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Some of the banks that collectively had more than $ 50 billion in exposure to Archegos Capital are conducting internal investigations into whether Bill Hwang, the former hedge fund manager who ran the family office, had hidden his other positions from them.
Leaders of prime brokerage divisions of at least two banks are asked by risk managers why they’ve given a company as small as Archegos tens of billions of dollars of transaction leverage volatile stocks through swap contracts, according to people familiar with the discussions.
Those trades exploded last week when Archegos was hit by margin calls after ViacomCBS shares fell, leading to chaotic deals as some banks tried to limit their losses.
Nomura, Japan’s largest investment bank, said its losses could reach $ 2 billion, while sources close to Credit Suisse said the Swiss bank could lose as much as $ 4 billion. Mitsubishi UFJ Financial Group has announced that it will record a loss of $ 270 million on transactions, while three other banks – Goldman Sachs, Morgan Stanley and UBS – have indicated their losses will be minimal.
It is not uncommon for prime brokerage clients, who typically serve hedge funds and other specialist investors, to provide few details about their other trading activities. But executives from at least two of the six banks are investigating whether Hwang deliberately misled them or concealed vital information about mirror positions he had amassed in rival banks, according to people involved in. polls.
Such replicated positions would magnify the risks on each of the transactions, making a bank less likely to extend so much credit against them.
No formal investigation has been announced.
The fallout from Archegos has put the spotlight on blue chip brokers, the lucrative sections of investment banking divisions that lend cash and securities to investment firms and help them process their transactions.
Hwang forged relationships with several top brokers despite a four-year trading ban in Hong Kong and paid US regulators $ 44 million in fines to settle the insider trading fees. The six banks competed to extend more than $ 50 billion to Archegos.
One wonders if Hwang’s counterparties knew about his relationships with other banks and the extent of leverage he was using for what appear to be positions concentrated in a handful of companies.
Rating agencies have downgraded the outlook for Credit Suisse and Nomura, citing concerns about “the quality of risk management”.
Representatives of the main brokers of the six banks met on Thursday evening after Archegos’ margin calls revealed its full exposure. The brokers discussed an orderly liquidation of large positions, but failed to strike a deal. The next morning, large block trades by Goldman and Morgan Stanley caused the prices of the affected shares to soar.
Credit Suisse, Goldman Sachs, Morgan Stanley, MUFG, Nomura and UBS all declined to comment. A representative for Hwang did not return a request for comment.
Additional reporting by Ortenca Aliaj in New York
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