Nomura and Credit Suisse are facing billions of dollars in losses after a US hedge fund, named by sources as Archegos Capital, defaulted on margin calls, putting investors on edge about who else might have been caught out.
Losses at Archegos Capital Management, run by former Tiger Asia manager Bill Hwang, had triggered a fire sale of stocks on Friday, a source familiar with the matter said.
Nomura, Japan’s largest investment bank, warned on Monday it faced a possible $2 billion loss due to transactions with a US client while Credit Suisse said a default on margin calls by a US-based fund could be “highly significant and material” to its first-quarter results.
The Swiss bank said that a fund had “defaulted on margin calls” to it and other banks, meaning they were now in the process of exiting these positions.
Two sources said Credit Suisse’s losses were likely to be at least $1 billion. One of those sources said the losses could go as high as $4 billion, a figure also reported by the Financial Times. Credit Suisse declined to comment on any estimate.
Nomura shares closed down 16.3 per cent, a record one-day drop, while Credit Suisse shares were down 14 per cent, their biggest fall in a year.
Switzerland’s financial regulator said on Monday it was aware of the hedge fund case and was in touch with Credit Suisse about it. The Swiss regulator also said several banks and locations internationally were involved.
The Swiss National Bank declined to comment.
In Japan, chief cabinet secretary Katsunobu Kato said the government would carefully monitor the situation at Nomura and that the Financial Services Agency would share information with the Bank of Japan.
Other banks’ shares were affected, with Deutsche Bank down 5 per cent, while UBS was 3.8 per cent lower. UBS had no immediate comment on its stock prices or exposure to Archegos.
Deutsche’s Archegos exposure was a fraction of what others have, a source familiar with the matter said, adding that the German bank had not incurred any losses and was in the process of managing its position.
A margin call is when a bank asks a client to put up more collateral if a trade partly funded with borrowed money has fallen sharply in value. If the client cannot afford to do that, the lender will sell the securities to try to recoup what it is owed.
Margin calls on Archegos Capital prompted a massive unwinding of leveraged equity bets. Shares in ViacomCBS and Discovery each tumbled around 27 per cent on Friday, while US-listed shares of China-based Baidu and Tencent Music plunged during the week, dropping as much as 33.5 per cent and 48.5 per cent, respectively, from Tuesday’s closing levels.
Investors were nervous about whether the full extent of Archegos’ apparent wipeout has been realised or whether there was more selling to come.
Nasdaq 100 futures and S&P 500 Futures were both down 0.5 per cent in early European trade as the widening fallout of Archegos’ liquidation became clearer.
Hwang did not respond to a message on LinkedIn. A person at Archegos who answered the phone on Saturday declined to comment. Hwang, who founded Archegos and ran Tiger Asia from 2001 to 2012, renamed it Archegos Capital and made it a family office, according to a page capture that sought to profit on bets on securities in Asia.
Hwang in 2012 settled insider trading charges by the US Securities and Exchange Commission according to a press release at the time. He and his firms at the time agreed to pay $44 million to settle, the press release said.
The scale of the losses at banks is likely to prompt questions about banks’ oversight of their exposure to Archegos.
“If the figures one can read about Credit Suisse are accurate, there is clearly a big risk management problem,” said Jerome Legras, managing partner and head of research at Axiom Alternative Investments, which invests in banks and insurers.
For Credit Suisse this will mark the second straight quarter the bank has recorded losses on hedge fund exposure and adds to pressure on chief executive Thomas Gottstein, who is grappling with the fallout from the bank’s dealings with collapsed supply chain finance company Greensill.
Some market participants said last week’s wild share price moves were likely to unsettle investors.
“It’s insane,” said Edward Moya, senior market analyst at OANDA. “When you consider how some of these companies have skyrocketed over the last few months, there will be concerns that we are over-levered.”
Others said potential further unwinds would only have a limited impact. The Nasdaq Composite and S&P 500 both surged over 1 per cent on Friday despite the sharp selloffs in Viacom and other stocks.
Michael Antonelli, market strategist at Baird, said: “Some of the names where big blocks were traded on Friday might see some near-term volatility as traders wonder whether the selling is complete.”
Several banks were involved with the trade unwinds. A source familiar with the matter said on Saturday that Goldman Sachs Group was involved.
On Monday, a source familiar with the situation said any losses incurred by Goldman Sachs were immaterial.
The Financial Times reported that Morgan Stanley sold $4 billion worth of shares early on Friday, followed by another $4 billion in the afternoon.
Bloomberg and the Financial Times on Saturday reported that Goldman liquidated more than $10 billion worth of stocks in the block trades.
An email to clients seen by Bloomberg News said Goldman sold $6.6 billion worth of shares of Baidu, Tencent Music Entertainment Group and Vipshop Holdings, before the US market opened on Friday, the Bloomberg report on Saturday said.
Following this, Goldman sold $3.9 billion worth of shares in ViacomCBS, Discovery, Farfetch, iQIYI and GSX Techedu, the report said. – Reuters
