Archegos Capital, a family-based private investment office is now at the centre of a multi-billion dollar fiasco involving secretive market bets. Reportedly it is behind the ‘unprecedented’ block trades, which is the sale or purchase of a large number of securities, that took place on Friday in the US markets.
The turbulence caused has sent a huge shockwaves across the financial markets throughout the world.
Run by former Tiger Asia manager, Bill Hwang, Archegos Capital on friday was forced to unload $20 billion of shares following its inability to meet margin obligations to brokers.
Let us look at the key players involved in the fiasco, the causes and global implications.
Firstly, What went wrong?
Archegos management had taken bets on stocks using borrowed money by pledging shares as collateral with the investment banks or brokers it had borrowed from.
In such an arrangement, when the value of the pledged shares fall, the broker of an individual is forced to liquidate the positions of a client in order to furnish additional cash.
This is known as a margin call.
In this case, when Archegos was unable to put up the money, its brokers dumped the shares Archegos had pledged with them.
Investment banks such as Goldman Sachs and Morgan Stanley dumped over $20 billion worth equity positions on behalf of Bill Hwang’s fund in a series of block trades.
Usually, block trades are routine affairs. However in this case the sheer size of the individual market orders were so large, traders immediately grew skeptical.
The price of the stocks with which block trade occurred plunged. And in such situations the steep fall triggers a sell-off by trader with buying position.
Blowup in Financial Funds
Financial institutions Nomura and Credit Suisse warned on Monday that they were facing financial losses after Archegos Capital defaulted on margin calls.
Nomura said on Monday that it faced a possible $2 billion loss due to transactions with a US client while Credit Suisse said “at this time it is premature to quantify the exact size of the loss resulting from this exit”, a default on margin calls by a US-based fund could be “highly significant and material” to its first-quarter results.
As reported in the economic times, sources said that the Credit Suisse’s losses were likely to be at least $1 billion. One of those sources said the losses could go as high as $4 billion.
According to a report in global banks may lose more than $6 billion from the downfall of Archegos Capital.
The warnings issued by Nomura and Credit Suisse are raising concerns for a wider contagion.
But so far, the impact has been only limited to the stocks that were part of Archegos portfolio. major equity indices in the U.S, europe and Asia remain unaffected.