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Archegos debacle deals $10 billion blow to banks

Etienne Balmer with Nathalie Olof-Ors in Zurich
·4-min read
Shockwaves rippled through global financial markets and institutions last month when then little-known Archegos sold at least $20 billion in stocks as it sought to cover obligations to its lenders.

Global bank losses from the collapse of US hedge fund Archegos jumped past $10 billion on Tuesday as Japan's Nomura reported a bigger financial impact than expected and Switzerland's UBS disclosed a surprise hit.

Shockwaves rippled through global financial markets and institutions last month when then little-known Archegos sold at least $20 billion in stocks as it sought to cover obligations to its lenders.

The debacle hit firms including Credit Suisse, Morgan Stanley and several leading Japanese banks.

Nomura had already estimated it faced losses of around $2 billion linked to its exposure.

But on Tuesday the Japanese bank said the damage would be closer to $3 billion and that it would open an investigation.

In its earnings report, Nomura announced it had booked a loss of 245.7 billion yen ($2.3 billion) in the 2020-2021 fiscal year. In addition, the bank expects losses of around $570 million for the fiscal exercise ending March 2022.

In Zurich, UBS said it had suffered losses of $774 million (640 million euros) related to Archegos in the first quarter, although it still reported increased profits.

That was far less than its Swiss rival Credit Suisse, which last week said it would lose a total of 5.0 billion Swiss francs ($5.5 billion) to cover damage related to Archegos across the first and second quarters.

US family-owned hedge fund Archegos, run by former Tiger Asia director Bill Hwang, had taken huge bets on a few stocks with money borrowed from banks.

When several of those bets turned sour, the fund was unable to meet "margin calls" -- when the banks demand extra cash or assets to cover losses in a brokerage account.

- 'Wide-ranging investigation' -

Nomura said Tuesday it has "unwound over 97 percent of its outstanding positions related to this event".

Chief executive Kentaro Okuda added that the group is "committed to... enhancing our risk management framework" in the wake of the blow.

Citing people close to Nomura, the Financial Times reported that the bank had suspended the head of its prime brokerage unit that dealt with Hwang.

The scale of Nomura's losses show "the magnitude of the company's risk concentration", said Shunsaku Sato, vice president-senior credit officer at Moody's Japan, in a note.

The additional losses realised in April "will drag down Nomura's earnings in fiscal 2021", he added.

For the last fiscal year, Nomura reported net income fell 29 percent to 153.1 billion yen.

On Monday, Nomura appointed a new CEO at the US subsidiary involved in the losses.

The firm also said Tuesday it had launched a "wide-ranging investigation of facts" surrounding the debacle and various reviews of its outstanding exposure and risk-management processes.

Nomura has not directly named Archegos, saying only that the losses were linked to "transactions with a US client".

For its part, UBS said it had "exited all remaining exposures" to the fund during April. Additional losses will have to be recorded in the second quarter but are "immaterial" for the group, it said.

UBS' group-wide profits for the first quarter were up 14 percent at $1.8 billion.

But the Archegos saga drove pre-tax profits down sharply at its investment banking unit, falling 42 percent year-on-year to $412 million.

- Credit Suisse storm -

"We are all clearly disappointed and are taking this very seriously," UBS chief executive Ralph Hamers said in the group's statement.

"A detailed review of our relevant risk management processes is underway and appropriate measures are being put in place to avoid such situations in the future."

UBS shares were down around two percent. Nomura finished more than two percent higher but its earnings were released after Tokyo closed.

A bigger storm is brewing at fellow Swiss financial giant Credit Suisse, which has also been rocked by the bankruptcy of British financial firm Greensill.

Shareholder associations have urged investors to vote against the re-election of Andreas Gottschling as the chairman of the board's risk committee at a general assembly on Friday.

The bank announced a net loss of 252 million Swiss francs ($275 million, 229 million euros) last week and said it would issue new shares to reinforce its capital base.

Morgan Stanley said earlier this month it had lost $911 million on Archegos.