Archegos’ Banks Had Some Chats

A lot of problems in finance come from fire sales and contagion, and a lot of regulation is organized around preventing them. Most classically, there is bankruptcy law: When a company runs into financial trouble, all of its creditors have an incentive to demand their money back and grab collateral to get paid back before everyone else, but if they all do that then the company will collapse and there won’t be much value left for anyone. So bankruptcy law gives the company the ability to stall its creditors and pay them all back equally, which prevents a rushed fire sale and preserves more value for all of them.

This problem is even more acute in banking — when a bank is troubled, depositors will run to get their deposits back — so there are things like deposit insurance and the central bank’s lender-of-last-resort function, which are designed to prevent value-destroying runs on the bank.