Archegos Capital Management is reportedly preparing for insolvency as banks seek to regain roughly $10 billion in combined losses suffered during the meltdown in March, the Financial Times reported Wednesday.
According to the report, Bill Hwang’s family office has hired restructuring advisers to navigate financial and operational obstacles as well as the potential legal claims from the banks involved.
Credit Suisse, Nomura, Morgan Stanley, UBS, MUFG, and Mizuho all lost billions each after Bill Hwang’s family office failed to meet margin calls on highly levered positions in a handful of stocks.
As a result, some of the banks are drafting “letters of demand” to the firm requesting repayment before filing legal claims, according to the Financial Times.
Weber blamed the episode on a lack of oversight of family offices, which do not have to disclose as much information about investments to regulators compared to other asset managers, such as hedge funds.
Weber in an exclusive interview on Bloomberg TV blamed the lack of oversight particularly in family offices – entities typically established by wealthy families – which don’t have to disclose information about the firm to regulators, unlike hedge funds.
Weber urged regulators like the US Securities and Exchange Commission to enforce more transparency, adding that without action from official agencies, UBS itself would force more transparency at the bank.
“If it’s not enforced by regulators, we will enforce it because we need that information,” Weber told Bloomberg Wednesday. “If we finance activity, we want these disclosures and if clients are unwilling to give that, well there may be other banks that give them that same exposure, but it won’t be us.”
Given the “unusual” situation, Weber revealed that UBS is conducting an internal investigation to get to the root of the issue. The chairman did clarify that they are not subject to regulatory action.
“We’re not very happy with this event,” he said. “I’m hyper-focused on this …We’ve not changed our risk appetite. This was not within what should have happened. So we need to get to the bottom.”
Weber also clarified that no one will be stepping down at the bank as a result of the episode, adding that it was the process that needed improvement.
“I don’t see a single failure of a single part of the organization,” he said. “But what I do see is that the number of combinations that interacted wasn’t very good and so we need to improve each and every element of that so that those interactions don’t happen again.”
It imploded in March when some of its highly levered bets on US media and Chinese tech companies started to go bad.
Its prime brokers – the banks which facilitate lending and sales to hedge funds and family offices – demanded it put up more collateral to cover potential losses. When Archegos failed to do so, the banks began to forcibly dump its holdings, leading tens of billions of dollars of selling.
Credit Suisse was the most badly burned by these fire sales. It eventually took a hit of $4.7 billion from Archegos in the first quarter after being slow to ditch its exposure. It pushed the bank to a $275 million loss in the first quarter.
Morgan Stanley took a $911 million loss from Archegos in its prime brokerage unit. But its profit nonetheless jumped 150% to $4 billion on the back of buoyant markets.
UBS chief executive Ralph Hamers said: “Our first quarter results also factored in a loss related to the default by a single US-based prime brokerage client. We are all clearly disappointed and are taking this very seriously.
“A detailed review of our relevant risk management processes is underway and appropriate measures are being put in place to avoid such situations in the future.”
UBS shares fell 2.73% in early trading to 13.74 Swiss francs ($15).
Credit Suisse, Switzerland’s second-biggest bank after UBS, reported first-quarter earnings on Thursday that showed the bank witnessed a slightly narrower net loss than analysts had expected.
A net loss of 252 million francs ($275 million) beat the 815 million francs ($890 million) mean estimate conducted by the bank’s own poll of analysts.
The bank said it had exited 97% of its trading positions related to a US-hedge fund. Credit Suisse has consistently been reluctant to name the fund, but the bank has cushioned the blow from its remaining exposure to Archegos Capital.
It expects to incur related losses of another 600 million francs ($654 million) in the second-quarter this year and said it would raise $2 billion to shore up its capital, in the aftermath of the hedge fund’s collapse.
