Goldman’s risk controls worked well during the Archegos fire sale: CEO Solomon
Goldman Sachs CEO David Solomon said Tuesday his bank’s risk management systems performed well after the forced liquidation of a highly indebted fund fueled several stocks in the US and China and took a billion dollar bite off other banks.
Discovery and ViacomCBS stocks fell dramatically in March after investment banks began buying large portions of the stock at sharply discounted prices when a client failed to meet margin requirements. It was widely reported that this client was the family office Archegos Capital Holdings, a highly indebted fund operated by Bill Hwang.
The forced sale caused an estimated loss of $ 4.7 billion at Credit Suisse, where two executives announced their resignation on Tuesday. However, Goldman has not reported any material losses from the deals.
“From my point of view, our risk controls worked well. We recognized the risk early on. We took corrective action immediately to reduce our risk according to the contract with the customer,” said Solomon in CNBC’s “Squawk Box”. “And I can’t really talk about what other banks have done and how they dealt with the situation, but I am very happy with how our team dealt with it.”
Hwang made his concentrated bets on stock swaps, where the investment banks he worked with officially owned the stocks and used high leverage on his trades. When stocks fell and he couldn’t meet his capital requirements, the banks held large chunks of the stocks.
“I think this is a classic case of an investor with concentrated positions that have leverage against them. And when price moves against them, it’s important to reduce risk,” said Solomon. “This isn’t the first time this has happened and it certainly won’t be the last.”
The Archegos explosion has renewed the debate about the possible need for closer scrutiny of family offices and swap positions. Solomon said the discussion of transparency in relation to more complex equity positions “deserves debate”.
Correction: Solomon appeared on “Squawk Box”.