NEW YORK (BLOOMBERG) – Alarms were blaring inside Wall Street’s corridors of power in the middle of last week, as executives realized they might be facing the biggest hedge fund blowup since Long-Term Capital Management in the 1990s.
Global investment banks, gathering in a hastily arranged call, needed a swift truce to deal with Bill Hwang’s Archegos Capital Management if they were to head off billions of dollars in losses for banks and a potential chain reaction across markets. Yet by Friday (March 26), it was everyone for themselves.
The forced liquidation that sent bellwether stocks tumbling last week and continues to send shock waves across capital markets, was preceded by bickering in the highest rungs of international finance that quickly devolved into finger-pointing and now fury, according to people with knowledge of situation. Banks are just starting to tally the carnage.
So far, Credit Suisse Group and Nomura Holdings have told shareholders their businesses face “significant” losses. Goldman Sachs Group, ahead of the pack on unloading positions, is telling investors the impact on its financial results will probably be immaterial. Deutsche Bank said it escaped too. Morgan Stanley, another big player that was still shopping blocks of stock as late as Sunday night, has yet to specify any toll.
Emissaries from several of the world’s biggest prime brokerages tried to head off the chaos by holding a call with MR Hwang before the drama spilled into public view Friday morning. The idea, pushed by Credit Suisse, was to reach some sort of temporary standstill to figure out how to untie positions without sparking panic, the people said.
But any agreement was elusive, and by Thursday night, some banks had shot off notices of default to Archegos to seize collateral and potentially shop it to buyers to contain the banks’ potential losses, the people said. Yet even then, it wasn’t clear when terms with Archegos would allow sales to proceed, one of the people said.
Soon came the finger-pointing over who was breaking ranks, the people said. Some emerged from the talks suspicious that Credit Suisse wasn’t fully committing to freezing sales. By early Friday, rival banks were taking umbrage after hearing that Goldman planned to sell some positions, ostensibly to assist Archegos. Morgan Stanley began drawing public attention with block trades.
Representatives for the banks declined to comment.
The worries over Archegos had begun mounting earlier in the week after a series of wrong-way bets exposed its fragility. The firm, little known outside finance circles, had amassed tens of billions of dollars in stock bets, much of it using opaque derivatives and borrowed funds, the people said. It included some giant bets on a small group of stocks. Then came ViacomCBS’s announcement this month of a US$3 billion (S$4 billion) stock sale, which prompted a share slide that hurt Archegos.
While block trades are common, the size of Archegos’s positions and their disposals rocked the market, as a US$20 billion selling spree gained momentum on Friday. Goldman Sachs and Morgan Stanley led the way, the people said. Other banks were left to follow, selling positions at a potential disadvantage.
Given Archegos’s size, unwinding its positions could generate losses of around US$2.5 billion to US$5 billion for the industry, depending on how hard it is to liquidate holdings, JPMorgan Chase & Co analyst Kian Abouhossein wrote in a note to clients.
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