Here are the key numbers:
Net Revenue: CHF 7.6 billion ($8.3 billion) versus CHF 5.2 billion ($5.6 billion) in Q4
International wealth management pre-tax profit: CHF 523 million ($571.3 million) versus CHF 442 million ($482 million) estimated
Revenue from investment-banking division: CHF 3.9 billion ($5.4 billion) versus CHF 2.2 billion ($3 billion) a year ago
Net loss: CHF 252 million ($275 million) versus CHF 353 million ($385 million) in Q4
“Our results for the first quarter of 2021 have been significantly impacted by a CHF 4.4 billion charge related to a US-based hedge fund,” CEO Thomas Gottstein said in a statement. “The loss we report this quarter, because of this matter, is unacceptable.”
“Among other decisive actions, we have made changes in our senior business and control functions; we have enhanced our risk review across the bank; we have launched independent investigations into these matters by external advisors, supervised by a special committee of the Board; and we have taken several capital-related actions,” he added.
Swiss regulator FINMA announced the same day that it has opened enforcement proceedings against the bank after it suffered losses in connection with Archegos.
Credit Suisse has emerged as the hardest-hit among the banks affected by the Archegos collapse. Other banks were quicker to wind down their related positions, leaving them relatively unscathed. The Swiss lender was already battling with a controversy linked to supply-chain finance as it had $10 billion worth of funds tied to Greensill Capital.
The impact on Credit Suisse from both the Archegos and Greensill saga could add up to $8.7 billion, Bloomberg reported, citing JPMorgan analysts.
Shares in Credit Suisse fell 5% in early European trading.
Global banks are expected to lose up to $10 billion following the Archegos Capital Management meltdown, JPMorgan said Monday – raising its estimate from an initial $2 billion-$5 billion – with Credit Suisse Group and Nomura Holding hardest hit.
“One line of argument which could explain why the scale of losses suffered by [Credit Suisse] and Nomura was higher could be a higher level of leverage extended by these banks compared to [Goldman Sachs and Morgan Stanley], which seem to have suffered smaller losses if any,” JPMorgan analysts led by Kian Abouhossein said in a research note Monday.
JPMorgan clarified that there may also be additional considerations that determined the sizable difference between the scale of losses suffered, such as the timing of the sale of positions, among others. Nonetheless, the entire episode affects the industry overall, given that global banks could end up losing five times the normal loss level for a collateralized daily mark-to-market business.
JPMorgan cites three lessons the industry could take away from the fund’s implosion.
First, investment banks in general are in better shape today and are more focused on high-volume execution platforms.
“There is no excessive leverage in the [investment banking] or [private banking] industry,” JPMorgan said. “Although [private banking] leverage has been increasing, it is nowhere near prior peaks.”
The bank also said it sees no excessive equity-swap growth, a simple instrument all parties will benefit from.
Second, US regulatory frameworks like Basel III and the Dodd-Frank Act have improved the risk profile of investment banks. JPMorgan, however, noted that there is still weak oversight for non-bank entities, especially when it comes to family offices.
Archegos, a family office founded in 2012, did not have to disclose investments, unlike traditional hedge funds. JPMorgan also pointed to the lack of transparency when it came to equity-swap filings.
The Archegos sell-off exposed the fragility of the financial system, especially those involving lesser-known practices such as total return swaps, a derivative instrument that enabled Bill Hwang’s office not to have ownership of the underlying securities his firm was betting on and the secrecy of family offices. Typically, family offices enjoy the “private adviser exemption” provided under the Advisers Act to firms as these usually advise less than 15 clients, among other conditions.
But JPMorgan said, “filing requirements would have applied to Archegos given its sizable exposure to some US securities. However, the fact that Archegos did not file with the [Securities and Exchange Commission] can be explained by the usage of total return swaps, which seems to be the primary method through which the sizable positions were built by Archegos.”
Dan Berkovitz, a Democratic commissioner on the Commodity Futures Trading Commission, denounced family offices and their ability to skirt some oversight.
“A ‘family office’ has nothing to do with ordinary families,” he said in a statement on April 1. “Rather, it is an investment vehicle used by centimillionaires and billionaires to grow their wealth, reduce their taxes, and plan their estates.”
