Wall Street counted the cost of the Archegos Capital meltdown on Tuesday, with pressure mounting on heavily exposed Credit Suisse and regulators stepping up scrutiny of the fallout from banks’ unwinding the New York fund’s positions.
Archegos, a $10 billion single-family office run by former Tiger Asia manager Bill Hwang, defaulted on margin calls by its banks. Its unwinding may result in those global lenders losing more than $6 billion, sources familiar with trades have said.
JPMorgan analysts, including Kian Abouhossein, estimated that the banks’ losses in total could potentially reach $10 billion, “well beyond normal unwinding 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 significant hit.
Credit Suisse’s shares fell another 3% on Tuesday and have slumped 16% so far this week, while shares of most other major European and U.S. banks bounced back from Monday’s battering.
Archegos responded to a request for comment with a repetition of its Monday statement which said that “all plans are being discussed.”
As the series of events that led Archegos’ brokers to liquidate the fund’s positions became clearer on Tuesday, regulatory scrutiny of the episode intensified.
U.S. and British regulators have been in discussions with market players, including broker-dealers, to determine the full extent of the fallout from the default on Archegos’ equity swap positions, a separate source briefed on the talks said.
The U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) have held meetings with the industry to understand the impact on firms and their customers, ascertain the credit risks and encourage dealers to check for further exposure, the source said.
Britain’s Financial Conduct Authority has also been involved in some of the calls with market players, the source said.
“The fallout from Archegos Capital’s margin call appears to be contained but the regulatory scrutiny will not go away anytime soon,” wrote Edward Moya, senior market analyst at OANDA, in New York, adding that prime brokerages could “start pressuring family offices or hedge funds to bring down the leverage they are using.”
Last Thursday, Archegos’ brokers discussed trying to limit the impact of unwinding the firm’s positions, two sources close to the matter confirmed. However, no agreement was reached on how to do that and Goldman Sachs sold a large block of $3 billion-$4 billion worth of stock before the market opened on Friday in a trade Archegos agreed to, one of the sources said.
“We would expect regulators will look carefully into this event and would not be surprised if there were some changes especially in light of the new administration,” banking analyst Vivek Juneja of JPMorgan wrote in a note on Tuesday.
An SEC spokeswoman said on Monday the agency was monitoring the situation but declined to comment further on Tuesday. A spokeswoman for FINRA did not respond immediately to a call for comment. Britain’s FCA said on Monday it was monitoring the situation and declined to comment further on Tuesday.
U.S. Senator Elizabeth Warren, a Democrat who is critical here of Wall Street, tweeted here that regulators need “transparency and strong oversight so the next hedge fund blowup doesn’t take the economy down with it.”
LOSSES PILE UP
Credit Suisse and Japan’s Nomura are set to bear the brunt of the bank losses, according to statements from the banks and sources, one of whom said Credit Suisse could lose as much as $4 billion. The bank has declined to comment on the size of its losses.
Credit rating agency Standard & Poor’s on Tuesday revised its outlook for Credit Suisse to “negative” from “stable.”
The prospect of big losses is putting further pressure on Credit Suisse’s risk management, already reeling from the fallout surrounding collapsed supply chain finance company Greensill.
Several analysts on Tuesday flagged that Credit Suisse’s share buyback program and dividend may be at risk.
“The hits just keep coming for Credit Suisse,” wrote Eoin Mullany at Berenberg, adding that the bank may need to suspend its share buy-back and reassess the way it manages risk.
Investors are likely to question why Credit Suisse appears to have suffered larger losses on Archegos than some of the fund’s other brokers.
The brokerage arm of Japan’s Mitsubishi UFJ Financial Group on Tuesday also flagged potential losses of around $300 million at its European subsidiary related to a U.S. client. It declined to comment on whether that client was Archegos.
Wells Fargo said it provided brokerage services to Archegos, but said it “did not experience losses related to closing out our exposure.”
Other major banks have said they do not expect a major impact from the downfall of Archegos. Goldman and Morgan Stanley were quick to offload shares on Friday, averting a material financial impact, sources familiar with their trades said.