Archegos Capital Hedge Fund scandal hits banks
Bank stocks fell on Monday amid news surrounding the default of major hedge fund Archegos Capital.
Large multinational banks can suffer multibillion-dollar losses as a result.
Shares in Japanese bank Nomura tumbled by a record 16.3% on Monday after news of a possible $2 billion loss from a client's trading operations. The loss is related to the liquidation of the positions of the Korean hedge fund Archegos Capital.
Credit Suisse shares fell by 14%, Deutsche Bank-by 3.3%. Morgan Stanley shares fell by 2.6%, Goldman Sachs-by 0.5%.
On Friday, Archegos Capital received a margin call and was forced to sell shares worth more than $20 billion, Bloomberg writes, citing informed sources.
The default of a Korean billionaire has wreaked havoc in the global banking system. A fund with $10 billion in assets defaulted on the margin requirements of one of its brokers, launching a cascade of margin calls that ended the fund in less than a day.
Archegos 'problems came to light on Friday, when Morgan Stanley, Goldman Sachs and Deutsche Bank suddenly began selling off tens of billions of dollars' worth of shares on the OTC market.
Archegos bought shares with leverage, taking both long and short positions in the shares at the same time. This strategy helped to make the fund less sensitive to market fluctuations, but it also created a risk: long positions of the fund brought less profit than short ones. One of the brokers demanded to bring in the money, others followed, a forced sale began, and Archegos crumbled like a house of cards.
Following Archegos, the banks that served it received huge losses. Japan's largest investment bank, Nomura, said on Monday that it could lose $2 billion due to transactions with an " American client." The loss will cover the bank's annual profit.
Credit Suisse, Switzerland's second-largest bank by assets, has warned of significant losses ($3-4 billion, according to Reuters).
US regulators have begun to investigate the reasons for the problems of the Archegos Capital fund. The Securities and Exchange Commission has entered into a dialogue with representatives of Credit Suisse, Nomura, Goldman Sachs and Morgan Stanley, writes Forbes.