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