The sun had already set on March 25, 2021, and Bill Hwang’s banks were still awaiting explanations.

Some had issued margin calls to his private investment firm, Archegos Capital Management, as its multibillion-dollar bets started souring. But despite assurances from Archegos staffers, the banks were left waiting on it to pay what it owed.

Finally, just after 8.20pm in New York, a call was convened between the lenders and Archegos representatives, including Hwang himself. It would soon be apparent how big the problem was.

For Bryan Fairbanks, a risk manager at UBS Group AG, the conversation confirmed what he described to a New York courtroom on Tuesday as his “worst fear”: Hwang had bet his US$36 billion fortune on a small group of stocks through a variety of banks, leaving them in the dark about the overlapping trades. There were six lenders on the call - Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc, Morgan Stanley, Nomura Holdings Inc and UBS.

Hwang assured the group he was “very confident” he could sell positions and satisfy margin calls if he had “a little more time”. But it was his next statement - that his firm’s equity capital remained “strong” at US$9 billion to US$10 billion - that shocked Fairbanks.

“It implied he lost more than 50% of his money that day alone,” Fairbanks said. “It was extremely alarming.”

The testimony goes to the heart of allegations by prosecutors that Hwang engaged in market manipulation while driving up prices of favoured stocks, and that he conspired with chief financial officer Patrick Halligan to mislead banks about the risks as Archegos sought financing to support its massive bets. Fairbanks took the stand as the first witness in a trial over Archegos’ collapse, which cost lenders at least US$10 billion and contributed to the downfall of Credit Suisse.

During his first day of testimony on Monday, Fairbanks said that all of the information Archegos shared with UBS was “lies”, and that he “probably would have hit the panic button” if he had known the investment firm’s positions were so concentrated. UBS lost US$860 million trading with Archegos.

Though Hwang sounded confident on the fateful conference call - a recording of which was played for the jury in court on Tuesday - the banker recalled a growing sense of dread.

Hwang explained on the call that he ran a “very concentrated book” with about 12 names. That disclosure confirmed Fairbanks’ concerns that overlapping positions were placed across the group of banks.

Hwang said on the call that he thought he could bring down gross exposure by 15% “using both long and short”. But as he described his positions and leverage, Fairbanks had a revelation: “It meant he was losing money faster than he was able to sell down his portfolio.”

The next day, Fairbanks said, UBS began unwinding Hwang’s wagers, which took about six to seven weeks. With other banks also unloading the same stocks, Archegos collapsed and their own losses soared.

Challenging the witness

As Hwang’s legal team took over questioning, they sought to make their case that banks did business with Archegos in a rush to earn fees - while ignoring risks - and that witnesses from those counterparties are shading the truth to shift blame from themselves.

Fairbanks acknowledged that Archegos’ potential value to UBS in terms of revenue was a “big number”, but said he had “fired other clients of almost similar magnitude”.

When Hwang lawyer Jordan Estes also asked if Fairbanks had been reprimanded by UBS due to the debacle, it drew an objection from the prosecution that the judge sustained.

The risk manager, who is no longer at UBS, had testified on Monday that one of his first assignments after joining the bank in 2010 was to close the account of Hwang’s previous hedge fund, Tiger Asia Management. Hwang launched Archegos as a family office in 2013 after Tiger Asia pleaded guilty in an insider trading case.

When Archegos sought to trade at UBS, Fairbanks said he thought the account had “hair on it”, meaning it would have a hard time being accepted as a client because of Tiger Asia’s history. But he said UBS decided to do business with Archegos anyway.

According to his testimony, Fairbanks first grew concerned about Archegos in the summer of 2020 due to its large position in a then-volatile stock: GSX Techedu, a Chinese educational software company now known as Gaotu Techedu Inc. But the bank later agreed to increase its exposure to US$10 billion from US$8 billion after Archegos representatives indicated more than 30% of its equity was cash.

Sinking feeling

Fairbanks said he constantly sought more details on the firm’s portfolio to better assess potential dangers, yet like many such clients, it was secretive. Archegos employees described investments, he noted, but they never offered a full picture.

Then, in late March of 2021, UBS warned Archegos that losses on its portfolio with the bank meant the firm faced a substantial margin call the next day of more than US$500 million. Fairbanks said he believed Archegos would meet the demand and that he felt reassured when its executives said they could free up cash by liquidating positions quickly.

But the next morning, after UBS issued a US$640 million margin call, a more dire picture emerged, Fairbanks said. He said Archegos’ head trader, William Tomita, disclosed that Archegos’ biggest positions were in companies like ViacomCBS, Discovery and Tencent Holdings - countering his earlier belief that the family office also held positions in leading technology companies such as Apple Inc.

“My gut sunk,” Fairbanks recounted. “I knew UBS was going to take a very large loss.”

Fairbanks said he emailed Tomita later that day, saying UBS senior management was “frustrated by the lack of engagement” by Archegos to meet margin call. They wanted to hear from Hwang.

The Swiss lender “hoped for the best”. Fairbanks said, but “prepared for the worst”.

  - Bloomberg