The collapse of United States based investment firm Archegos Capital could lead to the global banks to more than $6 billion, according to reports quoting information from sources that are familiar with the trades involving the US firm. There is a growing concern among regulators and investors that the incident could have much wider implications.
There was a worldwide sell off in banking stocks after the Swiss bank Credit Suisse and Japan’s Nomura issued warning of significant losses due to their lending portfolio to Archegos for equity derivatives trades.
There was a 2.6 per cent fall in the stocks of Morgan Stanley while a 1.7 per cent drop in eth stock price Goldman Sachs Group was reported. Shares of Nomura dropped by 16.3 per cent while there was a 14 per cent drop in the stocks of Credit Suisse – the biggest fall this year for the two stocks. There was also drops od 5 per cent and 3.8 per cent in the stocks of Deutsche Bank and UBS respectively.
Last Friday, there was a fire sale of stocks including ViacomCBS and Discovery because of losses reported at Archegos Capital Management which is a the family investment firm of former Tiger Asia manager Bill Hwang.
“This is a challenging time for the family office of Archegos Capital Management, our partners and employees,” said company spokesperson Karen Kessler in a statement. “All plans are being discussed as Mr. Hwang and the team determine the best path forward.”
Calls by banks to for more collateral to secure equity swap trades had been partially financed by the firm were not met by Archegos. According to reports, after those positions fell sharply in value, lenders sold big blocks of securities to recoup what they were owed.
“When you have people making certain bets based on what has outperformed in the past and the tide turns they get burned. The question is how much leverage they used,” said Richard Bernstein, chief executive of Richard Bernstein Advisors.
Reports quoting sources familiar with the matter said that the issue at the company started last week after media giant ViacomCBS conducted a disappointing stock sale which resulted in devastating bank margin calls for Archegos.
ViacomCBS selling its stocks at a price which diluted its value resultedin the share price of the media company dropping by as much as 23 per cent last Wednesday. Additionally, downgrades of the stock by analysts who were concerned that the stock had become over-valued also hit ViacomCBS even though typically stocks drop after share sales.
There was further loss to ViacomCBS’s stocks on Thursday as they dropped by 30 per cent compared to the share price of the stocks at the end of trading the day before. That raised significant concerns among the prime brokers at Archegos which prompted them to offload stocks in all the firms in which Archegos had invested.
The developments are being closely monitored by regulators in the United States, UK, Switzerland and Japan, according to reports.
(Adapted from Reuters.com)