Shares in major banks around the world remained under pressure on Monday in the wake of the fallout from the forced sale of $US20 billion in shares on Friday.
Two banks were especially hit hard, Japan’s Nomura and Switzerland’s Credit Suisse which are facing billions of dollars in losses and regulatory scrutiny in the wake of the sales.
Monday saw both banks reveal what they termed as ’significant’ losses in the wake of the sales which were forced after the hedge fund involved defaulted and failed to make margin calls issued by banks.
Investors will be watching Tokyo closely to see if Japanese regulators ask Nomura for more information on Tuesday and likewise in Europe tonight where there was talk of more questions from key regulators including central banks in Switzerland, the UK and the eurozone bank regulator.
Numerous media and market reports have named US hedge fund Archegos Capital as the source of the sales after it defaulted on equity derivative bets, putting investors on edge about who else might be exposed.
Friday saw the first sign of a problem when, without the usual warning, Goldman Sachs and Morgan Stanley dumped close to $US20 billion of shares starting before trading and continuing through the day.
The two banks dumped shares in several US media companies including ViacomCBS and Discovery, sending the shares of both companies down sharply on the day. Viacom shares plunged 27% at one stage as did shares in Discovery.
ViacomCBS shares fell another 5% on Monday and shares in Discovery were down more than 2%
On Monday Nomura and Credit Suisse warned they were facing significant losses in the wake of Friday’s sales.
Nomura said on Monday that it faced a possible $US2 billion loss due to transactions with an unnamed US client while Credit Suisse said a default on margin calls by an American-based fund could be “highly significant and material” to its first-quarter results.
Credit Suisse said that a fund had “defaulted on margin calls” to it and other banks, meaning they were now in the process of exiting these positions.
Nomura shares slumped 16.3% in Tokyo while Credit Suisse shares opened down 10% in Europe and then fell further to be close down 11.5%.
That’s a loss of $US2.9 billion in the market value of Nomura. Credit Sussie’s value was down by close to $3 billion.
Shares in Goldman Sachs, Morgan Stanley, UBS and Deutsche bank all eased over the session. Markets were rattled but managed to remain in the green for the day or end slightly lower. Wall Street saw the Dow end higher but the S&P 500 and Nasdaq both ended a touch lower after being lower earlier in the session.
For Credit Suisse this will mark the second straight quarter the bank has recorded losses on hedge fund exposure and adds to pressure on the bank which is grappling with the fallout from the bank’s dealings with collapsed supply chain finance company Greensill. The losses there could be $US1 billion or more.
The Financial Times said the losses at Credit Suisse from the hedge fund default could be as high as $US4 billion.
Last quarter Credit Suisse booked a $US450 million impairment after alternative investment firm York Capital Management, which it part owned, told its investors it would wind down its European hedge funds business.
US-listed shares of China-based Baidu and Tencent Music plunged during the week, dropping as much as 33.5% and 48.5%, respectively, from Tuesday’s closing levels.
Chinese companies are facing delisting threats in the US on accounting rules and having members of the Chinese Communist Party as a director or senior manager.
Reuters said Friday’s sales were generated when the hedge fund failed to settle margin calls after the shares in CBS and Discovery and those of the Chinese groups fell last week.
“Archegos bet on the stocks using derivatives including “total return swaps” which allow investors to receive profits on their positions without actually owning the stocks, according to one source familiar with the trades. The fund posts collateral against the securities rather than buying them outright with cash,” Reuters reported.
“The underlying shares were held by Archegos’ prime brokers, which lent the firm money and processed its trades. They included Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse and Nomura.”
Reuters said it had been told that Archegos’ positions were highly leveraged. The firm had assets totalling around $US10 billion but held positions worth in excess of $US50 billion – no longer it seems.
