Archegos fallout: global banks could lose over US$6b

London

MAJOR investment banks around the world face multi-billion-dollar losses after a family office, Archegos Capital Management, failed to meet margin calls on sliding speculative stock and derivative positions.

Archegos is run by Bill Hwang, a former hedge fund manager who was fined for alleged fraud in 2012.

There is now the question of why the banks either failed to carry out due diligence on the firm or chose to ignore his history.

Traders reported that Archegos had large leveraged positions. These included swaps - derivatives and other bull positions in media firms ViacomCBS and Discovery, RLX Technology, GSX Techedu, Baidu and several other shares in China and Wall Street.

But their prices started to slide and Archegos could not meet margin calls, as the share prices fell below its small deposits on the positions. Bankers estimate that, prior to the collapse, Archegos' net worth was more than US$10 billion.

One significant part of Mr Hwang's portfolio, which has been traded in blocks since March 26, was worth almost US$40 billion last week, Bloomberg estimated.

And as disposals kept emerging, estimates of his firm's total positions kept climbing by the billions.

Concerned investment bankers, known as "prime brokers", requested that Archegos cover the losses with more money, but when it failed to do so, they began a race to sell the stocks to limit their losses.

According to the Wall Street Journal, New York Times and various wire services, the group of banks includes Credit Suisse, Nomura, Goldman Sachs, Morgan Stanley, Wells Fargo, UBS and Deutsche Bank.

Global banks may lose more than US$6 billion from the downfall of Archegos Capital.

Both Credit Suisse and Nomura disclosed that they could incur substantial losses, but Goldman Sachs and Morgan Stanley claimed that they had closed the positions speedily, so their losses would be small.

Stocks of the banks that were Archegos' prime brokers fell.

But shares of Credit Suisse, which has also incurred sizeable losses via loans and a fund's investment in collapsed specialist bank Greensill, have slumped by 22 per cent since the end of February.

Regulators and market participants fear that there could be further reverberations in the markets.

So far, however, global stock market indices have hardly reacted.

"This is a challenging time for the family office of Archegos Capital Management, our partners and employees," a spokeswoman for the firm said.

"All plans are being discussed as Mr Hwang and the team determine the best path forward."

Mr Hwang had worked under the billionaire hedge fund titan Julian Robertson at the well-known hedge fund, Tiger Management.

He started his own fund, Tiger Asia. But in 2012, he faced an insider-trading investigation; securities regulators said Tiger Asia had allegedly used confidential information to bet against the shares of Chinese stocks, and had allegedly manipulated other shares.

It was reported at the time that Mr Hwang entered a guilty plea to wire fraud on behalf of Tiger Asia and paid millions of dollars in fines.

He also accepted a five-year ban on managing public money as a result of the settlement.

He reorganised the firm as a family office, meaning it was no longer managing outside money, and renamed it Archegos Capital Management.

The big question to be answered, however, is why the investment banks even allowed him to build up such risky positions in the first place.