Global banks may lose more than $6 billion from the downfall of US investment firm Archegos Capital and regulators and investors fear the episode could reverberate more widely.
Japan’s Nomura and Credit Suisse of Switzerland issued warnings of major losses from money lent to Archegos for equity derivatives trades, triggering a worldwide sell-off in banking stocks.
Morgan Stanley fell by 2.6 per cent and Goldman Sachs by 1.7 per cent on Monday.
Nomura shares were down 16.3 per cent at market close, a record one-day fall, while Credit Suisse suffered a 14 per cent drop, its biggest fall in a year. Deutsche Bank fell by 5 per cent and UBS was off 3.8 per cent.
Losses at Archegos Capital, a family office run by Bill Hwang, sparked a fire sale of stocks including ViacomCBS and Discovery on Friday.
“This is a challenging time for the family office of Archegos Capital Management, our partners and employees,” said spokeswoman Karen Kessler.
“All plans are being discussed as Mr Hwang and the team determine the best path forward.”
Archegos was unable to meet banks’ calls for more collateral to secure equity swap trades they had partly financed.
After those positions fell sharply in value, lenders sold big blocks of securities to recoup what they were owed.
“When you have people making certain bets based on what has outperformed in the past and the tide turns, they get burnt,” said Richard Bernstein, chief executive of Richard Bernstein Advisers.
"The question is how much leverage they used."
The problems started last week when a disappointing stock sale by media company ViacomCBS triggered devastating bank margin calls for Archegos. Shares in ViacomCBS fell by 23 per cent last Wednesday after it sold shares at a price that diluted its value.
While stocks typically decline after share sales, ViacomCBS was also hurt by analyst downgrades amid concerns that its stock was over-valued.
ViacomCBS shares extended their declines on Thursday, falling by 30 per cent from the previous Monday’s close. This set off alarm bells at Archegos’ prime brokers and prompted them to offload stock in all of Archegos’ investments.
Goldman and Morgan Stanley were quick to offload shares on Friday, averting a material financial blow.
Deutsche Bank said it had significantly reduced its exposure to Archegos without incurring any losses and was managing down its “immaterial remaining client positions”, on which it did not expect to incur a loss.
However, other banks faced more serious repercussions.
Nomura, Japan’s largest investment bank, issued a warning of a possible $2bn loss while Credit Suisse said a default on margin calls by a US-based fund could be “highly significant and material” to its first-quarter results.
Credit Suisse’s losses are expected to be at least $1bn but could reach $4bn. The investment bank declined to comment on loss estimates.
Investors questioned if the full impact of Archegos’ problem had been realised.
Market observers noted that only in February, hedge funds took major losses on short positions during the run-up in GameStop stock.
Hedge fund deleveraging also contributed to the turmoil in the US Treasuries market in March last year.
In the case of Archegos, the opaque and complex nature of its derivative trades, its lightly regulated structure as a family office and high leverage – fuelled by historically low interest rates – prompted concerns about potential systemic risk.
When you have people making certain bets based on what has outperformed in the past and the tide turns they get burned. The question is how much leverage they used
Regulators in the US, Switzerland, the UK and Japan are monitoring developments.
Archegos bought derivatives known as total return swaps, which allow investors to bet on stock price moves without owning the underlying securities. The fund posts collateral against the securities rather than buying them outright with cash.
Archegos’ positions were highly leveraged. The fund had assets of about $10bn but held positions worth more than $50bn.
Thomas Hayes, chairman of Great Hill Capital in New York, said Mr Hwang was known to run “a very concentrated, highly leveraged book”.
The underlying shares were held by Archegos’ prime brokers, which lent it money and structured and processed its trades. They included Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse and Nomura.
Unwinding the positions led banks to sell large blocks of stock. Shares of ViacomCBS and Discovery each tumbled by about 27 per cent on Friday, while US-listed shares of China-based Baidu and Tencent Music plunged by as much as 33.5 per cent and 48.5 per cent last week.
Mr Hwang, who ran Tiger Asia from 2001 to 2012, renamed the hedge fund Archegos Capital and converted it to a family office, according to the fund’s website. Family offices act as private wealth managers and have lower disclosure requirements than other investment companies.
Hedge fund managers said they wondered why Mr Hwang, whom several described as a “smart guy”, had made such big bets on ViacomCBS and Discovery, given the large wagers against the companies.
The pair are not considered to be high-growth plays, in contrast to other media stocks that have outperformed during the Covid-19 pandemic.
Mr Hwang and his firm paid $44 million in 2012 to settle Securities and Exchange Commission insider trading charges.
UAE currency: the story behind the money in your pockets
The burning issue
The internal combustion engine is facing a watershed moment – major manufacturer Volvo is to stop producing petroleum-powered vehicles by 2021 and countries in Europe, including the UK, have vowed to ban their sale before 2040. The National takes a look at the story of one of the most successful technologies of the last 100 years and how it has impacted life in the UAE.
