The Archegos Explosion and its Impact on the Markets

Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York, USA on January 31, 2018.

Brendan McDermid | Reuters

The troubles Archegos Capital Management had late last week bleeding into Monday as a number of large banks saw their share prices decline.

Here’s how the $ 20 billion explosion played out.

US media stocks ViacomCBS and Discovery were under heavy selling pressure on Friday, each losing more than 27%.

Some Chinese internet ADRs, including Baidu, Tencent and Vipshop, also saw similar sales last week.

ADRs are American depository receipts, essentially a certificate that represents a portion of a foreign stock and is traded on American stock exchanges.

The culprit for the massive sale was a forced liquidation of positions in the multi-billion dollar family office Archegos, according to CNBC.

Archegos, founded by former Tiger Management stock analyst Bill Hwang, had built massive positions in these stocks through swaps, a type of derivative that investors trade over-the-counter or among themselves without public disclosure of the holdings.

These swaps usually involve more leverage than usual.

Those big, leveraged bets came under pressure after ViacomCBS’s $ 3 billion stock offering through Morgan Stanley and JPMorgan fell apart earlier in the week, resulting in a widespread sale of the name.

ViacomCBS’s initial weakness sparked a series of events where the prime brokers rushed to exit positions on Archegos’s behalf and resulted in a massive margin call. The hedge fund was forced to provide more cash to cover the losses, resulting in a forced liquidation of more than $ 20 billion.

The sell-off of these names continued Monday, with ViacomCBS falling more than 8%. The discovery was down more than 3%.

“Substantial Losses”

A number of major banks warn of the consequences of doing certain deals but do not specifically mention Archegos.

Nomura, headquartered in Tokyo, released a trade update Monday citing a “significant loss” at one of its US subsidiaries due to transactions with an undisclosed US customer. Japan’s largest investment bank said it was assessing the potential scale of the loss, which is estimated at $ 2 billion. Their stocks fell nearly 14% on Monday.

Nomura did not immediately return a call from CNBC.

Credit Suisse said it and a number of other banks it did not mention were also affected and had begun to leave positions with the undisclosed company. The Zurich-based lender’s shares fell more than 15% after the announcement.

“While it is premature at this point to quantify the exact size of the loss from this exit, it could be very significant and material to our first quarter results despite the positive trends announced in our trade balance earlier this month.” , so Credit Suisse said.

It added that it would provide another update on the matter “in due course”.

Goldman Sachs, Morgan Stanley and Deutsche Bank also made it easy for Archegos to liquidate their holdings in many Chinese internet names through unregistered deals, CNBC reported.

Deutsche Bank announced on Monday that it had significantly reduced its Archegos-related exposure without suffering any losses.

“We manage the insignificant remaining customer positions, in which we do not expect a loss,” said the German lender in a statement on Monday.

Morgan Stanley also avoided significant losses on Archegos’ businesses, CNBC’s Leslie Picker sources said.

Goldman did not immediately respond to CNBC’s request for comments.

The Securities and Exchange Commission has been closely monitoring the impact of Archegos’ margin call default. “We have monitored the situation since last week and communicated with the market participants,” said an SEC spokesman on Monday

– CNBC’s Elliott Smith, Bob Pisani and Scott Wapner contributed to the coverage.

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