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Global bank losses may top $6 billion on Archegos downfall

Stock MarketsMar 29, 2021 07:27PM ET
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By Makiko Yamazaki, John Revill and Matt Scuffham

TOKYO/ZURICH/NEW YORK (Reuters) - Global banks may lose more than $6 billion from the downfall of Archegos Capital, sources familiar with trades involving the U.S. investment firm said on Monday, as regulators and investors feared the episode would reverberate more widely.

Japan's Nomura and Credit Suisse (SIX:CSGN) of Switzerland warned of major losses from lending to Archegos for equity derivatives trades, triggering a worldwide sell-off in banking stocks.

Morgan Stanley (NYSE:MS) shares fell 2.6% and Goldman Sachs Group (NYSE:GS) dropped 1.7%. Nomura shares closed down 16.3%, a record one-day drop, while Credit Suisse shares tumbled 14%, their biggest fall in a year. Deutsche Bank (DE:DBKGn) dropped 5% and UBS was off 3.8%.

Losses at Archegos Capital Management, run by former Tiger Asia manager Bill Hwang, sparked a fire sale of stocks including ViacomCBS (NASDAQ:VIAC) and Discovery (NASDAQ:DISCA) on Friday, a source familiar with the matter said.

"This is a challenging time for the family office of Archegos Capital Management, our partners and employees," company spokesperson Karen Kessler said in a statement. "All plans are being discussed as Mr. Hwang and the team determine the best path forward."

Archegos was unable to meet banks' calls for more collateral to secure equity swap trades they had partly financed. After those positions fell sharply in value, lenders sold big blocks of securities to recoup what they were owed, the sources said.

"This is the kind of thing that happens in a speculative environment. You start finding that things go wrong," said Richard Bernstein, chief executive of Richard Bernstein Advisors. "When you have people making certain bets based on what has outperformed in the past and the tide turns they get burned. The question is how much leverage they used."

Nomura, Japan's largest investment bank, warned of a possible $2 billion loss, while Credit Suisse said a default on margin calls by a U.S.-based fund could be "highly significant and material" to its first-quarter results.

Two sources said Credit Suisse's losses were likely to be at least $1 billion. One of them said the losses could reach $4 billion, a figure also reported by the Financial Times. Credit Suisse declined to comment.

But several other banks appeared to be relatively unscathed. The financial impact on Goldman Sachs was immaterial, a separate source said. Likewise, Morgan Stanley, which sold $4 billion in stocks related to Archegos on Friday, did not incur major losses, CNBC reported.

Deutsche Bank said in a statement it had significantly de-risked its Archegos exposure without incurring any losses and was managing down its "immaterial remaining client positions," on which it did not expect to incur a loss.

The broader market impact was muted with the U.S. S&P 500 benchmark closing slightly lower, while financials ended down more than 2%.

"You continue to see strength in the overall market. There is not fear of selling stocks all together, there's just fear in pockets of the market," said Dennis Dick, head of market structure at Bright Trading LLC in Las Vegas.

REGULATORS WATCHING CLOSELY

Investors questioned if the full impact of Archegos' problem had been realized.

Market observers noted that only in February, hedge funds took major losses on short positions during the run-up in GameStop Corp (NYSE:GME) stock. That forced hedge fund Melvin Capital Management to borrow money from another fund to stay afloat. Hedge fund de-leveraging also contributed toward turmoil in the U.S. Treasuries market in March 2020.

In the case of Archegos, the opaque and complex nature of its derivative trades, lightly regulated structure as a family office and high leverage - fueled by historically low interest rates - prompted concern about potential systemic risk.

Regulators in the United States, UK, Switzerland and Japan said they were closely monitoring developments.

Archegos bought derivatives known as total return swaps, which allow investors to bet on stock price moves without owning the underlying securities, according to one source familiar with the trades. The fund posts collateral against the securities rather than buying them outright with cash.

Archegos' positions were highly leveraged. The firm had assets of around $10 billion but held positions worth more than $50 billion, according to the source who declined to be identified.

Thomas Hayes, chairman of Great Hill Capital LLC in New York, said Hwang was known to run "a very concentrated, highly leveraged book."

The underlying shares were held by Archegos' prime brokers, which lent it money and structured and processed its trades. They included Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse and Nomura.