Read part four: an affection for classic cars lives on
Read part three: the age of the electric vehicle begins
Read part one: how cars came to the UAE
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Infiniti QX80 specs
Engine: twin-turbocharged 3.5-liter V6
Power: 450hp
Torque: 700Nm
Price: From Dh450,000, Autograph model from Dh510,000
Available: Now
BMW M5 specs
Engine: 4.4-litre twin-turbo V-8 petrol enging with additional electric motor
Power: 727hp
Torque: 1,000Nm
Transmission: 8-speed auto
Fuel consumption: 10.6L/100km
On sale: Now
Price: From Dh650,000
The specs
Engine: 6.2-litre V8
Transmission: ten-speed
Power: 420bhp
Torque: 624Nm
Price: Dh325,125
On sale: Now
Specs
Engine: Dual-motor all-wheel-drive electric
Range: Up to 610km
Power: 905hp
Torque: 985Nm
Price: From Dh439,000
Available: Now
Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
UAE currency: the story behind the money in your pockets
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The specs
- Engine: 3.9-litre twin-turbo V8
- Power: 640hp
- Torque: 760nm
- On sale: 2026
- Price: Not announced yet
Killing of Qassem Suleimani
The Voice of Hind Rajab
Starring: Saja Kilani, Clara Khoury, Motaz Malhees
Director: Kaouther Ben Hania
Rating: 4/5
UK's plans to cut net migration
Under the UK government’s proposals, migrants will have to spend 10 years in the UK before being able to apply for citizenship.
Skilled worker visas will require a university degree, and there will be tighter restrictions on recruitment for jobs with skills shortages.
But what are described as "high-contributing" individuals such as doctors and nurses could be fast-tracked through the system.
Language requirements will be increased for all immigration routes to ensure a higher level of English.
Rules will also be laid out for adult dependants, meaning they will have to demonstrate a basic understanding of the language.
The plans also call for stricter tests for colleges and universities offering places to foreign students and a reduction in the time graduates can remain in the UK after their studies from two years to 18 months.
On racial profiling at airports
The years Ramadan fell in May
Our legal consultant
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants
The years Ramadan fell in May
Mohammed bin Zayed Majlis
COMPANY PROFILE
Name: Mamo Year it started: 2019 Founders: Imad Gharazeddine, Asim Janjua Based: Dubai, UAE Number of employees: 28 Sector: Financial services Investment: $9.5m Funding stage: Pre-Series A Investors: Global Ventures, GFC, 4DX Ventures, AlRajhi Partners, Olive Tree Capital, and prominent Silicon Valley investors. What is the definition of an SME?
SMEs in the UAE are defined by the number of employees, annual turnover and sector. For example, a “small company” in the services industry has six to 50 employees with a turnover of more than Dh2 million up to Dh20m, while in the manufacturing industry the requirements are 10 to 100 employees with a turnover of more than Dh3m up to Dh50m, according to Dubai SME, an agency of the Department of Economic Development.
A “medium-sized company” can either have staff of 51 to 200 employees or 101 to 250 employees, and a turnover less than or equal to Dh200m or Dh250m, again depending on whether the business is in the trading, manufacturing or services sectors.
Race card
4pm Al Bastakiya Listed US$300,000 (Dirt) 1,900m
4.35pm Mahab Al Shimaal Group 3 $350,000 (D) 1,200m
5.10pm Nad Al Sheba Turf Group 3 $350,000 (Turf) 1,200m
5.45pm Burj Nahaar Group 3 $350,000 (D) 1,600m
6.20pm Jebel Hatta Group 1 $400,000 (T) 1,800m
6.55pm Al Maktoum Challenge Round-3 Group 1 $600,000 (D) 2,000m
7.30pm Dubai City Of Gold Group 2 $350,000 (T) 2,410m
The National selections:
4pm Zabardast
4.35pm Ibn Malik
5.10pm Space Blues
5.45pm Kimbear
6.20pm Barney Roy
6.55pm Matterhorn
7.30pm Defoe
Zayed Sustainability Prize
F1 The Movie
Starring: Brad Pitt, Damson Idris, Kerry Condon, Javier Bardem
Director: Joseph Kosinski
Rating: 4/5
Herc's Adventures
Developer: Big Ape Productions
Publisher: LucasArts
Console: PlayStation 1 & 5, Sega Saturn
Rating: 4/5
UAE currency: the story behind the money in your pockets
UAE currency: the story behind the money in your pockets
How Filipinos in the UAE invest
A recent survey of 10,000 Filipino expatriates in the UAE found that 82 per cent have plans to invest, primarily in property. This is significantly higher than the 2014 poll showing only two out of 10 Filipinos planned to invest.
Fifty-five percent said they plan to invest in property, according to the poll conducted by the New Perspective Media Group, organiser of the Philippine Property and Investment Exhibition. Acquiring a franchised business or starting up a small business was preferred by 25 per cent and 15 per cent said they will invest in mutual funds. The rest said they are keen to invest in insurance (3 per cent) and gold (2 per cent).
