Archegos Liquidation ($25Billion To Zero) Hits Nomura, Credit Suisse And Other Banks
Banks’ shares tumble amid pain over losses at firm run by former Tiger Asia manager Bill Hwang. Archegos Liquidation ($25Billion To Zero) Hits Nomura, Credit Suisse And Other Banks
A fire sale of stocks from a large U.S. investor slammed global investment banks Credit Suisse Group AG and Nomura Holdings Inc., which said they could incur substantial losses related to the trades.
Shares in Nomura fell 16%, a record single-day drop. Credit Suisse’s stock tumbled 13%, its biggest fall since last March.
In recent days, losses at Archegos Capital Management, run by former Tiger Asia manager Bill Hwang, have triggered the liquidation of positions approaching $30 billion in value, The Wall Street Journal has reported.
Credit Suisse said it was too early to quantify the exact impact it faced, but that it could be “highly significant and material” to its results for the first quarter, which ends this month.
“A significant U.S.-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” the Zurich-based bank said Monday. “Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions.”
A person familiar with Credit Suisse said its potential loss was related to the Archegos situation.
Japanese rival Nomura said it was owed about $2 billion by a U.S. client. A person familiar with the matter said the trades in question were related to Archegos.
Mr. Hwang, a former protégé of hedge-fund titan Julian Robertson, managed around $10 billion of family money through Archegos. The firm made big bets on public stocks in the U.S., Europe and Asia. Unwinding of his positions caused sharp falls last week in many stocks, including ViacomCBS Inc. and Discovery Inc., even while broader markets rose.
The potential Archegos losses are the latest in a series of hits that have exposed the Swiss bank as accident prone.
Earlier this month, the bank said it faces potential losses from the collapse of U.K. financial firm Greensill Capital, with which it ran $10 billion of investment funds. In February, Credit Suisse reported a fourth-quarter 2020 loss from more than $1 billion in charges to settle a U.S. court case over toxic securities and to mark down a stake it held in a big U.S. hedge fund.
The bank reported some loan losses last year from client frauds and net litigation provisions soared above $1.3 billion.
The Swiss bank spent years shrinking its investment-banking arm to reduce risk. It instead focused on the steady revenue from managing money for the world’s wealthy. Credit Suisse limits the investment bank’s capital to one-third of its total.
U.S. securities filings show Credit Suisse was prime broker in 2011 and 2012 to Mr. Hwang’s former firm, Tiger Asia Management LLC. Tiger Asia handed money back to investors after Mr. Hwang admitted in December 2012 that the hedge fund criminally used inside information from investment banks at least three times to profit on securities trades.
Tiger Asia paid $44 million to settle a related civil lawsuit, the Journal reported at the time.
The potential losses for Credit Suisse and Nomura highlight the inherent riskiness of investment banking, the business of trading securities and advising companies and investors on major transactions.
Banks across Wall Street reported strong profits last year on a boom in stock and bond trading during the pandemic. But there is a long history of securities-trading activity coming back to bite banks suddenly, wiping out months worth of profit in days.
Before Monday’s warning, Credit Suisse had said its pretax profit in January and February was the best in a decade, and that revenue in its investment bank was up more than 50% from last year.
In a margin call, a bank asks a client to put up more collateral if a position partly funded with borrowed money has fallen sharply in value. If the client can’t afford to do that, the lender will sell the securities to try to recoup what it is owed.
Large banks served as prime brokers to Archegos, meaning they processed the fund’s trades and lent it cash and securities. Late last week, Morgan Stanley, Goldman Sachs Group Inc. and Deutsche Bank AG swiftly unloaded large blocks of shares tied to Archegos, the Journal reported.
Deutsche Bank reduced its exposure unscathed, according to a spokesman. “We are managing down the immaterial remaining client positions, on which we do not expect to incur any loss,” he said.
Shares in Goldman Sachs, Morgan Stanley, Deutsche Bank and UBS Group AG edged lower Monday.
Block trades late last week involving Archegos spanned media companies such as ViacomCBS and Discovery, as well as many Chinese technology stocks, including Baidu Inc., GSX Techedu Inc., IQIYI Inc. and Tencent Music Entertainment Group.
The spreading pain from Archegos revived memories on Wall Street of Long Term Capital Management. The hedge fund, advised by two Nobel laureates, unraveled without warning in 1998, triggering a $3.6 billion bailout from a consortium of Wall Street banks, guided by the Federal Reserve.
So far, the selling hasn’t rippled beyond individual stocks.
Nomura said Monday an event on March 26 could “subject one of its U.S. subsidiaries to a significant loss arising from transactions with a U.S. client.” The bank said it was evaluating the extent of any loss and the impact on results.
