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Banks warn of losses after Archegos Capital stock unwind

Nomura faces possible US$2 billion loss; Credit Suisse says default on margin calls by US-based fund could be 'highly significant' to Q1 results

Published Tue, Mar 30, 2021 · 05:50 AM

Tokyo

NOMURA and Credit Suisse warned on Monday they were facing significant losses after a US hedge fund, named by sources as Archegos Capital, defaulted on margin calls.

A fire sale of stocks on Friday caused big drops in the share prices of companies linked to Archegos, said a source familiar with the matter, putting markets on edge about the scale of the possible fallout.

Nomura said on Monday that it faced a possible US$2 billion loss due to transactions with a US client, while Credit Suisse said a default on margin calls by a US-based fund could be "highly significant and material" to its first-quarter results.

Credit Suisse said that a fund had "defaulted on margin calls" to it and other banks, meaning they were now in the process of exiting these positions.

Nomura shares closed down 16.3 per cent while Credit Suisse shares opened down 10 per cent. Other bank stocks also fell, with the European financial services stock index down 0.9 per cent.

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Nasdaq 100 futures fell 1 per cent in late Asia trade as the widening fallout of Archegos' liquidation became clearer, while S&P 500 futures extended losses to fall 0.8 per cent.

Investors said systemic risks at this point seem unlikely, but were nervous about whether the full extent of Archegos' apparent wipe-out has been realised or whether there was more selling to come.

Shares in ViacomCBS and Discovery tumbled around 27 per cent each last Friday, while US-listed shares of China-based Baidu and Tencent Music plunged during the week, dropping as much as 33.5 per cent and 48.5 per cent respectively from last Tuesday's closing levels. Baidu was trading slightly lower in Hong Kong at the open.

Investors and analysts cited blocks of Viacom and Discovery shares being put on the market on Friday for likely exacerbating the decline in those stocks. Viacom was also downgraded by Wells Fargo last Friday.

A person at Archegos who answered the phone on Saturday declined to comment. Archegos was founded by Bill Hwang, who founded and ran Tiger Asia from 2001 to 2012, when he renamed it Archegos Capital and made it a family office, said a page capture of the fund's website. Tiger Asia was a Hong Kong-based fund that sought to profit on bets on securities in Asia.

Prior to starting Tiger Asia, Mr Hwang was an equity analyst for Tiger Management, said Archegos' website. Tiger Management, run by Julian Robertson, was a hugely successful hedge fund, which returned investor money and shut in 2000.

Mr Hwang in 2012 settled insider trading charges by the US Securities and Exchange Commission according to a press release at the time. He and his firms at the time agreed to pay US$44 million to settle, said the release.

The scale of the losses at banks is likely to prompt questions about the risk management of banks' exposure to Archegos.

In Japan, Chief Cabinet Secretary Katsunobu Kato said the government would carefully monitor the situation at Nomura and that the Financial Services Agency would share information with the Bank of Japan.

For Credit Suisse, this will mark the second straight quarter the bank has recorded losses on hedge fund exposure and adds to pressure on chief executive Thomas Gottstein, who is grappling with the fallout from the bank's dealings with collapsed supply chain finance company Greensill.

Last quarter, Credit Suisse booked a US$450 million impairment after alternative investment firm York Capital Management, which it held a stake in, informed investors it would wind down its European hedge funds business.

Some market participants said last week's wild moves were likely to make investors increasingly cautious.

"It's insane," said Edward Moya, senior market analyst at Oanda. "When you consider how some of these companies have skyrocketed over the last few months, there will be concerns that we are over-levered."

Other market participants said potential unwinds would only have a limited impact on broader markets. The Nasdaq Composite and S&P 500 both surged over 1 per cent last Friday despite the sharp sell-offs in Viacom and other stocks.

"These stories around fund liquidations happen from time to time," said Michael Antonelli, market strategist at Baird. "Some of the names where big blocks were traded on Friday might see some near-term volatility as traders wonder whether the selling is complete."

Several banks were meant to be involved with the trade unwinds. A source familiar with the matter said on Saturday that Goldman Sachs Group was involved. The Financial Times reported that Morgan Stanley sold US$4 billion worth of shares early on Friday, followed by another US$4 billion in the afternoon.

Bloomberg and the Financial Times on Saturday reported that Goldman liquidated more than US$10 billion worth of stocks in the block trades.

An e-mail to clients said Goldman sold US$6.6 billion worth of shares of Baidu, Tencent Music and Vipshop Holdings, before the US market opened on Friday, the Bloomberg report on Saturday said.

Following this, Goldman sold US$3.9 billion worth of shares in ViacomCBS, Discovery Inc, Farfetch, iQIYI Inc and GSX Techedu, said the report. REUTERS

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