Credit Suisse bid for tidy Archegos fix ends with banks brawling

NEW YORK • Alarms were blaring inside Wall Street's corridors of power in the middle of last week, as executives realised they might be facing the biggest hedge fund blow-up since Long-Term Capital Management in the 1990s.

Global investment banks, gathering in a hastily arranged call, needed a swift truce to deal with Mr Bill Hwang's Archegos Capital Management if they were to head off billions of dollars in losses for banks and a potential chain reaction across markets. Yet by Friday, it was everyone for themselves.

The forced liquidation that sent bellwether stocks tumbling last week, and continues to send shock waves across capital markets, was preceded by bickering in the highest rungs of international finance that quickly devolved into finger-pointing and now fury, according to sources with knowledge of the situation. Banks are just starting to tally the carnage.

So far, Credit Suisse Group and Nomura Holdings have told shareholders their businesses face "significant" losses. Goldman Sachs Group, ahead of the pack on unloading positions, is telling investors the impact on its financial results will probably be immaterial. Deutsche Bank said it escaped too. Morgan Stanley, another big player that was still shopping blocks of stock as late as Sunday night, has yet to specify any toll.

Emissaries from several of the world's biggest prime brokerages tried to head off the chaos by holding a call with Mr Hwang before the drama spilled into public view last Friday morning.

The idea, pushed by Credit Suisse, was to reach some sort of temporary standstill to figure out how to untie positions without sparking panic, the sources said.

But any agreement was elusive, and by Thursday night, some banks had shot off notices of default to Archegos to seize collateral and potentially shop it to buyers to contain the banks' potential losses, the sources said. Yet, even then, it was not clear when terms with Archegos would allow sales to proceed, one of the sources said.

Soon came the finger-pointing over who was breaking ranks, the sources said. Some emerged from the talks suspicious that Credit Suisse was not fully committing to freezing sales. By early Friday, rival banks were taking umbrage after hearing that Goldman planned to sell some positions, ostensibly to assist Archegos. Morgan Stanley began drawing public attention with block trades.

Representatives for the banks declined to comment.

The worries over Archegos had begun mounting earlier last week after a series of wrong-way bets exposed its fragility.

The firm, which is little known outside finance circles, had amassed tens of billions of dollars in stock bets, much of it using opaque derivatives and borrowed funds, the sources said. It included some giant bets on a small group of stocks. Then came the announcement by ViacomCBS this month of a US$3 billion (S$4 billion) stock sale, which prompted a share slide that hurt Archegos.

While block trades are common, the size of Archegos' positions and their disposals rocked the market, as a US$20 billion selling spree gained momentum on Friday. Goldman and Morgan Stanley led the way, the sources said. Other banks were left to follow, selling positions at a potential disadvantage.

Given Archegos' size, unwinding its positions could generate losses of around US$2.5 billion to US$5 billion for the industry, depending on how hard it is to liquidate the holdings, JPMorgan Chase analyst Kian Abouhossein wrote in a note to clients.

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