Third, JPMorgan said private banks, specifically those linked to Archegos, moving forward could improve their onboarding, especially with clients with backgrounds such as Hwang, who has run into trouble in the past. Private banks could also strengthen their risk management by giving less leverage to non-transparent family offices with concentrated positions and ensure checking the clients’ rehypothecation risk, among others.
Archegos in late March used borrowed money to make large bets on some stocks until Wall Street banks forced Archegos to sell over $20 billion worth of its shares after failing to meet a margin call. Hwang grew his family office’s $200 million investment to $10 billion. Reports say the former Tiger Management trader lost $8 billion in 10 days.
Bill Hwang built up a fortune of around $20 billion through savvy investments, but then lost it all in 2 days in March as his Archegos investment fund imploded after some of his bets went awry, a report has said.
Hwang, an alumnus of famed hedge fund Tiger Management, took around $200 million in 2013 and turned it into a $20 billion net worth by betting successfully on technology stocks, Bloomberg said in the most detailed look at Archegos’ finances yet.
But it all came crashing down at the end of March when some of Hwang’s highly leveraged bets started to go wrong and his banks sold huge chunks of his investments. The sales knocked around $35 billion off the value of various US media and Chinese tech firms in a day.
Bloomberg reported that Hwang’s early investments through his Archegos Capital Management family office included Amazon, travel-booking company Expedia, LinkedIn and Netflix, the latter of which reaped a $1 billion payday. Bloomberg cited people familiar with Hwang’s investments.
Hwang’s bets at some point shifted towards a broader range of firms, in particular media conglomerates ViacomCBS and Discovery. He also loaded up on Chinese tech companies such as Baidu and GSX Techedu.
Archegos’ investments powered it to a strong final quarter of 2020, with many of the stocks it held jumping more than 30%.
But the ViacomCBS bet would become particularly problematic for Hwang. It started to tumble during the week starting March 22, causing Archegos’ prime brokers – the major banks who lent it money and processed its trades – to demand more money as collateral, known in the business as a margin call.
With Hwang unable to put up the cash, Morgan Stanley sold around $5 billion of Archegos’ holdings at a discount, according to Bloomberg. Goldman then followed suit, selling billions of dollars of companies’ stock.
Some banks weren’t so fast, however, with Credit Suisse and Nomura left nursing estimated losses of $4.7 billion and $2 billion respectively.
A key reason that Hwang’s wealth collapsed so spectacularly is that he used large amounts of leverage. That is, Archegos borrowed lots of money to fund his investments, meaning it faced large losses when they went bad.
Gerard Cassidy, US bank analyst at RBC Capital Markets, told Insider in March: “Leverage is always a two-edged sword. In a bull market when prices are rising it enhances your returns. And then in a falling market, like you just saw in this particular case, it cuts your head off.”
Archegos was unavailable for comment but spokesperson Karen Kessler told Reuters at the end of March: “This is a challenging time for the family office of Archegos Capital Management, our partners and employees.”
“All plans are being discussed as Mr. Hwang and the team determine the best path forward,” she said.
Leaders at Switzerland-based Credit Suisse are discussing replacing chief risk officer Lara Warner, after the bank was caught up in several high-profile incidents, leading to large potential losses, Bloomberg reported. The outlet cited people briefed on the matter.
Despite chief executive officer Thomas Gottstein’s commitment to a clean slate in 2021, after a previous spying scandal at the bank, Credit Suisse has been one of the worst-performing major bank stocks in 2021.
The recent collapse of Greensill, along with chaos at Archegos, has potentially left investors facing another quarter of losses.
The role of Brian Chin, CEO of Credit Suisse’s investment bank, is also under scrutiny, two of the sources told Bloomberg. They added that the bank is planning a review of its prime brokerage business, which is housed under its investment bank.
Credit Suisse declined to comment.