Unwinding the positions led banks to sell large blocks of stock. Shares of ViacomCBS and Discovery each tumbled around 27% on Friday, while U.S.-listed shares of China-based Baidu and Tencent Music plunged as much as 33.5% and 48.5% last week.

Other stocks caught up in Archegos-related liquidations included Baidu Inc (NASDAQ:BIDU), Tencent Music Entertainment Group (NYSE:TME), Vipshop (NYSE:VIPS) Holdings Ltd, Farfetch (NYSE:FTCH) Ltd, iQIYI Inc and GSX Techedu (NYSE:GSX) Inc.

Hwang, who ran Tiger Asia from 2001 to 2012, renamed the hedge fund Archegos Capital and converted it to a family office, according to a page capture of the fund's website. Family offices act as private wealth managers and have lower disclosure requirements than other investment companies.

Hedge fund managers said they wondered why Hwang, whom several described as a "smart guy," had made such big bets on ViacomCBS and Discovery, given the large wagers against the companies. The pair are not seen as high-growth plays, in contrast to other media stocks that have outperformed during the COVID-19 pandemic, the sources said.

Hwang and his firm in 2012 paid $44 million to settle Securities and Exchange Commission insider trading charges.

Global bank losses may top $6 billion on Archegos downfall
 

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Comments (12)
Michael Cruz
Michael Cruz Mar 29, 2021 11:11PM ET
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jail them all. betting with other people's money like sociopaths
AmericaIsKing oftheGalaxy
AmericaIsKing oftheGalaxy Mar 29, 2021 11:10PM ET
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6 billion :( I hate these numbers I hear every day. 1700 Americans become millionaires every day. Trillion stimulus. I just want to pay my parents house off so they don't have to worry about it as they find it more and more difficult to walk from the back of their home to the front.  6 billion, they flush it down the toilet as if it's nothing.
Chris Hall
Chris Hall Mar 29, 2021 8:15PM ET
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More Greedy Useless Hedgies... Now They Just Screwing Over Banks Instead
Johnny Crash
Johnny Crash Mar 29, 2021 5:30PM ET
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Ah, who cares. The tax payer will bail them out again
Jacob Steinschlag
Jacob Steinschlag Mar 29, 2021 6:04AM ET
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Here we can see again that hedge funds are useful for...wait what?
K Kim
K Kim Mar 29, 2021 12:39AM ET
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Is he alive?
Roger Miller
Roger Miller Mar 28, 2021 10:01PM ET
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Someone should ask Powell how the big banks lending easy and cheap Fed dollars to outfits like Archegos help the economy and create jobs?
Dave Jones
Dave Jones Mar 28, 2021 10:01PM ET
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What a great question that would be! But it would never happen and even if it did they'd flub it and say these things happen and market forces blah blah blah...
Greg Russell
Greg Russell Mar 28, 2021 10:01PM ET
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Fed lowers rates for banks and banks create false fear and raise rates for us!
SK Tan
SK Tan Mar 28, 2021 8:19PM ET
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bb pump and sell. Same cycle will comes back again. Let's wait for another pump as dump is mostly done
Kevin Theboss
Kevin Theboss Mar 28, 2021 8:19PM ET
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Let’s not !!
danny Levine
danny Levine Mar 28, 2021 6:45PM ET
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I'll add some bidu tmrw. too cheap to resist rofl
danny Levine
danny Levine Mar 28, 2021 6:23PM ET
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why does this site keep banning me?
Joel Schwartz
Joel Schwartz Mar 28, 2021 6:19PM ET
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Big boys want to scare retail out of their positons. What else is new?
Todd Gray
Todd Gray Mar 28, 2021 6:19PM ET
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maybe.
Tom Tipton
Tom Tipton Mar 28, 2021 6:19PM ET
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This is beyond a scare tactic...both those companies are dumpsters and smart money knows it
Don Koester
Don Koester Mar 28, 2021 6:19PM ET
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the smart money who got margin called?
danny Levine
danny Levine Mar 28, 2021 6:19PM ET
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totally agree.
Dave Jones
Dave Jones Mar 28, 2021 5:29PM ET
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At last! A decent article about the truth!
danny Levine
danny Levine Mar 28, 2021 5:29PM ET
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beaware. it's from Reuters.
Dave Jones
Dave Jones Mar 28, 2021 5:29PM ET
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yeah I might have been sarcastic
 
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