Over the weekend, a story at MinistryWatch.com caught my eye: "Christian Billionaire and Philanthropist’s Bad Bets Rattle Wall Street."
Wow! I read on.
Nobody is sure how much the money maven and Christian philanthropist Sung Kook "Bill" Hwang was actually worth before his overly leveraged investment firm suddenly and dramatically ran out of cash last week. $10 billion? $20 billion? More?
Now, banks around the world that helped underwrite his growth say they may have lost billions after his empire collapsed. A Bloomberg article...says Hwang and his company are at the center of "a multibillion-dollar fiasco involving secretive market bets that were dangerously leveraged and unwound in a blink."
One veteran investment expert summed up the meltdown this way: "This has to be one of the single greatest losses of personal wealth in history."
Here are the basic facts, as summarized by MinistryWatch reporter Stever Rabey:
Hwang bought and sold shares in stocks "on margin," meaning he borrowed funds from banks, including Morgan Stanley, Goldman Sachs, Credit Suisse, Deutsche Bank, and the Japanese bank Nomura.... In addition to leverage, [he] used risky and complex financial instruments called derivatives....
Hwang was betting that the value of stocks such as ViacomCBS would rise, but when ViacomCBS announced it was selling additional shares, the stocks’ value decreased. That led Hwang’s banks to demand that he bring more collateral to the table. Bloomberg called this “one of the biggest margin calls of all time.”
When Hwang couldn’t comply, the banks started a massive sell-off of the billions worth of stock they owned. The fire sale only further reduced the stocks’ value. At one time during the past week, the value of ViacomCBS stock dropped by half.... As CNBC reported, the episode "ignited a whopping $20 billion wave of forced liquidations at a slew of Wall Street banks."
Although Hwang pled guilty in 2012 to insider trading and stock manipulation in a case brought by the U.S. Securities and Exchange Commission, there are no allegations of illegality related to this recent collapse. Instead, this seems to be a worst-case scenario that became a reality.
As noted above, Hwang’s investments were heavily leveraged. Stated simply, leverage uses borrowed capital as a funding source to increase the potential return of an investment.
The alluring thing about using leverage is that one’s gains are magnified. But so are losses, a possibility that’s often overlooked or explained away — until it happens. As investor Seth Klarman, author of Margin of Safety, once wrote about various investment risks, "The problem is that with so much attention being paid to the upside, it is easy to lose sight of the risk."
Risky business
Investing, by its very nature, involves putting money at risk. You can’t avoid that. But taking on an inordinate level risk on the assumption that everything will go as planned is asking for trouble — whether you’re billionaire Bill Hwang or average guy John Doe. To quote Howard Marks, another noted investor, "You might want to give some thought to how you’ll fare if the future doesn’t oblige."
Indeed. That’s why SMI urges you to Make Sure Your Investment Decision-Making Is Inside-Out. We also stress the importance of Diversification: The Only Free Lunch in Investing. As you get older, we think you should ask, Is it Time to Reduce Your Investment Risk? Further, we suggest that When in Doubt, Take the Safe Route.
And, of course, we think you should be Building Your Financial House on the Bedrock of Biblical Principles.
Keep plodding along
We hope Bill Hwang can recover somewhat and continue his support of Christian ministries and other charitable endeavors.
While there is likely more to this story than has been reported thus far, we can say that the sudden collapse of his financial holdings throws into sharp relief the wise words of Proverbs 21:5: “Steady plodding brings prosperity; hasty speculation brings poverty” (TLB).