Nomura estimated the claim against its client at $2 billion, based on Friday’s market prices, and said that could change depending on market moves and how transactions were unwound. Nomura also postponed a planned sale of $3.25 billion in dollar bonds.
Given the bank’s high capital buffers—it had a common-equity Tier 1 ratio of more than 17% as of the end of December—there “will be no issues related to the operations or financial soundness of Nomura Holdings or its U.S. subsidiary,” it said.
Like other banks, Nomura has recently benefited from booming global markets. Income from its international business more than doubled in the nine months through September, and made up 42% of group pretax income.
In credit markets, both banks saw a rise in the cost to insure their bonds against default using derivatives. The increases indicate jitters among investors, but they remain far below levels of the pandemic-induced market panic last March.
Global Banks Under Pressure Amid U.S. Fund’s Woes
Wall Street is facing a new problem linked to hedge funds, margin calls, financial derivatives, and leverage. It sounds a little scary, but it shouldn’t be enough to hurt the market. The same can’t be said for some banks’ stocks, though.
Shares of Credit Suisse and Nomura Holdings fell sharply on Monday, as each warned of potentially large losses from a U.S. client, likely linked to troubles for Archegos Capital Management reported by Bloomberg and The Wall Street Journal. Archegos declined to comment.
Credit Suisse (ticker: CS) American depositary receipts were down more than 13% in morning trading. Nomura (8604.Japan) shares fell more than 16% in Tokyo. S&P 500 was down 0.2%.
Neither bank identified the client, but the disclosures follow steep losses for shares of U.S. media companies ViacomCBS (VIAC) and Discovery (DISCA), and Chinese entertainment group IQIYI (IQ) on Friday, after some $30 billion in so-called block selling linked to the liquidation of Archegos positions in those stocks, the reports said.
Both the Journal and Bloomberg reported that the selling followed a margin call by Goldman Sachs (GS) on Archegos, the family office of former Tiger Fund manager Bill Hwang.
Goldman Sachs said that because it had proactively managed its risk, the financial impact won’t be material. Hwang didn’t immediately respond to a request for comment.
Block trades refer to much larger than average stock sales. A broker will take a large “block” and work to break it apart into little chunks sold to institutional investing clients, with the intention of minimizing the price impact.
Larger than average trading volume can easily impact stock prices. Roughly 20 million shares of ViacomCBS trade on any given day. More than 216 million shares traded Friday. The stock slid 27%.
Even before Friday, ViacomCBS stock had dropped 32% last week, which may have triggered problems for Archegos. The fund managed about $10 billion in capital but had more than $30 billion in exposure, according to the Journal.
Hedge funds generally borrow money to buy assets and secure the loans with the assets purchased. Brokers can seize those assets if the funds fail to make margin calls as losses on their positions grow. The process can wipe out a hedge fund’s capital. It can also create losses for brokers if the money they raise by selling the stock doesn’t cover the loans.
In addition to Credit Suisse and Nomura, Morgan Stanley and other investment banks reportedly had to exit positions related to the fund on Friday. Morgan Stanley wasn’t immediately available for comment.
Credit Suisse said in a trading statement that a “significant U.S.-based hedge fund defaulted on margin calls made last week” by it and other banks. “Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions,” it added.
The Swiss bank said that while it could not yet “quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first-quarter results.” The bank promised to update in “due course.”
Nomura Holdings issued a similar statement. “The estimated amount of the claim against the client is approximately $2 billion based on market prices as of March 26,” it said.
Switzerland’s independent financial-markets regulator FINMA said in a statement that was aware of the international hedge-fund case, noting that “several banks and locations internationally are involved.” FINMA said it was informed by Credit Suisse and is staying in contact.
Regulators get involved when losses threaten the financial condition of brokers. The Archegos situation, however, looks smaller than similar situation in the past. Nomura’s losses, at $2 billion, for instance, might shave about 1% off its regulatory capital cushion.
One of the most famous hedge-fund implosions was Long Term Capital Management. That fund, however, had peak exposure of up to $1 trillion around the time it needed to be bailed out back in 1998.
The exposure was so large it threatened the health of the financial system, prompting the Federal Reserve to broker a rescue for the fund. This time, investors will likely face selling in some bank stocks, such as Nomura, as well as in stocks Archegos is believed to own, or have owned.
Baidu (BIDU) for instance, was among stocks under pressure in recent days and its Hong-Kong listed shares fell another 5% on Monday, while its U.S.-listed shares were also down in premarket trading. Also caught up in the selling last week were shares of China’s Tencent Music Entertaiment Group. On Sunday, the company announced plans to buy back $1 billion in shares.
U.S. stocks were under pressure as investors braced for potentially more fallout. Still, the fallout looked contained. The Dow Jones Industrial Average was down about 0.1% Monday, following Friday’s gain of 1.4%.
