Shares in banks sold off sharply around the world on Monday after details emerged of the likely collapse of Archegos Capital. The little-known family investment office had relationship with major investment banks around the world and investors were left scrambling to work out how big losses would be and where they might fall.
The selling eased on Tuesday as the fallout became clearer. Credit Suisse (CSGN.SW), one of the hardest hit, rose 1.1%. The Euro Stoxx Banks 30 (EXX1.DE), which tracks Europe’s biggest banks, rallied over 2% to erase losses seen at the start of the week.
Troubles started on Friday after Goldman Sachs (GS) and Morgan Stanley (MS) offloaded huge chunks of shares in companies like ViacomCBS (VIAC) and Discovery (DISCA). It prompted speculation that a hedge fund had gone under. Over the weekend, it emerged that Archegos Capital — which manages the money of former Tiger Management trader Bill Hwang — had been liquidated after failing to meet margin calls.
“What appears to have happened here – briefly – is that last week’s slide in a number of Chinese tech stocks caused Archegos to be margin called; the fund couldn’t fulfil said margin calls, necessitating an unwind in their heavily leveraged positions,” said Michael Brown, a senior market analyst at Caxton Business. “As the saying goes, when you owe the bank $100, it’s your problem; when you owe the bank $1bn — or more — it’s their problem.”
Credit Suisse warned of “highly significant” losses on Monday and Japanese bank Nomura said it could face losses of $2bn linked to Archegos. Shares in both banks sank over 10% yesterday.
The updates from Credit Suisse and Nomura sparked a mini-panic in banking stocks, as investors scrambled to work out who was exposed and how big potential losses were. Archegos traded with borrowed money and reportedly had as much as $50bn in leverage. Deutsche Bank (DBK.DE), Goldman Sachs (GS), Morgan Stanley (MS), UBS (UBSG.SW), and Wells Fargo (WFC) all reportedly had relationships with the fund.
Kian Abouhossein and Amit Ranjan, banking analysts at JP Morgan, said in an investment note that banks could faces losses of up to $5bn across the industry.
Morgan Stanley was down 2.1% in the pre-market in New York on Tuesday, while Wells Fargo was 2.7% lower. Goldman Sachs was flat.
Archegos Capital released its first statement overnight saying it was considering “all plans” moving forward.
“This is a challenging time for the family office of Archegos Capital Management, our partners and employees,” the Guardian quoted a spokesperson as saying. “All plans are being discussed as Mr. Hwang and the team determine the best path forward.”
Representatives of Archegos have been contacted for comment.
Analysts said the fund’s blowup was unlikely to pose any systematic risk given the high levels of capital held by banks, which allows them to withstand losses.
“So far, there has not been a big unwind across assets,” said Neil Wilson, chief market analyst at Markets.com.
Attention is now turning to what may be done to prevent a situation like this arising again.
“There are already questions being asked about why so called ‘family offices’ are exempt from much of the scrutiny enjoyed by hedge funds and calls for the system to be tightened,” said Danni Hewson, a financial analyst at AJ Bell. “With the numbers quoted today suggesting as much as $6tn is currently under the management of such firms, there is the expectation change must come quickly.”
Family offices only look after funds of a single wealth family and these types of firms have exploded in popularity over the last decade. Family offices are subject to much looser regulation that other investment companies.
Archegos Capital reportedly structured the majority of its investments through swaps — a form of bet on a stock price, rather than actual ownership. These swap deals, which do not need to be disclosed, allowed the firm to build up huge exposure to single stocks across multiple banks without the lenders necessarily knowing about the business elsewhere.
Regulators around the world have said they are monitoring the Archegos situation.
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