Archegos losses mount, regulatory oversight of industry intensifies

ZURICH / NEW YORK (Reuters) – Wall Street counted the cost of Archegos Capital’s collapse on Tuesday, with increasing pressure on Credit Suisse and regulators stepping up their oversight of the fallout from the unwinding of the New York fund’s positions by the banks.

Archegos, a single $ 10 billion family office run by former Tiger Asia director Bill Hwang, defaulted on its banks’ margin calls. Its outcome could result in the loss of more than $ 6 billion from these global lenders, sources close to the trades told Reuters.

JPMorgan analysts, including Kian Abouhossein, estimated Tuesday that bank losses could potentially reach $ 10 billion, “well beyond the normal scenario for the industry.” They added they expected full disclosure by the end of the week from Credit Suisse, which on Monday warned of a heavy blow.

Shares of Credit Suisse fell another 3% on Tuesday and 16% so far this week, while shares of most other major European and US banks rebounded from Monday’s hard knocks.

As the string of events that led Archegos brokers to liquidate the fund’s positions became clearer on Tuesday, regulatory oversight of the episode intensified.

US and UK regulators have been in discussions with market participants, including brokers, to determine the extent of the fallout from the default on Archegos’ stock exchange positions, a separate source briefed on the negotiations said. .

The United States Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) have held meetings with the industry to understand the impact on companies and their customers, assess credit risks and encourage dealers to verify exposure additional, the source said.

Britain’s Financial Conduct Authority has also been involved in some of the calls with market participants, the source said.

“The fallout from Archegos Capital’s margin call appears to be contained, but regulatory oversight isn’t going away anytime soon,” wrote Edward Moya, senior market analyst at OANDA, New York. “Every prime brokerage is looking at their books and could start putting pressure on family offices or hedge funds to reduce the leverage they use.”

Last Thursday, Archegos brokers discussed the attempt to limit the impact of the unwinding of the firm’s positions, two sources familiar with the matter confirmed to Reuters. However, no agreement was reached on how to do this and Goldman Sachs sold a large block of shares worth $ 3-4 billion before the market opened on Friday as part of a exchange accepted by Archegos, said one of the sources.

Archegos did not immediately respond to a request for comment.

Moya said policymakers would likely seek reassurance that banks do not coordinate with other brokerage firms on client transactions, which could violate antitrust laws, lawyers say.

“We expect regulators to carefully review this event and would not be surprised if there were any changes, especially in light of the new administration,” JPMorgan bank analyst Vivek Juneja wrote in a note on Tuesday. .

An SEC spokeswoman said Monday the agency was monitoring the situation but declined to comment further on Tuesday. A FINRA spokeswoman did not immediately respond to a call for comment. Britain’s FCA said on Monday it was monitoring the situation and declined to comment further on Tuesday.

LOSSES ARE EMPLOYED

Credit Suisse and Japan’s Nomura are expected to bear the brunt of the bank losses, according to statements from banks and sources, one of which said Credit Suisse could lose up to $ 4 billion. The bank declined to comment on the extent of its losses.

The credit rating agency Standard & Poor’s on Tuesday revised its outlook for Credit Suisse to “negative” from “stable” due to concerns about the group’s risk management.

The prospect of large losses puts additional pressure on risk management at Credit Suisse, already reeling from the fallout surrounding the collapse of supply chain finance company Greensill.

Investors are likely to wonder why Credit Suisse appears to have suffered larger losses on Archegos than some of the fund’s other brokers.

The brokerage arm of the Japanese group Mitsubishi UFJ Financial also reported on Tuesday potential losses of around $ 300 million at its European subsidiary linked to a US client. He declined to say whether this client was Archegos.

Wells Fargo shares rose 2.5% on Tuesday after the company confirmed speculations that it had also provided brokerage services to Archegos, but said it “had not suffered any losses related to the closing of our exhibition ”.

U.S. banks were up overall, with Morgan Stanley up 1.8%, Goldman Sachs up 2%, JPMorgan up 1.2% and Citigroup up 2%.

“ THE HITS JUST CONTINUE TO COME ”

Several analysts reported on Tuesday that Credit Suisse’s share buyback program and dividend could be at risk due to the scandal.

“Success keeps coming for Credit Suisse,” Eoin Mullany wrote to Berenberg.

“We believe Credit Suisse will have to suspend its share buyback while in the longer term, we believe this will lead it to reassess the way it takes and manages risk.”

A Credit Suisse debt investor said the bank would likely not be able to reinstate its share buyback program until 2023.

The bank is also expected to face regulatory requirements for a larger capital cushion and incur higher borrowing costs, the investor said, adding that Credit Suisse may consider scaling back its private banking operations.

Other big banks said they did not expect a major impact from the fall of Archegos, with Deutsche Bank saying on Monday that it had not suffered any losses after “reducing the risks” of his exhibition in Archegos.

Goldman and Morgan Stanley rushed to offload shares on Friday, avoiding a significant financial impact, sources familiar with their transactions said.

Archegos’ troubles began last week when a disappointing share sale by media giant ViacomCBS triggered devastating bank margin calls for the fund, three sources familiar with the matter said on Monday.

($ 1 = 0.9419 Swiss francs)