Billions of pounds have been wiped off the value of major banks following a hedge fund collapse.
Credit Suisse and Nomura from Japan are facing a massive gains in their winnings after their client, Archegos Capital’s bets turn sour.
The crisis could cause major losses for UK investors exposed to ISAs, pensions or other savings.
Credit Suisse and Nomura asked Archegos for more money to cover the loans they provided. When money failed to materialize, the banks sold the Viacom shares at a loss, causing the value of the company to drop even further
Archegos had borrowed heavily from Credit Suisse and Nomura to invest in Viacom CBS and Discovery.
However, Viacom’s shares started to decline last week amid fears that its channels would lose it to rivals such as Netflix and Disney Plus.
That meant Credit Suisse and Nomura asked Archegos for more money to cover the loans they had made. When money failed to materialize, the banks sold the Viacom shares at a loss, causing the value of the company to drop even further.
Credit Suisse admitted yesterday that the incident would have a ‘very significant’ impact on earnings, estimated at between £ 2 billion and £ 3 billion.
Nomura said the crisis could take away the total profit for the past six months, at around £ 1.5 billion.
Bill Hwang, the high-flying financier behind Archegos, rushed to raise extra money and was forced into a firefight of various interests in other companies he owns, from British online retailer Farfetch to Chinese technology titan Tencent.
This, in turn, caused those stocks to go away, as Archegos struggled to find buyers willing to take over the stock.
The sell-off was estimated at around £ 20 billion. Some traders fear that the problems at Archegos could pose problems for the technology boom.
However, Neil Wilson, chief market analyst at trading site Markets.com, said, “A fund that inflates is not a systemic risk in itself, but rather questionable internal risk management.”
But the incident may prompt regulators, including the Bank of England and the Financial Conduct Authority, to investigate the relationship between hedge funds and prime brokers, in this case specialized branches of Credit Suisse and Nomura.
Prime brokerages lend to hedge funds and other large investors, allowing them to make bigger bets than they could otherwise afford.
Eleanor Creagh, a market strategist at Saxo Bank, said the losses involved would give rise to “intensified investigations into the disclosures” that hedge funds are required to make.
John Meyer, of UK broker SP Angel, said this could “tighten lending controls in the prime brokerage and equity lending departments of major banks.”
RUTH SUNDERLAND: Just a nasty episode … or a canary in a coal mine?
Hwang herself has a checkered past that should have sounded alarm bells (photo, Bill and Betty Hwang)
Deja vu, anyone? Reckless hedge funds. Banks were hit by massive losses. Regulators sleep behind the wheel.
It all sounds terrible and is reminiscent of those sickening months leading up to the financial crisis twelve years ago, but now with a pandemic.
At the epicenter of the latest storm is an outfit called Archegos. Most people, when questioned, will guess that this is the name of the charity foundation run by Prince Harry and Meghan.
In fact, it’s an obscure Wall Street hedge fund managed by Bill Hwang, a man who has had his share of clashes with regulators. Archegos’ misery, in turn, has exposed two of the world’s leading banks, Nomura and Credit Suisse, to losses of billions of dollars.
The question for UK pension fund investors and savers is whether it is an unpleasant but isolated episode.
Or, more alarmingly, is it a canary in the coal mine, a sinister prediction of a wider meltdown? The reaction in world markets was muted yesterday, suggesting there is little panic.
The consensus is that we are not facing Financial Crisis 2.0 – although it is worth remembering that most were disdainful of the latter until it actually happened. And its implosion comes at a nervous time for markets.
The valuations of US technology and media companies such as Tesla, Amazon and Facebook have soared during the pandemic that some analysts are concerned that they are in danger of falling. Many small UK investors have invested large chunks of their nest eggs in these stocks.
The problems at Archegos stem from the way it bought shares in US and Chinese media and technology companies “on margin,” in other words, with borrowed money. Buying on margin is one way to increase returns. It works wonderfully well as long as the stock is rising and investors are making huge profits by putting in very small amounts of their own money. But if the stock collapses, it could be disastrous. Investors not only incur large losses, they also have to pay back their loans.
Archegos was hit by margin calls – demands for cash or extra security – by Credit Suisse and Nomura after its shares in Viacom and some of its other holdings fell last week.
The fund was unable to pay, causing the banks and others to suffer heavy losses. In order to recover some of the money owed to the banks, Archegos was forced to make a fire purchase of billions of dollars in stock. The affair raises troubling questions about regulation. The fund seems to have escaped scrutiny as it is run as a ‘family office’, in which the money of Bill Hwang and his relatives is managed. Hwang himself has a checked past that should have sounded alarm bells.
Just under a decade ago, he admitted to fraudulent use of Chinese bank stocks. He also paid £ 32 million in fines for illegal trading charges.
As for Credit Suisse, the Archegos debacle is just the latest shame. Last but not least is the involvement in the collapsed financial house Greensill, where former Prime Minister David Cameron has questions about his role as an adviser.
Credit Suisse and Nomura have much stronger balance sheets than a decade ago and are in a much better position to absorb their losses.
Still, this should be a wake-up call, much like the breakup of Greensill, which basked in Mr Cameron’s fake credibility. When it comes to markets, greedy traders, and inept regulators, you never have to be complacent. Remember, Archegos and Greensill are just the train wrecks we know.