The bank was one of the main lenders to the Softbank-backed Greensill, a supply-chain lender that was recently forced to file for bankruptcy. A $140 million collateralized loan to Greensill is now in default, although $50 million has been recently repaid by administrators, Bloomberg reported.
This is essentially pooled debt that is taken to market via a single security. Investors receive scheduled payments from the loans but assume most of the risk in the event that borrowers default.
The Swiss bank’s asset management unit also ran a $10 billion group of funds with Greensill, which are being wound down.
On Monday, the Swiss firm had $4.8 billion wiped from its market capitalization on Monday. Its shares tumbled as much as 14% when the bank warned it could suffer a major blow to its first-quarter profits after Archegos, a US-based hedge fund liquidated.
It said the losses could be “highly significant and material” to its first-quarter earnings, due next month.
Archegos, the family office of trader Bill Hwang, was forced to liquidate more than $20 billion of leveraged equity positions last week. The fire sale hammered stocks such as ViacomCBS and Baidu, and set off alarms at multiple Wall Street banks.
The bank could face a loss of $3 billion to $4 billion, the Financial Times reported, citing two sources. The top end of that estimate would be almost triple its net income in the first quarter of 2020. From the Archegos trades, the banking sector could take a collective hit of up to $10 billion, JPMorgan analysts have estimated.
Bloomberg noted that this is only adding to the scrutiny on management, after several other miscues at the investment bank and beyond, including exposure to the Luckin Coffee Inc. fraud.
Gottstein is expected to remain CEO, the people told Bloomberg.
The latest issues for the bank could also put its planned share buyback at risk, potentially pausing it for a second time, Bloomberg reported, as losses could threaten the bank’s dividend distribution.
Credit Suisse declined to comment on the potential fallout of the trades.
The derivatives instruments that triggered the Archegos Capital Management implosion have for years been scrutinized by regulators and some of Wall Street’s biggest investors, including Warren Buffett.
Archegos’ investments were partially concentrated in derivatives called total-return swaps. The highly leveraged trading strategy also had a role in the fallout of Long-Term Capital Management, a hedge fund that failed in 1998 and ultimately required a bailout from a consortium of Wall Street banks to prevent a financial-market collapse.
In the letter, Buffett described how LTCM used total-return swaps and how the instruments are contracts that can facilitate 100% leverage in various markets, including stocks.
In a total-return swap, one party, usually a bank, puts up all the money for the purchase of a stock, and another party, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes, Buffett explained.
“Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions,” the investor said.
He said highly experienced investors and analysts could encounter major problems analyzing the financial conditions of firms that are heavily involved with derivatives contracts, including total-return swaps. He said that when he and Berkshire Vice Chairman Charlie Munger read through the footnotes detailing the derivatives activities of major banks, the only thing they understood was that they didn’t understand how much risk the institution was running.
“The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear,” Buffett said.
He said that the derivatives businesses were expanding “unchecked” and that central banks and governments had found no effective way to control or even monitor the risks posed by these contracts.
Archegos was trading on leverage using total-return swaps, and, according to Forbes, the family office did not disclose its position and subsequent transactions because Securities and Exchange Commission law exempts family offices from disclosing these trades.
Amid the largest melt down of a firm Wall Street has witnessed since the global financial crisis, it wasn’t just banks that lost billions. Bill Hwang, the man behind Arcehgos Capital Management, also suffered a staggering $8 billion dollars in 10 days – one of the fastest losses of that size traders have ever seen, The Wall Street Journal reported.
The massive selloff was largely felt on Friday last week when shares of media conglomerates and investment banks dropped off, sending shockwaves through the market and sparking fears of wider spread contagion.
Japanese firm Nomura Holdings said it could suffer a possible loss of around $2 billion, while Credit Suisse Group, which has declined to provide a numerical impact, could see around $3 billio-$4 billion, according to reports.
Hwang, who founded Archegos as a family office in 2013, used borrowed money to make large bets on some stocks until Wall Street banks forced his firm to sell over $20 billion worth of shares after failing to meet a margin call, hammering stocks including ViacomCBS and Discovery.
