Is Speculation a Bit Rampant on Wall Street?

With Wall Street near record highs, one has to wonder if this is driven by fundamentals or speculation. In late January, we had GameStop speculation by the Reddit / Robinhood crowd. Considering that it is still at an elevated stock price, one has to wonder if speculation is still playing a role in that stock. 

Then in late March, we had the Archegos Capital Management fiasco, which sent ViacomCBS stock plunging from the mid-50s to the mid-40s. It also impacted Discovery, Baidu and Tencent. CNBC (Mar 27) reported on the situation that had occurred on Friday, Mar 26:

Some of the severe selling pressure in select U.S. media stocks and Chinese internet ADRs on Friday was due to the forced liquidation of positions held by the multibillion dollar family office, Archegos Capital Management, according to a source with direct knowledge of the situation.

Archegos Capital was founded by the former Tiger Management equity analyst, Bill Hwang.

Now what is interesting is how two different banks dealt with the situation as they had dealings with Archegos.

CNBC (Apr 6) reported about the impact to Credit Suisse, which didn't fair too well.

It took a charge of $4.7 billion as a result and now expects a first-quarter pre-tax loss of around $960.4 million.

Investment Bank CEO Brian Chin and Chief Risk and Compliance Officer Lara Warner will step down from their roles with immediate effect.

Credit Suisse on Tuesday announced several high-level staff departures and proposed a cut to its dividend as it weighs heavy losses from the Archegos Capital saga.

CNBC (Apr 6) reported on Morgan Stanley, which did fairly well:

Morgan Stanley had the consent of Archegos, run by former Tiger Management analyst Bill Hwang, to shop around its stock late Thursday, these people said. The bank offered the shares at a discount, telling the hedge funds that they were part of a margin call that could prevent the collapse of an unnamed client.

But the investment bank had information it didn’t share with the stock buyers: The basket of shares it was selling, comprised of eight or so names including Baidu and Tencent Music, was merely the opening salvo of an unprecedented wave of tens of billions of dollars in sales by Morgan Stanley and other investment banks starting the very next day.

Morgan Stanley dumped $5 billion in shares. The loss they took isn't mentioned other than they gave a discount on the shares. Maybe they lost $500 million or less? 

The question to me is who acted more ethical here: Credit Suisse or Morgan Stanley? Sure, two high level executives lost their jobs at Credit Suisse and they might have to cut their dividend, but they kept the losses internally. Of course, was taking the losses intentional or just someone deciding not to put in a few extra hours of overtime sending out e-mails, calling people up, etc etc to spread out the losses.

Meanwhile, Morgan Stanley pushed what I would assume would be the majority of the losses on hedge funds. CNBC mentions that some of the hedge funds feel "betrayed." On the other hand, Zerohedge (Apr 7) points out that these hedge funds are dubbed "equity capital markets strategies, which means they "don’t have views on the merits of individual stocks. Instead, they’ll purchase blocks of stock from big prime brokers like Morgan Stanley and others when the discount is deep enough, usually to unwind the trades over time." I would think that Morgan Stanley is guilty of a lie of omission. But again, they sold to hedge funds that specialize in buying discounted shares. Also, I'm sure they'll send some business to those hedge funds to help them recover their losses.

Anyways, back to the rampant speculation that is in the title of this post. Archegos Capital is an example of what is a called a family office being over-leveraged. How many other such entities get taken down?