People can be seen on Wall St. outside the New York Stock Exchange (NYSE) in New York City, March 19, 2021.
Brendan McDermid | Reuters
When investors rush to the exits, it pays to get out the door first.
That happened last week when declining shares in ViacomCBS sparked a $ 20 billion wave of foreclosures at the Wall Street banks targeting Archegos Capital Management, the family office founded by former Tiger Management analyst Bill Hwang.
By the time Credit Suisse and Nomura, two Archegos prime brokers, announced on Monday that they were dealing with losses that could be “ very significant ” to the banks, rival firms Goldman Sachs and Morgan Stanley had already finished offloading. their positions, according to people with knowledge of the matter.
Goldman managed to sell most of the shares related to the Archegos margin calls on Friday, which helped the company avoid losses in the delivery, one of the people said. Morgan Stanley sold $ 15 billion worth of stock in a matter of days, avoiding significant losses, The Washington City Times’s Leslie Picker reported.
Investors punished the two non-US banks. Nomura ended 14% lower on Monday, while Credit Suisse was down 11.5% as the market closed. Meanwhile, Morgan Stanley was down 2.6% and Goldman shares a modest 0.5%.
“In this environment, where information flows quickly and you need to act quickly, this shows significant weakness on the part of Nomura’s risk management,” said Mark Williams, a finance professor at Boston University and a former Federal Reserve examiner. “Did they not understand the risks they were taking or ignore them because they wanted to grow?”
In addition to not acting fast enough to avert losses – Nomura and Credit Suisse each indicated that they were still winding down positions as of Monday – the two companies may not have been as disciplined with Hwang’s fund as their big one. US rivals, industry observers said.
Nomura estimated the company was losing $ 2 billion as of Friday’s market prices, while Credit Suisse said the deficit could be “very significant and material” to the bank’s first quarter results. Calls to Credit Suisse and Nomura were not immediately answered.
Morgan Stanley, Goldman and JPMorgan Chase are the largest prime brokers in the world, according to sources tracking industry earnings. Credit Suisse is in seventh place, while Nomura is out of the top ten.
Smaller companies will sometimes accept less collateral or offer cheaper financing terms to win over clients in the hyper-competitive prime brokerage world, the sources said. That works when markets are rising, but can lead to pain when stocks go south and leveraged bets implode.
Nomura and Credit Suisse also have smaller trading activities in the US, which may have limited their ability to quickly redeem large blocks of shares after it became clear what was going on. Meanwhile, Goldman sold $ 10.5 billion worth of shares of Baidu Inc., Tencent Music Entertainment Group, ViacomCBS and Discovery on March 26, according to an email from a customer reported by Bloomberg.
The eruption at Archegos, a relatively obscure entity before last week’s spectacular collapse, raises the question of what other risks lurk in the client books of major investment banks.
“Should they even make bets where they could lose $ 2 billion in a week?” Williams said. “It looks like they were swinging at the gates when they can lose so much.”