The arrest of the founder of investment firm Archegos last week, accused of securities fraud, is a great reminder of the potential debt. In March 2021, Archegos was insolvent, allegedly concealing its debt from Wall Street firms by using “total return swaps” to manipulate stock prices. The inevitable crash destroyed $100 billion in stock value. (Archegos attorneys have denied the allegations.) Separately, supply chain financier Greensill used what Fitch describes as a “hidden debt loophole” that collapsed around the same time.
Are there many of these out there? I ask because we are in the most dangerous phase of the economic cycle. Interest rates are rising to fight inflation and there can be all kinds of leverage that we don’t know about. Always have. Recessions (and especially recessions) will expose these underlying horrors. In 2018, the columnist argued that “in a recession, equity falls but debt kills.” We’re about to find out if that’s still true.
https://www.wsj.com/articles/debt-can-be-a-killer-investments-stocks-loans-elon-musk-twitter-economic-cycle-inflation-downturns-stock-prices-11651420308 Debt Can Be a Killer