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Archegos Blowout Heaps Pressure on Credit Suisse

The continued saga of the investing mishap.
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Credit Suisses shareholders are “bracing for a multibillion-dollar hit from a fire sale of positions held by hedge fund Archegos and analysts downgraded its stock Tuesday over the reputational damage,” WSJ writes.

Why It Matters: CEO Thomas Gottstein had made a sweeping effort to reduce risk after taking the job last year. It, unfortunately, wasn’t enough to prevent two massive hits from Archegos Capital Management and Greensill Capital.

  • The magnitude of the losses are currently unclear. But it is expected to release more info this week and said Monday the hit could be “highly significant and material” to its Q1 numbers.

The Background: Bill Hwang, former Tiger Asia manager, managed a family office in Archegos, with “large, concentrated positions in some stocks, including ViacomCBS Inc., Discovery Inc., GSX Techedu, and Vipshop Holdings Ltd. All have tumbled over the past week. Losses at Archegos have triggered the liquidation of positions in excess of $30 billion in value.”

  • Another bank — Mitsubishi UFJ Financial Group — is reportedly getting ready to take a $300 million bath stemming from “its exposure to a U.S. client,” which is believed to be Archegos.

How Big: “Berenberg analysts put Credit Suisse’s Archegos losses at around $3.2 billion and estimated another $531 million in losses at the bank from the collapse of Greensill, which Credit Suisse lent money to and partnered with for a $10 billion set of investment funds.”

Looking Ahead: Credit Suisse will probably have to suspend its $1.6 billion stock buyback program and its reputation could have irreversible damage. Angry shareholders could lobby for more risk reform in the bank’s processes.

  • This all comes after a previous regime, run by former CEO Tidjane Thiam, failed to reduce the bank’s risk portfolio and stacked up a series of “business missteps.”

Justin Oh:

I would wait for this to blow over before jumping on buying some of these stocks on weakness. 

Firstly, we don’t know the full extent of the losses that Credit Suisse ($CS), Nomura ($NMR), and others will actually face over time. 

Secondly, make sure to understand why you would want to own one of these investment banks in the first place. If you’re looking for beneficiaries of higher interest rates, $CS might not be your best bet, as only about 27% of its revenues come from interest income, while the rest come from commissions, fees, and trading revenues.

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