverage. for romaine bostick, joe weisenthal and tim stenovec, have a great evening. bloomberg technology is coming up. daybreak: asia is coming up in australia and sound off with

kevin cirilli is coming up on bloomberg radio. this is bloomberg. ♪

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