A fire sale of shares of a large US investor hit the global investment banks Credit Suisse Group AG and
Nomura Holdings Inc.,
which said they could suffer significant losses related to the deal.
Nomura’s shares fell 16%, a record drop in one day, Refinitiv data showed. Credit Suisse shares fell 13%.
In the past few days, losses at Archegos Capital Management, led by former Tiger Asia manager Bill Hwang, have led to the liquidation of positions whose value is rising approaching $ 30 billion, the Wall Street Journal reported.
Credit Suisse said it was too early to quantify the exact impact, but it could be « very significant and material » to results for the first quarter ending this month.
» A major US hedge fund defaulted last week due to margin calls from Credit Suisse and certain other banks, « said the Zurich-based bank on Monday. « After the fund failed to meet these margin requirements, Credit Suisse and a number of other banks are in the process of exiting these positions. »
A person familiar with Credit Suisse said their potential loss was related to Archegos’ situation.
Japanese rival Nomura said it was owed about $ 2 billion by a U.S. customer. A person familiar with the matter said the business in question was related to Archegos.
Mr. Hwang, a former protégé of the hedge fund titan
Julian Robertson,
managed approximately $ 10 billion in family funds through Archegos. The company placed huge bets on public stocks in the US, Europe and Asia. The unwinding of his positions caused a sharp decline in a number of stocks last week, including
ViacomCBS Inc.
and
Discovery Inc.,
even if broader markets rose.
Archegos’ potential losses are the latest in a string of hits that exposed the Swiss bank as being at risk of accidents.
Earlier this month the bank announced that it had potential losses through exposed to the collapse of UK finance firm Greensill Capital, which it used to manage $ 10 billion in mutual funds. In February, Credit Suisse reported a loss of more than $ 1 billion in the fourth quarter of 2020 to settle a US lawsuit over toxic stocks and to list a stake in a major US hedge fund.
The bank reported in Some credit losses from customer fraud last year and provisions for net litigation surged to over $ 1.3 billion.
The Swiss bank has been downsizing its investment banking area for years to reduce risk. Instead, it focused on the steady income from managing funds for the world’s rich. Credit Suisse limits the capital of the investment bank to one third of its total capital.
US securities filings show that Credit Suisse was prime broker for Mr. Hwang’s former company Tiger Asia Management LLC in 2011 and 2012. Tiger Asia returned money to investors after Mr. Hwang admitted in December 2012 that the hedge fund had criminally used inside information from investment banks at least three times to profit from securities trading.
Mr. Hwang and Tiger Asia paid $ 44 million to settle a related civil lawsuit without admitting or denying the allegations, the Journal reported at the time.
The potential losses for Credit Suisse and Nomura underscore the inherent risk of investment banking, trading in securities and advising companies and investors on important transactions. Wall Street banks reported strong gains last year due to a boom in stock and bond trading during the pandemic. But there is a long history of securities trading activity suddenly returning to bite banks and wipe out profits from months in days.
Before Monday’s warning, Credit Suisse had stated that its pre-tax profit was its best in January and February has been for ten years and that the revenues in their investment bank have increased by more than 50% compared to the previous year.
With a margin call, a bank asks a customer to provide more collateral if a position that was partially financed with borrowed money has depreciated significantly. If the customer cannot afford this, the lender sells the securities in an attempt to recover the amounts owed.
Large banks acted as prime brokers for Archegos, which means they processed the fund’s business and lent it cash and Securities. At the end of last week,
Morgan Stanley,
Goldman Sachs Group Inc.
and
Deutsche Bank AG
The Journal reported that large blocks of stock tied to Archegos were rapidly discharged.
Deutsche Bank’s exposure to Archegos is a fraction of the numbers reported by other banks, said a person familiar with the matter. As of Friday, the lender hadn’t suffered any losses on positions, the person said.
Block trades late last week that included cross-Archegos media companies like ViacomCBS and Discovery, as well as a number of Chinese tech stocks, including
Baidu Inc.,
GSX Techedu Inc.,
IQIYI Inc.
and
Tencent Music Entertainment Group.
The spreading pain of Archegos brought back memories of long-term capital management on Wall Street. The hedge fund, advised by two Nobel Prize winners, was dissolved without warning in 1998 and sparked a $ 3.6 billion bailout by a consortium of Wall Street banks led by the Federal Reserve.
So far, the sale has not expanded beyond individual stocks. The S&P 500 futures early Monday were down slightly and the bond markets barely changed.
Nomura said Monday that a March 26 event could « expose one of its US subsidiaries to a significant loss on transactions with a US customer. » The bank assessed the magnitude of the losses and the impact on results.
Nomura estimated the claim against its client at $ 2 billion based on Friday market prices, and said it would depend on market movements and the market Processing transactions could change. Nomura also postponed a proposed sale of $ 3.25 billion bonds.
Given the bank’s high capital buffers – it had a core capital ratio of more than 17% at the end of December – there will be « no business-related issues or the financial soundness of Nomura Holdings or its US subsidiary ”. it said.
With limited growth opportunities domestically, in 2008 Nomura tried to take advantage of the global financial crisis to expand overseas and bought Lehman Brothers’ investment banking franchise in Asia Pacific and Europe. However, from 2011 and 2016 restructuring and cost-cutting rounds had to be carried out.
Like other banks, Nomura recently benefited from booming global markets. International business revenues more than doubled in the nine months to September, accounting for 42% of the group’s pre-tax revenues. Total pre-tax income for the period was 396.8 billion yen, equivalent to $ 3.6 billion. In the credit markets, both banks saw the cost of insuring their bonds against defaults with derivatives increased. The levels suggest unrest among investors but remain well below the level of the pandemic-triggered market panic in March 2020.
Corrections & reinforcements
Nomura stock’s 15.2% decline in morning trading in Tokyo set it on its way to its biggest one-day loss since 2009. An earlier version of this article incorrectly stated that it would be the biggest such loss in nearly 10 years . (Corrected March 29th)
Ref: https://www.wsj.com