Shares in investment banks Credit Suisse and Nomura sank by more than 10% this week after they warned of “substantial losses” , says Quentin Webb in The Wall Street Journal. Credit Suisse says its loss could be “highly significant and material” to its first-quarter results, while Nomura reckons it could lose up to $2bn (it made $2.82bn between April and December 2020). The losses stem from “fire sale of stocks” involving around $30bn of assets that occurred after Archegos Capital Management, a family investment vehicle managed by Bill Hwang, failed to meet a margin call. The banks, which lent the fund money to bet on stocks, had to sell off the stricken fund’s losing positions.
Both banks should have been more alert to the risks, say Antony Currie and Jennifer Hughes on Breakingviews. While the amount of leverage Hwang used wasn’t “excessive”, there were “plenty of other warning signs”. The fund’s concentrated positions in high-risk technology stocks “such as Baidu, Discovery and GSX Techedu” were a red flag, as was the use of derivatives, possibly to mask his positions. Hwang himself was also a “walking risk factor”: he was “banned from trading in Hong Kong for four years” after one of his previous funds, Tiger Asset Management, was involved in “wire fraud”.
Who else is affected?
Nomura and Credit Suisse are unlikely to be the only banks involved, says Erik Schatzker and Sridhar Natarajan on Bloomberg. Goldman Sachs appears to have “fuelled a pipeline of billions of dollars in credit” for Hwang to make “highly leveraged bets” on tech stocks; the bank has admitted that it was involved in selling at least $10.5bn of Hwang’s portfolios last week. However, it seems to have gotten off lightly, since it has reportedly told clients and shareholders that it believes that any losses sustained as a result of the sales “are likely to be immaterial”. Whatever happens to the banks involved, the collapse of Archegos Capital Management is also likely to be bad for the shares of the companies it was betting on, says Edmund Lee in The New York Times. A case in point is the media company ViacomCBS, which fell by 50% last week after rising nearly tenfold in the past year. Part of this decline was due to the decision to “offer new shares to raise as much as $3bn”, which prompted a number of analysts to downgrade its price. But the sale of 30 million shares by Archegos Capital Management on Friday was undoubtedly key.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
At least ViacomCBS was sensible enough to use the share-price boom to raise cash before the bottom fell out of its shares, says Lex in the Financial Times. However, the collapse of Archegos Capital Management is a reminder that record stockmarket valuations mean that “altitude sickness exacerbated by leverage” is an “ever-present risk”. Investors need to ponder whether the “reckoning” over high equity valuations will spill over “into other stock and investment funds”.
-
High earners face £15k income hit by 2029 following Autumn BudgetRachel Reeves’s Autumn Budget means high earners – or HENRYs – are now looking at an income hit running into the thousands. Can you avoid it?
-
Millions underestimate how many paydays are left until retirement - why you should be counting your payslipsKeeping track of how long you will be earning a salary for can help work out how much you need to put into a workplace pension
-
British blue chips offer investors reliable income and growthOpinion Ben Russon, portfolio manager and co-head UK equities, ClearBridge Investments, highlights three British blue chips where he'd put his money
-
Coreweave is on borrowed timeAI infrastructure firm Coreweave is heading for trouble and is absurdly pricey, says Matthew Partridge
-
Renewable energy funds are stuck between a ROC and a hard placeRenewable energy funds were hit hard by the government’s subsidy changes, but they have only themselves to blame for their failure to build trust with investors
-
Profit from document shredding with RestoreRestore operates in a niche, but essential market. The business has exciting potential over the coming years, says Rupert Hargreaves
-
The war dividend – how to invest in defence stocks as the world arms upWestern governments are back on a war footing. Investors should be prepared, too, says Jamie Ward
-
Literacy Capital: A trust where great returns fund a good causeThere’s plenty to like about specialist private-equity trust Literacy Capital, says Max King
-
An AI bust could hit private credit – could it cause a financial crisis?Opinion Private credit is playing a key role in funding data centres. It may be the first to take the hit if the AI boom ends, says Cris Sholto Heaton
-
8 of the best ski chalets for sale nowThe best ski chalets on the market – from a traditional Alpine-style chalet in Switzerland to an award-winning Modernist building in Japan’s exclusive ski areas
