Credit Suisse, Nomura Warn of Financial Hit From Fund Selloff

The market is shaking from a massive wind down.
(Novikov Aleksey)
(Novikov Aleksey)
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A massive sell-off from a sizable U.S. investor sent a shockwave through markets, dealing a potentially massive hit to investment banks Credit Suisse Group and Nomura Holdings, WSJ reports.

The Details:

  1. “Losses at Archegos Capital Management, run by former Tiger Asia manager Bill Hwang, have triggered the liquidation of positions approaching $30 billion in value.”
  2. Nomura saw a record 16% single-day drop in its share price. Credit Suisse declined 13%.

Who Is Bill Hwang? He’s the former protege of Julian Robertson, a hedge-fund magnate, and managed roughly $10 billion of family money at Archegos. After deciding to unwind a series of “big bets” on public stocks throughout the U.S., Europe and Asia, stocks like ViacomCBS and Discovery responded with sharp declines even as broader markets rose.

Credit Suisse has spent years reducing its investment-banking arm to mediate risk. It’s currently facing potential losses stemming from the collapse of U.K. financial firm Greensill Capital on top of this situation.

  • Loan losses from last year “from client frauds and net litigation provisions soared above $1.3 billion.”
  • “Japanese rival Nomura said it was owed about $2 billion by a U.S. client.”

The Final Word: “The potential losses for Credit Suisse and Nomura highlight the inherent riskiness of investment banking, the business of trading securities and advising companies and investors on major transactions. Banks across Wall Street reported strong profits last year on a boom in stock and bond trading during the pandemic. But there is a long history of securities trading activity coming back to bite banks suddenly, wiping out months’ worth of profit in days.”

Justin Oh:

From what I’m reading, this blow up was caused by:

  • Archegos was running a significantly leveraged book, rumored to be 5-6x leveraged. That means with $20 billion in capital Hwang could have been controlling $80+ billion in long positions.
  • Hwang was clearly in a lot of software, China, and tech names, and when they went down, his leverage worked against him and he started getting margin calls… one of the biggest I can remember.
  • Massive block trades on Friday imply that he was heavily in Baidu ($BIDU), Tencent Music ($TME), Vipshop ($VIPS), Discovery ($DISCA, $DISCK), Farfetch ($FTCH), Shopify ($SHOP), Viacom ($VIAC), and others.
  • The prime brokers (the banks) have margin-called Archegos, forcing the liquidation of its positions and almost certainly wiping out the fund.

At this point, the forced liquidations are so large that they are causing market-wide fear and the banks are stuck with hundreds of millions to billions of losses.

Rumors are flying that Credit Suisse ($CS), Nomura ($NMR), and Morgan Stanley ($MS) might lose multiple billions of dollars ($4B+), while Goldman Sachs ($GS) and Deutsche Bank ($DB) might have mitigated their losses with less exposure or better risk management.

Rumors are also saying that the prime brokers were trying to work together to unwind the positions, but someone broke ranks and started to front-run the others to stem the losses, causing messy selloffs.

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