The fiasco exposed the fragility of the financial system, especially those involving lesser-known practices such as a total return swaps, a derivative instrument that enabled Hwang’s office not to have ownership of the underlying securities his firm was betting on.
It also revealed the lack of oversight of family offices, which manage more than $2 trillion, The Wall Street Journal reported. Family offices don’t have to disclose investments, unlike traditional hedge funds.
“The collapse of Archegos Capital Management and the billions of dollars in losses to investors and other market participants is a vivid demonstration of the havoc that errant large investment vehicles called ‘family offices’ can wreak on our financial markets,” Dan Berkovitz, a Democratic commissioner on the Commodity Futures Trading Commission, said in a statement, Thursday.
“A ‘family office’ has nothing to do with ordinary families. Rather, it is an investment vehicle used by centimillionaires and billionaires to grow their wealth, reduce their taxes and plan their estates,” Berkovitz said.
The founder grew his family office’s $200 million investment to $10 billion, but he did not need to register as an investment advisor since he was only managing his own wealth.
But this isn’t the first time the devout Christian founder, who is known for his risky investments, has run into trouble. In 2012, Hwang pleaded guilty to insider trading and closed down his Tiger Asia Management fund. He was banned from managing clients’ money in the US for five years. In Hong Kong, he was also banned from trading securities in 2014 for four years.
Yet, in spite of the huge losses as a result of his fund’s implosion, some have praised Hwang’s abilities.
Tom Lee, head of research at Fundstrat Global Advisors, in a tweet on Tuesday, said investors should be cheering hedge fund successes not jeering their failures. Lee said Hwang, who he has known for many years, is “easily in the top 10 of the best investment minds” that he knows.
Goldman Sachs was quicker than its rivals at offloading billions of dollars of stock held by the imploding investment fund Archegos. Japanese banking giant Nomura wasn’t so fast, according to reports, and is facing losses of around $2 billion in one of its arms.
Now, Goldman analysts have downgraded Nomura’s shares, pronouncing on Tuesday: “We now think upside for the stock looks limited.”
The analysts, led by Shinichiro Nakamura, also lowered their earnings forecasts for Nomura, saying: “We assume the company would look to adopt a generally more risk-focused or cautious approach.”
The major banks that lent to Archegos Capital Management tried to reach an agreement last week when it became clear that Bill Hwang’s fund was struggling to come up with cash to cover its bets, according to reports in the Financial Times and Bloomberg.
Yet those talks broke down, the reports said, and Goldman started selling huge blocks of Archegos’ holdings in companies such as ViacomCBS on Friday, causing stock prices to tumble.
Michael Brown, senior market analyst at Caxton FX, said it was a case of “every bank for themselves.” He added: “Unsurprisingly, [any agreement] quickly fell apart, such is the cut-throat nature of the business.”
On Monday, it became clear Nomura had not been fast enough when it said it was facing “a significant loss arising from transactions with a US client.”
Goldman, itself the heart of the action, swiftly downgraded Nomura’s stock from “buy” to “neutral” on Tuesday.
“We lower our [earnings] estimates given Nomura’s March 29 disclosure that it could book losses/provisions [of] approximately $2 billion,” the analyst said.
Nomura Holdings was down around 19% for the week on Wednesday at 581 Japanese yen, roughly $5.25. Goldman’s new 12-month target price is 630 yen.
Goldman said that if losses in the bank’s prime brokerage business rise to $3-$4 billion, “we would see a possibility that the company could rein in shareholder distributions.”
Nomura and Goldman Sachs both declined to comment.
JPMorgan now reckons the losses at certain banks involved with Archegos, such as Nomura and Credit Suisse, could be as high as $10 billion.
A person with knowledge of the situation said Goldman had “proactively managed” its risk and that its losses were “immaterial.”
Brown said: “For now, it’s a point to GS in this one.”