NEW YORK / ZURICH (Reuters) – While banks such as Goldman Sachs, Morgan Stanley and Deutsche Bank were able to abandon their transactions with relatively unscathed Archegos Capital, Credit Suisse and Nomura were set on fire in the inflammatory sale.
The explosion of the Archegos fund, a family office run by former Tiger Asia director Bill Hwang, is still rippling through the financial system, with global banks at risk of losing more than $ 6 billion so far.
Credit Suisse Suisse and Japan’s Nomura should bear the brunt of this.
They had hoped that rival banks that had also funded and processed trades for Archegos would hold back from exiting their positions, but were left short when Goldman Sachs and Morgan Stanley began to unwind their trades with the fund, according to three people with a background. direct knowledge of the situation. matter.
So far, it appears the banks that have exited the trades the fastest have suffered the least and Goldman Sachs may have even benefited from it, three sources close to the trades said.
Goldman Sachs declined to comment.
Credit Suisse has yet to confirm its losses, but sources said the Swiss bank is facing losses of up to $ 4 billion. Nomura, Japan’s largest investment bank, warned on Monday of a possible loss of $ 2 billion.
The Archegos saga is a blow to both banks, which were trying to expand their investment banking and trading activities in the United States, and underscores the challenges of struggling to compete with big American rivals on their own. ground.
“Goldman Sachs and Morgan Stanley came out faster and got better prices. They know more about what’s going on. Credit Suisse and Nomura do not have the same status, ”said David Hendler, analyst at Viola Risk Advisors.
Morgan Stanley and Nomura declined to comment. Credit Suisse did not respond to requests for comment.
Free from regulatory control as a family office playing on Hwang’s personal fortunes, Archegos had built up significant positions in stocks, including ViacomCBS, using risky derivatives called “total return swaps”.
These swaps allow investors to bet on movements in stock prices, often with high leverage, without owning the underlying stocks. Instead, banks buy and hold stocks and give the fund a return linked to performance. The fund must secure transactions by giving bank guarantees, such as cash or stocks.
Archegos had assets of around $ 10 billion, but held positions worth more than $ 50 billion, according to one of the sources, suggesting that Hwang was heavily in debt. Leverage is risky because just as it amplifies potential returns, it also amplifies losses.
Archegos declined to comment beyond his statement on Monday when he said it was a “difficult time”.
SHARE SPIRAL SALE
Investor disappointment with media giant ViacomCBS’s sale of shares last Wednesday, to which Archegos was heavily exposed, appears to have been the catalyst for its collapse, the sources said.
As ViacomCBS stock fell last week, falling 30% from nearly $ 68 last Monday Thursday morning, the alarm bells went off in Archegos banks, the sources said. .
They turned to Archegos for more collateral to cover the increased exposure on its swap positions, but the fund did not have enough liquidity. By failing to meet the margin call, the fund defaulted on its transactions with the banks.
In a bid to avert a crisis, Hwang held a conference call with banks later Thursday asking them to agree to suspend the sale of the stocks that underpin his swap operations in the hope that they will bounce back. two of the sources said.
Some banks, including Credit Suisse, preferred to hold back, but Goldman Sachs and others were keen to start selling shares to free up cash so Archegos could pay them what was owed.
No deal was reached and Goldman began offloading shares before the market opened on Friday. He has sold more than $ 10.5 billion in shares held in Viacom, Baidu Inc and Tencent Music Entertainment Group, among others.
Morgan Stanley also unloaded $ 8 billion in shares.
In total, Archegos banks have sold millions of shares in companies the fund has staked on, pushing down stocks in the media and other sectors.
This left other banks, primarily Credit Suisse and Nomura, running for exit before closing. By the time they decided to start selling, stocks had fallen too far for banks to avoid significant losses.
“The first one out is not panic,” said Matt Freund, co-chief investment officer at Calamos Investments. “It doesn’t make sense to join in a panic, but sometimes it makes sense to start one.”