SIMPLY PUT: The ripple effect of Archegos Capital's collapse may cost global banks $6 billion

SIMPLY PUT: The ripple effect of Archegos Capital's collapse may cost global banks $6 billion
Morgan Stanley (L), Nomura (C) and Credit Suisse (R)MorganStanley/Nomura/CreditSuisse
  • Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse and Nomura may collectively lose out on $6 billion amid the Archegos Capital Management’s downfall.
  • Nomura, alone, is at risk of bleeding more than $2 billion.
  • The loss for Credit Suisse may be even higher from $3 billion to $4 billion, according to estimates.
Global banks may lose out on more than $6 billion as Archegos Capital Management — run by former Tiger Asia hedge fund manager Bill Hwang — triggered a fire sale of stocks, unnamed sources familiar with trades of the US investment firm told Reuters.

This includes Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse and Nomura, who are Archegos’ prime brokers. Prime brokers lend money as well as structure and process trades for a hedge fund.

“This is a challenging time for the family office of Archegos Capital Management, our partners and employees. All plans are being discussed as Mr.Hwang and the team determine the best path forward,” company spokesperson Karen Kessler said in a statement.

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What led to Archegos’ selling its stocks so rapidly?
Archegos Capital Management, which operates as a family office, was asked by lenders to cough up more collateral to secure equity swap trades that they had partially financed.

Archegos was forced to liquidate more than $20 billion in shares on Friday when it was unable to meet that margin call, according to Bloomberg. Among the sales were shares of ViacomCBS, GSX Techedu, Baidu and Discovery.

After those positions fell sharply in value, global banks sold big blocks of securities to recover the money that was already owed to them by the US investment firm.

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Who is taking a hit and how bad is it?
The hardest hit among Archegos Capital’s prime brokers are Japan’s largest investment bank, Nomura, and Credit Suisse.

Nomura warned of a possible $2 billion loss on Monday, March 29. “This estimate is subject to change depending on the unwinding of the transactions and fluctuations in market prices,” said the press release. Its share price took a hit of 16% on the same day.

Unnamed sources familiar with the matter told the Financial Times that Nomura held emergency talks with Japan’s Financial Services Authority before disclosing its exposure.

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Meanwhile, Credit Suisse tanked 14% as the news of Archegos Capital came to the fore, wiping out $5 billion of its market value. The bank’s actual loss could be as high as $3 billion to $4 billion.

Goldman Sachs and Morgan Stanley were quicker than Nomura and Credit Suisse to pull the triggers. They offloaded shares as early as Friday, March 26. This allowed them to avert material financial impact, sources told Reuters. However, the two banks have not issued any official statement on the matter yet.

Deutsche Bank, on the other hand, did come out to clarify that it has significantly de-risked its Archegos exposure without incurring any losses. It is currently reducing "immaterial remaining client positions," on which it does not expect to incur a loss, according to Bloomberg.

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Why did no one catch the collapse before it happened?
Archegos Capital Management is a family office. Family offices are a type of hedge fund established by wealthy families to manage their money and provide related services to family members. This could include tax and real estate planning as well as managing philanthropic ventures.

Family offices are generally not regulated. They do not have to register with the US Securities and Exchange Commission (SEC) because the Investment Advisers Act of 190 expects firms, which advise fewer than 15 clients.

Due to this, hedge funds like Archegos Capital Management do not have to provide quarterly financial reports on their equity holding or give the SEC any information on the types and size of their assets.

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This leaves very few avenues for regulators to monitor systemic risk that may lead to a massive sell-off as seen over the last week with Archegos Capital.

Globally, family offices managed nearly $6 trillion in assets as of 2019, according to market research firm Campden Research.

SEE ALSO:
A hedge-fund liquidation has wiped billions from Chinese and US stocks, and no one knows what's going to happen next

US stocks fall after a $30 billion wave of selling tied to hedge-fund Archegos rattles traders

Credit Suisse loses $5 billion in market value after warning of a big hit following Archegos blow-up

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