Regulators across the world are all said to be closely watching events unfold as global banks may lose an estimated $6bn or more from the downfall of Archegos Capital Management, a family office run by former Tiger Asia manager Bill Hwang.
The US Securities and Exchange Commission and the UK’s Financial Conduct Authority have requested information from the six banks involved in Friday’s firesale to assess whether any acted acted inappropriately. They include Goldman Sachs, Morgan Stanley and Wells Fargo, as well as Swiss rivals UBS and Credit Suisse and Japan’s Nomura
“It is a dereliction of duty for regulators at the Securities and Exchange Commission, the Federal Reserve, the Treasury Department and elsewhere, including most prominently the members of the Financial Stability Oversight Council, to allow these systemic risks to continue to build up unseen and unregulated,” Dennis Kelleher, CEO of financial reform group Better Markets, said in a statement.
As a family office, Archegos was not subject to direct regulatory scrutiny and the recent sell off is raising questions over how much leverage banks offered to the firm and how a secretive investor came to amass such large positions under the radar.
Archegos was reported to have about $10 bn under management and anywhere from three to 10 times that amount in market exposure. In addition, it was reported to have most of its market exposure concentrated in a few positions such as entertainment group ViacomCBS.
Archegos Capital was forced to dissolve its holdings at the end of last week as it had become unable to meet margin calls from its lenders, sending major entertainment and tech stocks tumbling.
The family office was facing financial difficulties even before then and various big banks had to tried to prevent a crisis by entering into swaps contracts with Archegos last Friday. This exposed its funds to volatile equities worth billions of dollars.
The biggest collateral damage of the Archegos story is on big banks led by Credit Suisse and Nomura which announced significant losses in the first quarter due to Archegos going bust, according to Ipek Ozkardeskaya, senior analyst at Swissquote.
Nomura, which is Japan’s largest investment bank, warned it faced a possible $2bn loss while Credit Suisse said its losses would be “highly significant and material” in the first quarter but did not put a figure on it. Analysts estimate that the Swiss bank could face losses as high as $4bn.
Another possible banking victim is the securities business of Mitsubishi UFJ Financial Group which today said it could lose $300m due to its exposure to a US client, which it didn’t identify by name. The bank is Japan’s largest, and the trades took place at one of its overseas subsidiaries.
Ozkardeskaya added that Nomura dived up to 20% and Credit Suisse plunged 14% on announcement of loss.
She notes that although the excess credit risk of the moment – mostly due to the excess liquidity available in the system – is nothing new, “Archegos could trigger some appetite loss in other banking stocks in the coming days, as other big banks are not spared from Archegos-like risks in the actual market environment.”
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