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March 29, 2021

Secret Derivatives Trading by Goldman Sachs, Morgan Stanley, and the Latest Hedge Fund Collapse Again Reveal the Dangers of the Unregulated Shadow Banking System


Monday, March 29, 2021

Contact: Pamela Russell at 202-618-6433 or

Washington, D.C.  –  Dennis M. Kelleher, President and Chief Executive Officer of Better Markets, issued the following statement in response to reports that Goldman Sachs, Morgan Stanley and other systemically significant global investment banks enabled a hedge fund to secretly accumulate gigantic holdings in numerous publicly traded companies via undisclosed leveraged equity derivatives positions:

“Goldman Sachs, Morgan Stanley and other global investment banks reportedly sold more than $19 billion of stock blocks on Friday, causing market capitalization losses of $33 billion or so. Those losses, reportedly precipitated by the liquidation of a collapsing hedge fund, rippled throughout the financial system as other hedge funds, Wall Street’s biggest banks, mutual funds, broker dealers, and other market participants either defensively joined the selling or had to mark down their positions, reconfigure their portfolios, adjust their trading strategies, reposition their derivatives books, prepare for additional sales if any, and rethink hedge positions, among other things.

“Today, market participants are sitting on a knife’s edge wondering if Friday was the beginning, the middle or the end of the block sales, derivatives unwinding, and resulting losses like the $2 billion announced at Nomura and a potentially material loss at Credit Suisse. The questions and turmoil from the globe’s largest banks reportedly allowing a hedge fund with $15 billion to borrow up to as much as $80 billion via total return swaps and other synthetic positions, and thereby gain an economic exposure equal to more than 10% of the stock of some of those public companies, are just beginning. For example, apart from that leverage and hiding that ownership, what role if any did those banks and their clients play in the stock price run up of those names over the last couple of months and the price collapse over the last couple of days? This question is critically important because the collapsed hedge fund was reportedly run by a person who previously engaged in substantial insider trading and settled criminal and civil charges banning him from the industry, and being rejected as a client by Goldman Sachs for years due to that illegal conduct until recently.

“While the most sophisticated market participants learned on Friday that the $19 billion of ‘fire sales’ were the result of a so-called ‘forced-deleveraging,’ a well-known euphemism for when hedge funds exit massive positions to meet margin calls and/or their prime brokers and derivatives dealers sell collateral due to missed margin calls on highly leveraged positions, the markets had no idea how big the positions were, in what stocks, how much was going to be sold, who owned it, what the leverage was, among other things. That’s because the shadow banking system remains non-transparent in material respects and much larger than it was in 2008, when it triggered a financial collapse and economic catastrophe known as the ‘Great Recession.’

“Systemic risk from secret and interconnected leverage, trading and derivatives in astronomical undisclosed amounts continue to permeate the shadow banking system and remain as dangerous today as it was in 1998 when the Long-Term Capital Management hedge fund blew up. And, as in 1998, 2008 and 2020, Wall Street’s largest, taxpayer-backed and bailed-out too-big-to-fail banks are at the center of creating and selling these dangerous products and enabling this high-risk conduct.

“It is a dereliction of duty for regulators at the Securities and Exchange Commission (SEC), the Federal Reserve, the Treasury Department and elsewhere, including most prominently the members of the Financial Stability Oversight Council (FSOC), to allow these systemic risks to continue to build up unseen and unregulated. As we have called for in the past (a few examples are below), the Biden administration regulators need to act swiftly and comprehensively to protect our financial system, our economy and, ultimately, Main Street jobs from these well-known and long-unaddressed risks.”

Proposed Rule Amendments and Guidance Addressing Cross-Border Application of Certain Security-Based Swap Requirements (File Number S7–07–19).

Request for Comment on Portfolio Margining of Uncleared Swaps and Non-Cleared Security- Based Swaps (RIN 3038-AF07; RIN 3235-AM64).

Use of Derivatives by Registered Investment Companies and Business Development Companies; Required Due Diligence by Broker-Dealers and Registered Investment Advisers Regarding Retail Customers’ Transactions in Certain Leveraged/ Inverse Investment Vehicles : File Number S7–24– 15 (RIN 3235–AL60).

Margin and Capital Requirements for Covered Swap Entities, 84 Fed. Reg. 59970 (November 7, 2019).


Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit

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