Unraveling Archegos Fund Shows Risks of Investment Banking

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Heard on the Street: Losses at Credit Suisse and Nomura as positions at Archegos are liquidated serve as a reminder that banks’ costs can come well after profits are booked

Bill Hwang’s hedge fund Archegos Capital Management. Nomura estimated its exposure at roughly $2 billion, while Credit Suisse said it was “premature to quantify” the hit. Shares in both banks plummeted by more than 10%.

The sale of big blocks of shares late last week by many banks—including Morgan Stanley , Goldman Sachs and Deutsche Bank —hinted at a hedge-fund collapse. Investors should brace for a wider fallout as it is unclear if all of Archegos’ positions have yet been unwound. Shares in a handful of other lenders with potential links to the fund were slightly down in morning trading.

The losses come just weeks after many global banks announced full-year results boosted by billions of dollars in earnings from investment banks capitalizing on last year’s market volatility. The news is a reminder that there is lingering risk associated with those outsize gains. As the 2008 financial crisis made clear, costs in banking can come long after profits are booked and celebrated.

Credit Suisse is still digesting the collapse earlier this month of Greensill, a British supply-chain finance company that declared bankruptcy shortly after the Swiss bank froze funds that provided it with liquidity. The double hit could be an extraordinary run of bad luck; there were other banks caught up in both failures. Alternatively, it could point to endemic problems of risk management at Credit Suisse.

 

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