If you believe in the adage that a healthy economy can’t exist without a healthy financial system, then you’re in luck. It wasn’t looking good for large banks when news broke last weekend that Wall Street firms were liquidating the positions of Bill Hwang’s Archegos Capital Management after it failed to meet margin calls. Estimates of the firm’s total positions reached $100 billion. The first question that came to mind was whether this had the potential to turn into a financial crisis; early reports focused on “excessive leverage” and Archegos’s generous use of derivatives to amplify bets.
Sure, a number of Wall Street banks said their earnings — not to mention their reputations — will take a hit, but it’s nothing that can’t be handled. That is clearly evident in the benchmark KBW Bank Index, which was little changed for the week, as well as in the corporate bond index, where a tightening of yield spreads suggests banks are more creditworthy now than before the Archegos revelations.
