Futures are down big to start the week because of an announcement from Global investment banks Credit Suisse Group and Nomura Holdings who said they could incur substantial losses from dealings with a U.S. client. (WSJ)
“We don’t know yet the prime reason why this hedge fund had to liquidate,” said Luc Filip, head of investments at SYZ Private Banking. “It adds to the unsettling things happening in the market.”
So what is happening? Bloomberg reports that the fund in question belongs to Bill Hwang and his Archegos Capital Management that took large heavily leveraged positions. (Bloomberg)
The forced liquidation of more than $20 billion in holdings linked to Bill Hwang’s investment firm is drawing attention to the covert financial instruments he used to build large stakes in companies…Much of the leverage used by Hwang’s Archegos Capital Management was provided by banks including Nomura Holdings Inc. and Credit Suisse Group AG through swaps or so-called contracts-for-difference, according to people with direct knowledge of the deals. It means Archegos may never actually have owned most of the underlying securities — if any at all.
What does this mean? Joe Weisenthal, in his morning email, says that the possibility of further trades looming combined with the usual end-quarter volatility means investors will be glued to their screens this morning. But the bigger question is why are banks taking such big hits?
It’s not that unusual to see big banks take a hit on some kind of trade that’s gone bad. What’s weird about the potential losses incurred at Nomura and Credit Suisse, however, is that they’re related to a client who made risky stock bets. Normally when you get headlines about banks taking a hit, it’s as a result of some bet that everyone wrongly assumed was ultra safe, like a mortgage bond or a can’t-lose arbitrage trade. With stocks, everyone knows they’re risky and volatile, and as such, are rarely the locus of some surprise loss catching everyone offnguard. The lack of good risk controls makes you wonder if the “stocks only go up” mentality has been over-internalized.
Today will probably give us a good idea if this is an isolated incident or if this is a sign of more to come.
It’s not all bad news this morning. Oil retreated as salvage teams refloated the giant vessel that has been blocking the Suez Canal. (Bloomberg)