News, Views & Truths (05/04/21)

Published on: April 5, 2021

Hello, everyone and welcome to our Easter Monday edition of News, Views & Truths; money never sleeps.  

Or, apparently, eats Easter eggs.

Last week, the major news centred around a little-known hedge fund called Archegos Capital Management and how their default on margin calls has caused huge losses in both the stocks held and the banks that supplied the borrowing.

So, as a starter for ten: A margin account contains securities bought with borrowed money; typically, a combination of both an investor’s own money and money borrowed.  A margin call occurs when the value of an investor’s margin account falls below a pre-arranged amount and refers specifically, to the demand that an investor deposits additional money or securities into the account, bringing it up to the minimum value.

When a margin call occurs, the investor must choose to either deposit more money in the account or sell some of the assets held in their account.

On Monday, following the huge bets that Archegos was making on a number of specific media stocks known as media conglomerate ViacomCBS, was the announcement of plans for a $3bn share sale.  Although the shares had nearly tripled over the past 12 months, this share sale appeared to be too much for the market and, as a result, the shares sold off more than 25%.

This in itself was certainly headline-worthy, but the resulting margin call by Archegos took this to a whole new level.

Archegos Capital was using borrowed money to make these stock positions and, in an effort to avoid making public disclosure filings, Archegos reportedly used derivatives known as ‘total return swaps’ to mask some of its large investment positions.  Investors using these swaps receive the total return of a stock from a dealer and those returns are typically amplified by leverage.

As the share price fell, Archegos’ lenders demanded money to cover the bets and, as there was no cash available, the banks’ brokers stepped in and seized the share capital.

Goldman Sachs, one of Archegos’ lenders, seized collateral and sold shares, forcing a liquidation that drove down shares of ViacomCBS and other media stocks.  However, it was Nomura Bank and Credit Suisse that took the greatest hit due to their lending to Archegos.  

Both banks warned of large losses, with the profits at Nomura, Japan’s largest investment bank, projected to be wiped out for the second half of the financial year, while Credit Suisse said on Monday that the wave of selling may have a “highly significant and material” impact on its first-quarter results.

The warning sent shares in both banks tumbling, with Nomura closing 16% lower in Tokyo, their worst one-day fall. Credit Suisse shares sank 13.8%, their steepest decline since the pandemic-induced turmoil in March 2020.

And the projected losses are getting bigger and bigger.

Analysts at JP Morgan now think the implosion of Archegos could trigger $10bn of losses across the financial system; Credit Suisse’s losses alone could reach up to $3.5bn, whilst Nomura’s losses are estimated at $2bn.

And the moral of today’s story?  If it looks too good to be true, it almost certainly is.


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Updated: November 2020