Goldman, Morgan Stanley avoided losses after the fund collapse hit Nomura

New York Stock Exchange (NYSE) on Wall Street on January 12, 2021 in New York City.

Angela Weiss | AFP | Getty Images

When investors are stomping on the exits, it pays to be the first to arrive.

It happened when the decline in ViacomCBS last week sparked a $ 20 billion wave of foreclosed sales at Wall Street banks, Archegos Capital Management, the family office run by former Tiger Management analyst Bill Hwang was founded.

When Credit Suisse and Nomura, two top Archegos brokers, announced early Monday that they were facing losses that could be “significant” to banks, rival firms Goldman Sachs and Morgan Stanley, according to data from already discharged their positions knowing the matter. They asked for anonymity to talk about private negotiations.

Goldman managed to sell most of the shares on Friday in connection with its margin calls on Archegos, which one of the people said helped the company avoid losses in the aftermath. Morgan Stanley sold $ 15 billion worth of shares in a matter of days trying to avoid significant losses, CNBC’s Leslie Picker reported.

Investors punished the two non-US banks. Nomura lost 14% on Monday, while Credit Suisse was down 11.5% at the close of the market. Meanwhile, Morgan Stanley was down 2.6% and Goldman stock was down a modest 0.5%.

Before the stock sales became public late last week, five Archegos banks convened a phone call with Hwang to discuss ways to ward off a messy fire sale, Bloomberg and other news outlets reported. The truce did not last, however, and Goldman quickly began placing clients on massive blocks of stock.

“In this environment where information flows fast and you need to act quickly, it shows a significant weakness in Nomura’s risk management system,” said Mark Williams, Boston University finance professor and former Federal Reserve auditor. “Did you not understand the risks you were taking or did you ignore them because you wanted to grow?”

A pedestrian wearing a protective face mask walks past the signage for Nomura Holdings Inc. outside its headquarters in Tokyo, Japan on Monday, March 29, 2021.

Kiyoshi Ota | Bloomberg | Getty Images

Aside from not acting fast enough to stave off losses – Nomura and Credit Suisse each said they closed their positions as of Monday – the two companies may not have been as disciplined with Hwang’s funds as their big ones, according to industry observers American competitors.

Nomura estimated the company posted a $ 2 billion loss from market prices on Friday, while Credit Suisse said the shortfall could be “highly significant” to the bank’s first quarter results. Calls to Credit Suisse and Nomura were not returned.

Morgan Stanley, Goldman, and JPMorgan Chase are the largest prime brokers in the world, according to sources tracking industry revenue. Credit Suisse is in seventh place, while Nomura is outside the top 10.

Smaller companies sometimes accept less collateral or offer cheaper financing terms to attract customers in the highly competitive world of prime brokers. This works when markets are rising, but can be painful when stocks go south and leveraged bets implode.

Nomura and Credit Suisse also have smaller trading operations in the US, which may have limited their ability to quickly outsource large blocks of stock after it became clear what happened. On Friday, Goldman sold $ 10.5 billion in stocks in companies including Baidu, Tencent Music Entertainment Group, ViacomCBS and Discovery, according to a customer email reported by Bloomberg.

“This is a challenging time for Archegos Capital Management’s family office, our partners and employees,” said a representative from the family office late Monday. “All plans are discussed while Mr. Hwang and the team determine the best way forward.”

The explosion at Archegos, a relatively unknown company before its spectacular collapse last week, calls into question what other risks lurk in the client books of major investment banks.

“Should you even take bets that could lose you $ 2 billion in a week?” Williams said. “It seems like they would have swung for the fences when they could lose that much.”

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