Big Banks Anticipate Losses in the Billions
Last week, Archegos Capital Management, the $10 billion hedge fund founded by Bill Hwang, was forced to liquidate over $30 billion in equities including millions of shares in ViacomCBS, media company Discovery, and a number of Chinese tech companies.
The move came after Archegos, which had borrowed on margin while using derivatives, was met with demands by banks to post greater collateral so as to minimize losses.
According to the Wall Street Journal, the hedge fund complied with collateral requests at first but then was unable to, which is when lenders started a fire sale on the stocks involved. The sudden availability of huge blocks of shares in the marketplace only served to cause their prices to become more depressed.
By early this week, the investment banks that had lent Archegos Capital money were estimating significant losses. While Nomura hasn’t specified which client was involved, it is now estimating about $2 billion in losses involving this unnamed client.
Analysts report that Credit Suisse may be looking at losses of $3 billion to $4 billion. Mitsubishi UFJ Financial Group said that exposure to an unnamed U.S. client may have led to $300 million in losses.
What Caused Archegos Capital to Liquidate?
The Wall Street Journal reports that Archegos Capital Management unwound about $30 billion of positions on Thursday and Friday because of leverage from banks. These included total return swaps that let investors take big positions while putting up limited funds and generally borrowing from the banks.
Problems for the firm started brewing over the last few weeks when the stock price of companies in which the hedge fund had significant exposure began to sell off and their prices began to drop. This included ViacomCBS announcing a common stock sale on March 22.
Archegos Capital then began to sell some of its position in ViacomCBS, which placed more pressure on the stock. Banks then started to sell block trades of these shares, which is usually done at a discount.
The prime brokers that worked with Archegos, making trades for them and/or lending capital, include Morgan Stanley (MS), Deutsche Bank (DB), Goldman Sachs (GS), UBS, Nomura (NMR), and Credit Suisse (CS). Deutsche Bank, Goldman Sachs, and Morgan Stanley appear to have kept losses related to Archegos to a minimum.
It was just in 2012 that Bill Hwang pleaded guilty to wire fraud involving insider trading on behalf of his firm, Tiger Asia Management. The US Justice Department said that Hwang’s firm made $16 million in illicit profits. According to Fortune, as late as 2018, Goldman Sachs Group still refused to do business with Hwang but the lure of high commissions brought Goldman and other big banks back to him.
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