Global banks face losses, regulatory scrutiny as Archegos-linked block-trade fallout continues

30 Mar, 2021 04:09
source: Singularity Financial

Singularity Financial Hong Kong March 30, 2021 – Warnings by Credit Suisse and Nomura that they expect to incur big losses as a result of lending to Archegos triggered a sell-off in banking stocks around the globe on Monday.

A wave of block trades continued on Monday with a large stake in Rocket Cos Inc. sold through Morgan Stanley, according to people familiar with the matter. The possibility of additional trades still looms over the market, while the traditional end-of-quarter volatility may contribute to sharper swings on previously high-flying stocks.

“About 20 million shares were sold earlier during Monday’s session at $25.25 each. Shares in the parent of Quicken Loans, the largest retail non-bank lender, erased gains to traded little changed in the afternoon”, according to latest Bloomberg’s report.

A margin call on the family office of former Tiger Management trader Bill Hwang has led to the liquidation of more than $20 billion in stocks ranging from Chinese technology firms to U.S. media giants.

The block trades initiated by Goldman Sachs Group Inc. and Morgan Stanley were triggered after Archegos failed to meet margin calls, leaving Nomura Holdings Inc. and Credit Suisse Group AG facing potentially “significant” losses and sending shares of both plunging.

Both Nomura Holdings Inc. and Credit Suisse Group AG fell more than 14% during Monday’s trading session. The KBW Bank Index slumping as much as 3.5%, the most in two months. Goldman dropped as much as 3%, even after the investment bank was said to have told shareholders and clients that the margin call will likely have an immaterial impact on its financial results. Morgan Stanley sank as much as 5%.

“Sizeable block trades — especially those done at a discount to the market price — are always unnerving for investors, especially when the seller isn’t clear. Put simply, the fear is that someone else somewhere knows something bad that you don’t”, said the Bloomberg.

“That’s why shares in Chinese tech giants such as Baidu Inc. and Alibaba Group Holding Ltd. fell sharply in the Asian morning as traders tried to get out in front of whatever was going on. Alibaba later recovered after Wall Street realized the mayhem was driven by specific rather than sector-wide sales.”

So who is Bill Hwang and what went wrong for him?

Hwang has had a long and controversial career. A protege of Tiger Management hedge-fund legend Julian Robertson, the so-called tiger cub struck out on his own and built Tiger Asia Management in New York partly with money from his former boss. Hwang’s multi-billion dollar Asia-focused hedge fund produced stellar returns. Then in 2012, he pleaded guilty to insider trading on some Chinese bank stocks and agreed to criminal and civil settlements of more than $60 million, later closing down the fund.

That didn’t mean he stopped investing, though. Instead, Hwang focused on managing his own money out of a family office — Archegos — which grew to be bigger than many better known hedge funds. Such set-ups that manage money for wealthy families don’t usually have outside investors, meaning they are free to take bigger risks and are often under less regulatory scrutiny.

In this case, Bloomberg reported that Archegos had used derivatives contracts with brokers — known as swaps — to gain substantial additional leverage. That meant that the firm didn’t have to disclose its holdings in regulatory filings, since the positions were on the banks’ balance sheets.

He was forced by his bankers to sell more than $20 billion worth of shares after some trading positions moved against him, people directly familiar with the trades told Bloomberg, asking not to be named because the details aren’t public.

As the bets went wrong, Hwang’s prime brokers started demanding he provide more collateral and then exercised their right to liquidate his positions to recover their money.

Prime brokers are the investment banks that lend hedge funds and family offices securities and cash and also process trades for them. Once some banks began to liquidate positions, a dash to sell was triggered among others to avoid losses on stocks that would soon be plummeting in value.

Nine stocks have borne the brunt of the selling so far: online and entertainment companies ViacomCBS, Discovery and Shopify Inc.; Chinese firms Tencent Music, Baidu, GSX Techedu Inc., iQiyi Inc., Vipshop Holdings Ltd.; and U.K. online retailer Farfetch Ltd.

Some of them were already under pressure before the block trades. After-school tutoring company GSX withstood attacks from short sellers who alleged many users were robots, before tumbling in October following a Credit Suisse stock downgrade as the broker said it faced increased competition.