Global banks face losses, regulatory scrutiny after Archegos share dump

Nomura and Credit Suisse are facing billions of dollars in losses and regulatory scrutiny after a U.S. investment firm, named by sources as Archegos Capital, defaulted on equity derivative bets, putting investors on edge about who else might be exposed.

Losses at Archegos Capital Management, run by former Tiger Asia manager Bill Hwang, triggered a fire sale of stocks on Friday, a source familiar with the matter said.

A phone message left for Archegos at its New York offices on Monday morning was not immediately returned.

Warnings by Credit Suisse and Nomura that they expect to incur big losses as a result of lending to Archegos triggered a sell-off in banking stocks around the globe on Monday. Morgan Stanley shares fell nearly 3% and Goldman Sachs Group dropped 1.5%. Nomura shares closed down 16.3%, a record one-day drop, while Credit Suisse shares tumbled 14%, their biggest fall in a year.

The financial impact on Goldman Sachs was immaterial, a separate source said on Monday. Morgan Stanley, which sold $4 billion related to Archegos on Friday, did not incur significant losses, CNBC reported on Monday.

Moreover, the broader market impact appeared limited, with the U.S. S&P 500 benchmark flat in afternoon trading while financial stocks were down 1%.

"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.

Nomura, Japan's largest investment bank, warned on Monday it faced a possible $2 billion loss due to transactions with a U.S. client, 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.

The Swiss bank said that a fund had "defaulted on margin calls" to it and other banks, and the institutions were liquidating those 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.

Switzerland's financial regulator said on Monday it was in touch with Credit Suisse regarding the incident.

In Japan, Chief Cabinet Secretary Katsunobu Kato said the government would carefully monitor the situation at Nomura and the Financial Services Agency would share information with the Bank of Japan.

Other banks' shares were affected, with Deutsche Bank down 5%, while UBS was 3.8% lower. UBS had no immediate comment on its stock price or exposure to Archegos.

Deutsche Bank said in a statement that 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.

In the United States, the Securities and Exchange Commission has been "monitoring the situation and communicating with market participants since last week," a spokesperson said.

MARGIN CALLS

A margin call is when 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 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% on Friday, while U.S.-listed shares of China-based Baidu and Tencent Music plunged during the week, dropping as much as 33.5% and 48.5%, respectively, from Tuesday's closing levels.

Archegos bet on the stocks using derivatives including "total return swaps" which allow investors to receive profits on their positions without actually owning the stocks, according to one source familiar with the trades. The fund posts collateral against the securities rather than buying them outright with cash.

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

Archegos' positions were highly leveraged. The firm had assets totalling around $10 billion but held positions worth in excess of $50 billion, the source said.

With such high leverage, investors were nervous on Monday about whether the full impact of Archegos' problem had been realized or whether more selling would follow.

Hwang did not respond to a LinkedIn message seeking comment.

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. Tiger Asia was a Hong Kong-based fund trading in Asia securities.

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

Hwang is known to use outsized leverage to magnify his bets.

"Bill Hwang ... runs a very concentrated, highly leveraged book," said Thomas Hayes, chairman at Great Hill Capital LLC in New York.

Other hedge fund managers said they were puzzled as to why Hwang, whom several described as a "smart guy," had made such big bets on ViacomCBS and Discovery, given many investors were betting 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.

Short interest in ViacomCBS and Discovery was 18.4% and 30.45% respectively, according to Monday data from S3 Partners.

REGULATORY FALLOUT

Alex Brazier, head of financial stability strategy and risk at the Bank of England, said in a Reuters Newsmaker interview on Monday that the BoE was monitoring events "very closely and the supervisors of the relevant firms are closely engaged".

Other stocks involved in Archegos-related liquidations included Baidu Inc, Tencent Music Entertainment Group, Vipshop Holdings Ltd, Farfetch Ltd, iQIYI Inc and GSX Techedu Inc.