Forced Selling at Large Funds

Dated events

1. Sept. 23, 1998 · New York Fed brokers a $3.6 billion private rescue of LTCM by 14 firms
   The Federal Reserve Bank of New York gathered 14 major banks to put together a $3.6 billion rescue of Long-Term Capital Management, a giant investment fund that had borrowed enormous amounts and was about to fail. Because LTCM had made huge bets with so many banks, its collapse threatened to cause a chain reaction where banks would all try to dump the same investments at once, dragging down prices of things that had nothing to do with each other. In the following weeks, the Fed cut interest rates to calm things down, and rules about how much funds could borrow came under serious debate.
2. Aug. 9, 2007 · Quant hedge funds suffer heavy losses as crowded stock trades unwind
   Several large computer-driven investment funds, including ones run by Goldman Sachs, lost huge amounts in just a few days as their automatic trading strategies all tried to sell the same stocks at the same time. The problem was that many funds had copied similar strategies and borrowed heavily, so when one started selling, it forced others to sell too, hitting stocks that seemed completely unrelated. This event was an early warning sign of deeper problems in the financial system that would fully surface the following year.
3. Oct. 24, 2008 · Global stocks fall on recession fears as hedge funds unwind leveraged positions
   As the financial crisis deepened, investors rushed to pull their money out of hedge funds, forcing those funds to sell whatever they could, including stocks, bonds, and commodities that had nothing to do with the housing crisis. Banks that had lent money to these funds demanded their cash back, creating a vicious cycle where selling caused more selling across seemingly unconnected investments. Many hedge funds ended up freezing withdrawals entirely, trapping investors' money for months.
4. March 20, 2020 · Leveraged mortgage funds hit by margin calls; AG Mortgage says it can't pay more
   As fear over COVID-19 shutdowns spread, banks demanded that heavily borrowed investment funds put up more cash, forcing those funds to sell almost anything they owned, even safe government bonds and gold, just to raise money. This created the strange situation where nearly every type of investment fell at the same time, because the selling was driven by who needed cash, not by what the investments were actually worth. The Federal Reserve stepped in with emergency programs to keep markets functioning, and prices began to stabilize in the following weeks.
5. March 26, 2021 · Banks begin dumping Archegos Capital's stock holdings in huge block trades
   Banks including Goldman Sachs and Morgan Stanley began dumping billions of dollars worth of shares after Archegos Capital, a private investment fund run by Bill Hwang, could not meet demands to put up more cash to back its enormous borrowed bets. Because Archegos had secretly built up huge positions in companies like ViacomCBS and Discovery through multiple banks, none of the banks realized how exposed they were until it was too late. Banks that were slower to sell lost more than $10 billion in total, led by Credit Suisse and Nomura, and Credit Suisse's troubles from this event contributed to its eventual takeover by UBS.

Assets named in this scenario · 6

Deutsche BankFinancial Select Sector SPDR FundInvesco QQQ Trust (Nasdaq-100)JPMorgan ChaseSPDR S&P 500 ETF TrustUBS Group

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