The fire sale of about $20 billion of Archegos assets, comprising Chinese and US stocks, has sent jitters in the global financial markets, raising worries that the event could be a possible “Lehman moment” that would force multiple lenders – mainly Credit Suisse and Nomura — to suffer huge losses and recognise that leverage extended to the fund had created excessive risk. The huge margin call on Archegos was the major driver behind last Friday’s steep sell-off and the subsequent hits to several global bank balance sheets.
What’s the sell-off all about?
Archegos Capital Management, a private investment firm based in New York, resorted to a huge fire sale of stocks worth $20 billion on Friday that caused big drops in the share prices of companies linked to the investment firm, putting markets on the edge about the scale of the possible fallout. Nomura said on Monday that it faced a possible $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.
The fund, which had large exposures to Viacom CBS and several Chinese technology stocks was hit hard after shares of the US media group began to tumble last Tuesday and Wednesday. The decline in stock prices prompted a margin call from one of Archegos’s prime brokers, triggering similar demands for cash from other banks. Shares in Viacom CBS and Discovery tumbled around 27% each on Friday, while US-listed shares of China-based Baidu and Tencent Music plunged during the week, dropping as much as 33.5% and 48.5%, respectively, from Tuesday`s closing levels.
Hedge funds in Hong Kong and Tokyo said on Monday that traders were braced for further block sell-offs in stocks associated with Archegos and other funds that could also be forced to unwind heavily leveraged positions, such as Teng Yue Partners, when trading opens in the US on Monday.
What has been the damage to banks?
Credit Suisse is estimated to have lost between $3 bn and $4 bn. Deutsche Bank was also exposed to the Archegos sell-off, but its losses are expected to be a fraction of those suffered by other brokers. Nomura shares closed down 16.3% while Credit Suisse shares were down 13.4% at 0855 GMT. Other bank stocks also fell, Deutsche Bank was down 5% while UBS was 3.8% lower.
Other prime brokers that had provided leverage to Archegos said the problems at Nomura and Credit Suisse related to being slower in offloading share blocks into the market compared with their peers, notably Goldman Sachs and Morgan Stanley.
What are the banks saying about the issue?
Credit Suisse said in a statement on Monday: “A significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks. Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions.” While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first-quarter results, it said.
Nomura said in a statement that it was evaluating the extent of the potential losses, noting that its estimated claim against the client was about $2 bn. The bank saidthe figure was based on market prices at the close of the US trading on Friday and could rise should asset prices continue to fall. The extremely high level of leverage Nomura appeared to have extended to Archegos was “baffling”, bankers said.
Who founded Archegos?
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. Tiger Asia was a Hong Kong-based fund that sought to profit on bets on securities in Asia. Prior to starting Tiger Asia, Hwang was an equity analyst for Tiger Management according to Archegos` website. Tiger Management, run by Julian Robertson, was a hugely successful hedge fund, which returned investor money and shut shop in 2000.
Hwang in 2012 settled insider trading charges by the US Securities and Exchange Commission. He and his firms at the time agreed to pay $44 million to settle, according to a release.
What’s a margin call?
Typically, a margin call occurs when the value of an investor’s margin account falls below the broker’s required amount during a market correction or sell-off. As the margin account contains securities bought with borrowed money, a margin call occurs when lenders demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value. A margin call is usually an indicator that the securities held in the margin account has decreased in value. When a margin call occurs, the investor must choose to either deposit more money in the account or sell some of the assets held in their account. If the investor fails to pay up the margin amount, the lender will resort to sale of assets lying in the investor’s account.