The collapse of the entity has not yet dragged into other broader markets, but it is too early to consider it isolated
How can the collapse of a single intermediary take away a good part of the results of a bank in the year? That’s the question Credit Suisse and Nomura investors ask after both entities announced that they would suffer significant losses following the collapse of Archegos Capital Management. Blatant control failures lead one to wonder if there are other latent dangers in bank accounting.
Shares of the French and Japanese banks fell about 16% on Monday, erasing in one fell swoop, together the two, about $ 8.4 billion in value of the shares. Nomura said it has a claim of about $ 2 billion against a client that Reuters says is Archegos, a family business run by former Tiger Asia director Bill Hwang. The Financial Times reported that Credit Suisse’s losses could be between $ 3 billion and $ 4 billion after the fund stopped covering margin calls at the end of last week. The loss between the two could be equivalent to the combined net result that the two banks expected to generate for the year, according to Refinitiv estimates.
Neither bank has been clear about how a single customer could be so expensive. It is true that Hwang’s underlying operations may have been dangerous. According to some reports, Archegos used derivatives such as contracts for difference to bet on high-valuation companies such as GSX Techedu and Baidu. These instruments were already leveraged, thereby magnifying losses if the market changed. Nomura and Credit Suisse also appear to have gotten the bottom of a domino effect, as rivals such as Goldman Sachs and Morgan Stanley withdrew their collateral from Hwang. The sales of multi-million dollar tranches of shares by those banks caused stocks like ViacomCBS to crash, in a typical fool case the latter.
But the volume of losses implies a broader failure in the most elementary risk management. The eight stocks most frequently associated with Hwang, according to the media, fell an average of 36% last week. It is a lot, but it falls within the limits of the most pessimistic scenarios that banks must consider when providing loans for risky operations. It’s also hard to understand how banks approved such broad exposures.
One likely answer is that the brokerage desks at Nomura, Credit Suisse and other banks will become more stringent when it comes to lending. That in turn could lead to a forced selloff in other highly leveraged hedge funds, with the potential to expose other investors who have stepped out of line. The Archegos crash has yet to drag out larger markets, but it is too early to consider it an isolated event.