Of the 5,500 respondents who preferred property as their primary investment, 54 per cent said they plan to make the purchase within the next year. Manila was the top location, preferred by 53 per cent.
The specs
Engine: 1.5-litre 4-cylinder petrol
Power: 154bhp
Torque: 250Nm
Transmission: 7-speed automatic with 8-speed sports option
Price: From Dh79,600
On sale: Now
Killing of Qassem Suleimani
The specs
Engine: 1.6-litre 4-cyl turbo and dual electric motors
Power: 300hp at 6,000rpm
Torque: 520Nm at 1,500-3,000rpm
Transmission: 8-speed auto
Fuel consumption: 8.0L/100km
Price: from Dh199,900
On sale: now
Zayed Sustainability Prize
Ruwais timeline
1971 Abu Dhabi National Oil Company established
1980 Ruwais Housing Complex built, located 10 kilometres away from industrial plants
1982 120,000 bpd capacity Ruwais refinery complex officially inaugurated by the founder of the UAE Sheikh Zayed
1984 Second phase of Ruwais Housing Complex built. Today the 7,000-unit complex houses some 24,000 people.
1985 The refinery is expanded with the commissioning of a 27,000 b/d hydro cracker complex
2009 Plans announced to build $1.2 billion fertilizer plant in Ruwais, producing urea
2010 Adnoc awards $10bn contracts for expansion of Ruwais refinery, to double capacity from 415,000 bpd
2014 Ruwais 261-outlet shopping mall opens
2014 Production starts at newly expanded Ruwais refinery, providing jet fuel and diesel and allowing the UAE to be self-sufficient for petrol supplies
2014 Etihad Rail begins transportation of sulphur from Shah and Habshan to Ruwais for export
2017 Aldar Academies to operate Adnoc’s schools including in Ruwais from September. Eight schools operate in total within the housing complex.
2018 Adnoc announces plans to invest $3.1 billion on upgrading its Ruwais refinery
2018 NMC Healthcare selected to manage operations of Ruwais Hospital
2018 Adnoc announces new downstream strategy at event in Abu Dhabi on May 13
Source: The National
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The years Ramadan fell in May
The specs
Engine: 2.4-litre 4-cylinder
Transmission: CVT auto
Power: 181bhp
Torque: 244Nm
Price: Dh122,900
Zayed Sustainability Prize
GOLF’S RAHMBO
- 5 wins in 22 months as pro
- Three wins in past 10 starts
- 45 pro starts worldwide: 5 wins, 17 top 5s
- Ranked 551th in world on debut, now No 4 (was No 2 earlier this year)
- 5th player in last 30 years to win 3 European Tour and 2 PGA Tour titles before age 24 (Woods, Garcia, McIlroy, Spieth)
UAE v Gibraltar
What: International friendly
When: 7pm kick off
Where: Rugby Park, Dubai Sports City
Admission: Free
Online: The match will be broadcast live on Dubai Exiles’ Facebook page
UAE squad: Lucas Waddington (Dubai Exiles), Gio Fourie (Exiles), Craig Nutt (Abu Dhabi Harlequins), Phil Brady (Harlequins), Daniel Perry (Dubai Hurricanes), Esekaia Dranibota (Harlequins), Matt Mills (Exiles), Jaen Botes (Exiles), Kristian Stinson (Exiles), Murray Reason (Abu Dhabi Saracens), Dave Knight (Hurricanes), Ross Samson (Jebel Ali Dragons), DuRandt Gerber (Exiles), Saki Naisau (Dragons), Andrew Powell (Hurricanes), Emosi Vacanau (Harlequins), Niko Volavola (Dragons), Matt Richards (Dragons), Luke Stevenson (Harlequins), Josh Ives (Dubai Sports City Eagles), Sean Stevens (Saracens), Thinus Steyn (Exiles)
FIGHT CARD
Welterweight Mostafa Radi (PAL) v Tohir Zhuraev (TJK)
Catchweight 75kg Leandro Martins (BRA) v Anas Siraj Mounir (MAR)
Flyweight Corinne Laframboise (CAN) v Manon Fiorot (FRA)
Featherweight Ahmed Al Darmaki (UAE) v Bogdan Kirilenko (UZB)
Lightweight Izzedine Al Derabani (JOR) v Atabek Abdimitalipov (KYG)
Featherweight Yousef Al Housani (UAE) v Mohamed Arsharq Ali (SLA)
Catchweight 69kg Jung Han-gook (KOR) v Elias Boudegzdame (ALG)
Catchweight 71kg Usman Nurmagomedov (RUS) v Jerry Kvarnstrom (FIN)
Featherweight title Lee Do-gyeom (KOR) v Alexandru Chitoran (ROU)
Lightweight title Bruno Machado (BRA) v Mike Santiago (USA)
