Hedge fund meltdown is a (another) warning to Wall Street

Editor’s Note: A version of this story appeared in CNN Business’ Nightcap newsletter. To get it in your inbox, sign up for free, here.

Tonight: Global banks are, once again, learning about the dangers of excessive leverage; the Great Stuck may be unstuck, but the Suez saga isn’t over; and the housing market has truly gone bonkers. Let’s get into it.

HEDGE FUND FAIL

A little-known hedge fund has caused widespread chaos on Wall Street. And it’s a scary reminder of the dangers posed by extreme leverage, secret derivatives and rock-bottom interest rates, my colleague Matt Egan writes.

WHAT HAPPENED

Archegos Capital, a hedge fund few people had heard of, used borrowed money to build massive positions that propped up media stocks including ViacomCBS and Discovery. It did so using complicated financial instruments called swaps (If you’re having flashbacks to 2008, stick with me…). The hedge fund’s type of excessive leverage is made possible by extremely low interest rates from the Federal Reserve.

Archegos’ complex strategy left the firm badly exposed, and its bets came under pressure as Viacom shares slipped over a large stock offering earlier in the week.

The hedge fund faced a so-called forced liquidation of its position, and that set off a bloodbath Friday that sank shares of ViacomCBS and Discovery more than 25% apiece.

The firesale wiped out more than half of Viacom’s value last week alone. Banks face billions in losses from their exposure to Archegos.

Here’s why this is scary for everyday Americans: In this era of easy money, Archegos was able to borrow so much that its failure created shockwaves large enough to ripple across Wall Street. And that can impact everyday Americans’ retirement accounts. It also demonstrates the intricate web linking firms across Wall Street — and the risks to the banks providing large amounts of leverage.

“It’s a wake-up call. With leverage, comes risk,” said Art Hogan, chief market strategist at National Securities Corporation. “We saw it on the short side when GameStop blew up. Now we are seeing it on the long side.”

Read more about how the hedge fund imploded.

NUMBERS OF THE DAY 

Here’s a little by-the-numbers story that perfectly sums up what’s happening in the US housing market.

• A fixer-upper in suburban Washington, DC was listed for $275,000 on a Thursday. By Sunday evening, it had 88 offers. 
• 76 were all-cash offers. 
• Fifteen 15 of the offers came in sight-unseen.  
• The four-bedroom, 1,800 square-foot home sold for $460,000 — nearly a 70% increase from the asking price. The buyer is an investor who is will likely to renovate and resell at an even higher price, according to the listing agent.   

WHAT’S GOING ON?

Home sales fell off a cliff at the beginning of the pandemic. By May, sales were coming but inventory wasn’t. Even in a seller’s market, many homeowners are putting off listing their properties because they don’t want to deal with the all-cash-elbow-jabbing-sight-unseen scrum they would face in finding their next home. Inventory is staying tight, and mortgage rates are staying low. CNN Business’ Anna Bahney has more.

FLOAT ON  

It’s free!

The megaship that’s been clogging the Suez Canal for nearly a week was finally dislodged, clearing the way for hundreds of waiting vessels to begin transiting the vital trade artery.

High fives all around to the dredgers and tug boaters that worked to dislodge the beast. And a big tip of the hat to all the creators of memes that captured the absurdity of the way-too-big boat in the way-too-narrow corridor.

But the Suez saga isn’t nearly over. Here’s why:

• It will take days to clear the backlog. There were more than 360 vessels — including 35 crude oil tankers and 96 container ships — waiting to use the canal.  
• Shipping was a mess long before this. The pandemic upended global supply chains last year. Initially, economic activity ground to a halt. Then the buying sprees began with a vengeance — your Peloton splurge, your home office equipment, that new sofa and TV … all of those caught companies off guard and gunked up the works.  
• Higher prices are coming. The average cost to ship a 40-foot container shot up from $1,040 last June to $4,570 on March 1, according to S&P Global Platts. Eventually, those costs could be passed on to consumers, adding to rising inflation — aka the i-word, aka the Wall Street Villain Who Shan’t be Named, aka the thing keeping investors up at night.   

THE TAKEAWAY

More than 80% of global trade by volume is moved by sea, and disruptions — even just one ship, albeit a ginormous one, running aground — can add billions of dollars to supply chain costs. It’s only a matter of time before those costs shift to consumers.

QUOTE OF THE DAY

“We have African Americans today who have a lot less wealth in part because they have not been able to inherent the wealth that would have accrued had their ancestors been able to accrue that wealth.” 

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, expressed support for reparations to address the consequences of racism and inequality in America. “There are definitely merits to it in the sense that, if people have been harmed by laws, then there should be a discussion about redress,” Bostic, who became the first Black president of a regional Fed bank in 2017, told CNN Business in an interview.

WHAT ELSE IS GOING ON

• Rent relief: The federal ban on evictions has been extended yet again, this time to June 30, bringing relief to tens of millions of renters struggling to catch up.

• Saucy: Watch out, Rao’s. Carbone wants to be the new fancy grocery store pasta sauce. 

• To the max: Southwest Airlines just placed the largest order for Boeing’s 737 Max since it was grounded two years ago. 
• Turn the music up: Peloton and Verzuz, two success stories of the pandemic economy, unveiled a new music collaboration series.