This is what happened when the fall in shares of ViacomCBS last week sparked a wave of $ 20 billion forced sales at Wall Street banks to Archegos Capital Management, the family office founded by former Tiger Management analyst Bill Hwang.
By the time Credit Suisse and Nomura, two main Archegos brokers, announced early Monday that they were facing losses that could be “very large” for banks, rival firms Goldman Sachs and Morgan Stanley had already finished trading. unload their positions, according to people with knowledge of the subject.
Goldman managed to sell most of the shares linked to its Archegos margin calls on Friday, helping the company avoid any loss in the episode, according to one of the people. Morgan Stanley sold $ 15 billion in stock within days, avoiding significant losses, CNBC’s Leslie Picker reported.
Investors sanctioned the two non-US banks. Nomura ended Monday down 14%, while Credit Suisse slipped 11.5% as the market closed. Meanwhile, Morgan Stanley fell 2.6% and Goldman shares fell a modest 0.5%.
“In this environment, where information flows quickly and you need to act quickly, this demonstrates a significant weakness in Nomura’s risk management,” said Mark Williams, professor of finance at Boston University and former reviewer of the Federal Reserve. “Did they not understand the risks they were facing or did they ignore them because they wanted to grow up? ”
As well as not acting quickly enough to avoid losses – Nomura and Credit Suisse each said they were still unwinding their positions on Monday – the two companies may not have been so disciplined with the fund. Hwang than their big American rivals, industry watchers say.
Nomura estimated that from Friday’s market prices the company suffered a loss of $ 2 billion, while Credit Suisse said the shortfall could be “very large and significant” to the results of the first quarter of the bank. Calls to Credit Suisse and Nomura were not immediately returned.
Morgan Stanley, Goldman and JPMorgan Chase are the world’s largest blue chip brokers, according to sources who track industry earnings. Credit Suisse is ranked seventh, while Nomura is not in the top ten.
Small businesses will sometimes accept fewer collateral or offer cheaper financing terms to gain clients in the hyper-competitive world of prime brokerage, the sources say. It works when markets are rising, but can lead to pain when stocks go south and leveraged bets implode.
Nomura and Credit Suisse also have smaller trading operations in the United States, which may have limited their ability to quickly offload large blocks of shares once what was going became clear. Meanwhile, on March 26, Goldman sold $ 10.5 billion in shares of companies such as Baidu Inc., Tencent Music Entertainment Group, ViacomCBS and Discovery, according to a client email reported by Bloomberg.
The explosion of Archegos, a relatively obscure entity before its dramatic collapse last week, calls into question other risks lurking in the client books of major investment banks.
“Should they even be in the business of taking bets where they can lose $ 2 billion in a week? Williams said. “Looks like they were swinging for the fences if they can lose that much. ”