“You worry that this sort of frothy trading activity in turn creates pockets of distress among investors and banks that leads to larger unwinds and losses for financials,” said Neil Wilson, chief market analyst at Markets.com.
“Leveraged family funds blowing up is nothing new though and I’d think that whatever impact this has on the banks, it will be a quarter or two of profit at worst. Excessive valuations in some names and sectors have created pockets of distress when things start to unravel. It’s a worry and a symptom of excess liquidity,” he said in a note to clients.
“Shares in ViacomCBS and Discovery had been bid up to the rafters this year and came tumbling down, taking Archegos with them,” he said, noting ViacomCBS was up over 170% year-to-date and Discovery up 150% in the same period before last week’s selloff.
Billions In Secret Derivatives At Center Of Archegos Blowup
The forced liquidation of more than $20 billion in holdings linked to Bill Hwang’s investment firm is drawing attention to the covert financial instruments he used to build large stakes in companies.
Much of the leverage used by Hwang’s Archegos Capital Management was provided by banks including Nomura Holdings Inc. and Credit Suisse Group AG through swaps or so-called contracts-for-difference, according to people with direct knowledge of the deals. It means Archegos may never actually have owned most of the underlying securities — if any at all.
While investors who own a stake of more than 5% in a U.S.-listed company usually have to disclose their holdings and subsequent transactions, that’s not the case with positions built through the type of derivatives apparently used by Archegos.
The products, which are transacted off exchanges, allow managers like Hwang to amass exposure to publicly-traded companies without having to declare it.
The swift unwinding of Archegos has reverberated across the globe, after banks such as Goldman Sachs Group Inc. and Morgan Stanley forced Hwang’s firm to sell billions of dollars in investments accumulated through highly leveraged bets.
The selloff roiled stocks from Baidu Inc. to ViacomCBS Inc., and prompted Nomura and Credit Suisse to disclose that they face potentially significant losses on their exposure.
One reason for the widening fallout is the borrowed funds that investors use to magnify their bets: a margin call occurs when the market goes against a large, leveraged position, forcing the hedge fund to deposit more cash or securities with its broker to cover any losses. Archegos was probably required to deposit only a small percentage of the total value of trades.
The chain of events set off by this massive unwinding is yet another reminder of the role that hedge funds play in the global capital markets. A hedge fund short squeeze during a Reddit-fueled frenzy for Gamestop Corp. shares earlier this year spurred a $6 billion loss for Gabe Plotkin’s Melvin Capital and sparked scrutiny from U.S. regulators and politicians.
The idea that one firm can quietly amass outsized positions through the use of derivatives could set off another wave of criticism directed against loosely regulated firms that have the power to destabilize markets.
While the margin calls on Friday triggered losses of as much as 40% in some shares, there was no sign of contagion in markets broadly on Monday. Contrast that with 2008, when Ireland’s then-richest man used derivatives to build a position so large in Anglo Irish Bank Corp. it eventually contributed to the country’s international bailout.
In 2015, New York-based FXCM Inc. needed rescuing because of losses at its U.K. affiliate resulting from the unexpected de-pegging of the Swiss franc.
Much about Hwang’s trades remains unclear, but market participants estimate his assets had grown to anywhere from $5 billion to $10 billion in recent years and total positions may have topped $50 billion.
“This is a challenging time for the family office of Archegos Capital Management, our partners and employees,” Karen Kessler, a spokesperson for Archegos, said late Monday in an emailed statement. “All plans are being discussed as Mr. Hwang and the team determine the best path forward.”
CFDs and swaps are among bespoke derivatives that investors trade privately between themselves, or over-the-counter, instead of through public exchanges. Such opacity helped to worsen the 2008 financial crisis and regulators have introduced a vast new body of rules governing the assets since then.
Over-the-counter equity derivatives occupy one of the smallest corners of this opaque market. Swaps and forwards linked to stocks had a gross market value of $282 billion at the end of June 2020, according to data from the Bank for International Settlements. That compared with $10.3 trillion for swaps linked to interest rates and $2.4 trillion for swaps and forwards linked to currencies.
Regulators have begun clamping down on CFDs in recent years because they’re concerned the derivatives are too complex and too risky for retail investors, with the European Securities and Markets Authority in 2018 restricting the distribution to individuals and capping leverage. In the U.S., CFDs are largely banned for amateur traders.
Banks still favor them because they can make a large profit without needing to set aside as much capital versus trading actual securities, another consequence of regulation imposed in the aftermath of the global financial crisis. Among hedge funds, equity swaps and CFDs grew in popularity because they are exempt from stamp duty in high-tax jurisdictions such as the U.K.
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