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By Makiko Yamazaki and John Revill
TOKYO/ZURICH (Reuters) - Nomura and Credit Suisse are facing billions of dollars in losses after a U.S. hedge fund, named by sources as Archegos Capital, defaulted on margin calls, putting investors on edge about who else might have been caught out.
Losses at Archegos Capital Management, run by former Tiger Asia manager Bill Hwang, had triggered a fire sale of stocks on Friday, a source familiar with the matter said.
A phone message left for Archegos at its New York offices on Monday morning was not immediately returned.
The warnings on big losses triggered a sell-off in banking stocks around the globe on Monday, with Morgan Stanley falling nearly 4% and Goldman sliding 1.5%. Nomura shares closed down 16.3%, a record one-day drop, while Credit Suisse shares tumbled 14%, their biggest fall in a year.
However, the broader impact on financial markets appeared limited, with the U.S. benchmark S&P 500 flat in morning trading while financial stocks were down less than 1%.
"You continue to see strength in the overall market. There is not fear of selling stocks all together, there's just fear in pockets of the market," said Dennis Dick, head of market structure and a proprietary trader at Bright Trading LLC in Las Vegas.
Nomura, Japan's largest investment bank, warned on Monday it faced a possible $2 billion loss due to transactions with a U.S. client, while Credit Suisse said a default on margin calls by a U.S.-based fund could be "highly significant and material" to its first-quarter results.
The Swiss bank 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.
Two sources said 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, a figure also reported by the Financial Times. Credit Suisse declined to comment on any estimate.
Switzerland's financial regulator said on Monday it was aware of the hedge fund case and was in touch with Credit Suisse about it. The Swiss regulator also said several banks and locations internationally were involved.
The Swiss National Bank declined to comment.
In Japan, Chief Cabinet Secretary Katsunobu Kato said the government would carefully monitor the situation at Nomura and that the Financial Services Agency would share information with the Bank of Japan.
Other banks' shares were affected, with Deutsche Bank down 5%, while UBS was 3.8% lower. UBS had no immediate comment on its stock prices or exposure to Archegos.
Deutsche Bank said in a statement that it had significantly de-risked its Archegos exposure without incurring any losses and was managing down its "immaterial remaining client positions", on which it did not expect to incur a loss.
In the United States, the Securities and Exchange Commission has been "monitoring the situation and communicating with market participants since last week," a spokesperson said.
A margin call is when a bank asks a client to put up more collateral if a trade partly funded with borrowed money has fallen sharply in value. If the client cannot afford to do that, the lender will sell the securities to try to recoup what it is owed.
Margin calls on Archegos Capital prompted a massive unwinding of leveraged equity bets. Shares in ViacomCBS and Discovery each tumbled around 27% on Friday, while U.S.-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.
Bloomberg reported https://www.bloomberg.com/news/articles/2021-03-29/billions-in-secretive-derivatives-at-center-of-archegos-blowup?srnd=premium on Monday that the leverage provided to Archegos by banks including Nomura and Credit Suisse was through swaps or contracts-for-difference, citing sources, meaning they would not have to disclose holdings publicly.
Investors were nervous about whether the full extent of Archegos' apparent wipeout has been realized or whether there was more selling to come.
Hwang did not respond to a message on LinkedIn. A person at Archegos who answered the phone at the weekend declined to comment. Hwang, who founded Archegos and ran Tiger Asia from 2001 to 2012, renamed it Archegos Capital and made it a family office, according to a page capture https://web.archive.org/web/20210124211426/https://www.archegoscapital.com/management of the fund's website. Tiger Asia was a Hong Kong-based fund https://www.reuters.com/article/togerasia-hedgefund/update-1-hedge-fund-tiger-asia-to-return-investor-money-idUKL4E8JE2XP20120814 that sought to profit on bets on securities in Asia.
Hwang in 2012 settled https://www.reuters.com/article/us-crime-insidertrading-tiger/tiger-cub-manager-pleads-guilty-in-insider-trading-case-idUSBRE8BB1RG20121212 insider trading charges by the U.S. Securities and Exchange Commission according to a press release https://www.sec.gov/news/press-release/2012-2012-264htm at the time. He and his firms at the time agreed to pay $44 million to settle, the press release said.
In his portfolios Hwang is known to use outsized leverage to magnify his bets.
"Bill Hwang ... runs a very concentrated, highly leveraged book," said Thomas Hayes, chairman at Great Hill Capital LLC in New York.
The scale of the losses at banks is likely to prompt questions about banks' oversight of their exposure to Archegos.
Alex Brazier, head of financial stability strategy and risk at the Bank of England, told a Reuters newsmaker that the BoE was monitoring events "very closely and the supervisors of the relevant firms are closely engaged".
"If the figures one can read about Credit Suisse are accurate, there is clearly a big risk management problem," said Jérôme Legras, managing partner and head of research at Axiom Alternative Investments, which invests in banks and insurers.
For Credit Suisse this will mark the second straight quarter the bank has recorded losses on hedge fund exposure and adds to pressure on Chief Executive Thomas Gottstein, who is grappling with the fallout from the bank's dealings with collapsed supply chain finance company Greensill.
Several banks were involved with the trade unwinds.
Goldman Sachs sold three blocks of shares on Friday, a source familiar with the sale process said. It sold $6.6 billion of shares in Baidu Inc, Tencent Music Entertainment Group and Vipshop Holdings Ltd, before the U.S. market opened. That was followed by the sale of $1.7 billion of shares in ViacomCBS Inc and $2.3 billion of shares in Discovery Inc, Farfetch Ltd, iQIYI Inc and GSX Techedu Inc later that day.
Morgan Stanley made two separate sales on Friday, both times offloading $4 billion worth of stock, the same source said.
Any losses incurred by Goldman Sachs were immaterial, a separate source said on Monday.
(Reporting by Megan Davies, Ira Iosebashvili and Kenneth Li in New York, additional reporting by Juby Babu and Sagarika Jaisinghani in Bengaluru, Rachel Armstrong and Julien Ponthus in London, Tom Sims in Frankfurt and Matt Scuffham and Herbert Lash in New York; Writing by Jane Merriman and David Randall Editing by Carmel Crimmins and Susan Fenton)