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Fmr. Wall Street professional examines the fallout from Archegos

Americans for Financial Reform Senior Policy Analyst Alexis Goldstein joins Yahoo Finance Live to discuss her recent op-ed following the fallout from Archegos.

Video Transcript

AKIKO FUJITA: The sell-off stemming from Archegos Capital rocked Wall Street earlier this year. And it exposed the lack of oversight when it comes to family offices. Our next guest says it's time for policymakers to act in an op-ed published in "The New York Times." She writes, "If policymakers leave private funds under-regulated, we may not know how many others are following Archegos's dangerous playbook until it's too late." Let's bring in Alexis Goldstein. She's Americans for Financial Reform senior policy analyst. Alexis, it's good to talk to you today. Let's start with that question you kind of pose in that excerpt we just read. I mean, how many more of these Archegos incidents do you see in the market? How significant is that risk?

ALEXIS GOLDSTEIN: We don't know the answer to that question, and that what troubles me. So there's several different problems. One is that what is known as family funds, which is what Archegos is, is a really big marketplace. There's lots of funds out there. Leon Cooperman, who is the famous billionaire, who has been in the news a lot, he converted his hedge fund into a family fund. And they don't have any reporting requirements.

But then there's also things that Archegos was doing that, even if Archegos had been a hedge fund, would not have needed to been reported to regulators. And that is things like using derivatives that behave like stocks, but aren't stocks. And because they're not using stocks, they don't have to report them. So there's plenty of hedge funds that are probably doing the same kinds of risky bets that Archegos was doing, taking on lots and lots of leverage, using certain kinds of derivatives. But they're silent, they're invisible. And the regulators don't know about it. And those are the kinds of risks that can lead to systemic risks, if everybody's doing the same thing at the same time, like they were in the financial crisis, and it all blows up in their face. And so, that's the kind of thing that keeps me up at night.

ZACK GUZMAN: Yeah, that's probably why it's important to the broader audience there because if a family fund loses money and it's their problem, that's fine. But when it triggers a lot of the other losses at some of the banks that are working on the trades there and playing their role in it, it becomes much larger. And then you've got your systemic issues there. But when you look at it, I mean, the moves weren't necessarily even major. We're talking about leverage that was used there by Archegos. So talk to me about how it might be even worse when it comes to crypto. I mean, the moves we're seeing today would prove out that family fund had been exposed to crypto on a day like today, I imagine it could have been even worse.

ALEXIS GOLDSTEIN: That's right, right? The whole bottom seems to have fallen out in crypto, although it's somewhat recovering. So crypto isn't disclosed either. So it's the same sort of Archegos secrecy problem. If you're a hedge fund trading crypto, we have no idea that you're doing it because you don't have to report the trades. And so, if, you know, every hedge fund is crowding into the same crypto position at the same time, and all of a sudden, the bottom falls out like a day like today, they might have to sell other positions that they have, which they do hold with banks, who are backed by taxpayer money.

And if there's forced liquidation at every fund that does business with the bank at the same time, then the whole market goes down. And it can lead to this sort of death spiral. And this is precisely the kind of thing that the Federal Reserve actually warned about in its financial stability report last year that banks were giving great credit and loaning tons of money to hedge funds who were their favorite clients, and maybe they shouldn't be doing that. And Archegos is a really good example of exactly that, which is why I've been surprised that the Fed hasn't been a little bit more on top of the Archegos example. They've been kind of downplaying it.

But when everyone's on the same side of the same trade and it goes bad, that's when it can start to hit the whole economy. That's when it can hit the banks. And that's when it becomes, as you say, Zack, a systemic risk issue. And that's the kind of thing the regulators need to be looking out for. Whether it's crypto, whether it's derivatives that aren't reported, or whether it's family funds that don't have to do any reporting at all, we need transparency in order to protect the markets for everybody.

AKIKO FUJITA: You've already hit on a number of things that Gary Gensler over at the SEC has said he's already looking into. As it relates to family offices, what specifically do you think the regulation should look like?

ALEXIS GOLDSTEIN: I mean, Akiko, it's a good question. I do think Congress has a role here because Congress carved them out of the 2010 Dodd-Frank Act. There is actually a draft bill from Chairwoman Maxine Waters, who heads the Financial Services Committee, to add them, to give them oversight, if they have $750 million or more in assets that they're managing.

But I also think that there are probably hooks that the regulators can use, just to bring a little bit more transparency into what they're doing now, right? There's probably ways to think creatively about it. But I think a combination of action from Congress and action from the regulators can hopefully shine a little bit more spotlight on this. So we don't-- we got really lucky, I think, with Archegos. We might not get so lucky next time. So I think now is a really good time to act.

AKIKO FUJITA: Alexis Goldstein, Americans for Financial Reform Senior Policy Analyst, it's good to get your insight today. Thanks so much for joining us.