Industry reacts to Archegos meltdown as global banks face billions in losses

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Industry reacts to Archegos meltdown as global banks face billions in losses

Regulators across the world are all said to be closely watching events unfold as global banks may lose an estimated $6bn or more from the downfall of Archegos Capital Management.

Both Japan's Nomura and Credit Suisse of Switzerland warned of major losses from lending to Archegos for equity derivatives trades, triggering a worldwide sell-off in banking stocks.

"This is a challenging time for the family office of Archegos Capital Management, our partners and employees," company spokesperson Karen Kessler said in a statement. "All plans are being discussed as Mr. Hwang and the team determine the best path forward."

The Archegos meltdown is reminiscent of the collapse of Long Term Capital Management in the late 1990s, and serves as a reminder of the risk attached to investment banking activities."

Meanwhile, industry experts gave their initial reactions to International Investment.

Laith Khalaf, financial analyst at AJ Bell, said: "The Archegos meltdown is reminiscent of the collapse of Long Term Capital Management in the late 1990s, and serves as a reminder of the risk attached to investment banking activities, in particular the trading of derivatives, which Warren Buffett once described as financial weapons of mass destruction."

He added: "Since the financial crisis, banks have had to hold higher amounts of capital the more risk they want to take in their activities, which serves to limit losses to shareholders in the banks in question, to prevent a more widespread and systemic problem."

Noel O'Halloran, CIO at KBI Global Investors, said: "What I find astonishing is seemingly how history has just repeated itself and how we have seen many of these same ingredients before, the same iceberg lurking beneath the surface with apparently too much industry and stock concentration, too much leverage and the same ex-post challenges about all parties involved being asleep at the wheel etc.

"For investors and advisers the impact seems to be largely confined to stock specific volatility at present and the overall market itself protected."

While Will Howlett, equity research analyst at Quilter Cheviot, said: "The meltdown of Archegos Capital Management comes at an awkward time for Credit Suisse and incoming chairman Antonio Horta-Osorio following the bank's exposure to the Greensill saga, a high-profile spying scandal and disappointing final quarter results.

"Archegos had large exposures to Viacom CBS and several Chinese technology stocks which began to fall sharply in the middle of last week. Credit Suisse acts as one of the prime brokers to Archegos, and the fund defaulted on margin calls made last week by Credit Suisse and certain other banks. After failing to meet margin calls, Credit Suisse and other parties are in the process of exiting these positions."

Howlett added: "The final bill for exiting these positions will be considerable. The bank has advised that while it is premature to quantify the size of the loss from these exits, 'it could be highly significant and material' to Q1 results. Reports in the press suggest that expected losses could be above the statutory net income reporting for FY20.

"It does beg the question, what other skeletons are lurking in the closets of big investment banks? Archegos was largely unheard of just a week ago, and the default is potentially leading to a loss equivalent to more than a full year's earnings for Credit Suisse. What else could be out there?

"While it appears the worst of the storm has passed in terms of Credit Suisse's share price volatility, the Archegos episode does highlight the risks involved in investing in banks, and the need for investors to be well-diversified, including in other areas within financials."

The episode also highlights the importance of robust governance and risk controls, as well as the danger of leverage, he said.

"It does seem that in this case, the bank's risk controls have fallen short. Bill Hwang has a chequered history including being banned from trading in Hong Kong and fined millions of dollars in the US to settle illegal trading charges. Was it wise for the bank to offer him significant levels of leverage?"