Nomura Holdings has just issued a statement of a potentially massive $2 billion loss at one of its U.S. subsidiaries.
"Nomura is currently evaluating the extent of a possible loss and the impact it could have on its consolidated financial results," the mega-bank said in a press release.
Following the announcement, Nomura's share price fell nearly 15% in trading in Tokyo.
Speculation is that the losses are tied to a massive margin call on Friday that ouccred against Archegos Capital Management .
Archegos, the family office of former Tiger Management trader Bill Hwang, was forced by its banks to sell more than $20 billion worth of shares after some positions moved against it, Bloomberg reported.
On Friday, Morgan Stanley traded about $13 billion, including Farfetch Ltd., Discovery Inc., Baidu Inc. and GSX Techedu Inc., said the sources, while Goldman Sachs Group Inc. sold $6.6 billion worth of shares of Baidu, Tencent Music Entertainment Group and Vipshop Holdings Ltd. before the market opened in the U.S, according to an email to clients seen by Bloomberg News.
That move was followed by the sale of $3.9 billion of shares including ViacomCBS Inc. and iQiyi Inc. the email said.
The liquidations appear to have left Archegos, which managed an estimated $10 billion of personal wealth for Hwang and his family, under extreme pressure following heavy losses, reports The Wall Street Journal.
Class A shares of Discovery dropped $15.85, or 27%, to $41.90 on Friday, the largest percentage decrease since September 2008. ViacomCBS shares dropped $18.12, or 27%, the largest percentage decrease on record for the company, according to Dow Jones Market Data going back to 1990.
According to The Wall Street Journal, it was highly leveraged positions that resulted in the margin calls:
According to people familiar with the fund, the highly leveraged Archegos took big, concentrated positions in companies and held some positions via swaps. Those are contracts brokered by Wall Street banks that allow a user to take on the profits and losses of a portfolio of stocks or other assets in exchange for a fee.
The use of swaps allowed Mr. Hwang to maintain his anonymity, even as Archegos was estimated to have had exposure to the economics of more than 10% of multiple companies’ shares. Investors holding more than 10% of a company’s securities are deemed to be company insiders and are subject to additional regulations around disclosures and profits...
Mr. Hwang’s strategy began backfiring in recent weeks, as the stock price of companies in which Archegos had significant exposure, including China internet search giant Baidu Inc. and Farfetch, began to sell off. Baidu’s stock price rose sharply in February, but by mid-March its shares had dropped more than 20% from its highs.
Farfetch’s stock followed a similar trajectory, dropping more than 15% off its February highs by March.
Apparently, Archegos tried to muscle the stocks higher in recent weeks (a very dumb move). From the Journal:
ViacomCBS’s stock at times rose even as the broader market fell the week of March 15, leading some traders to speculate that a ViacomCBS investor was propping up its price and trying to squeeze short sellers. In a short squeeze, short sellers are forced to buy back shares to close out their losing bets, pushing prices sharply higher in the process.
Similarly, GSX’s resilient stock price, despite heavy attacks from activist short sellers and an investigation by the U.S. Securities and Exchange Commission, had perplexed hedge funds shorting the stock. Goldman and Morgan Stanley on Friday sold a total of nearly 33 million shares of GSX in block trades, traders said.
Multiple banks including Goldman, Morgan Stanley, Deutsche, Credit Suisse Group AG, and UBS Group AG served as prime brokers to Archegos, meaning they processed its trades and lent it cash and securities.
Goldman and Morgan Stanley on Thursday and Friday worked with Archegos to sell some of its stock to help it post more collateral. As part of that process, the banks executed block trades of stocks, including in Tencent Music Entertainment Group, Baidu and IQIYI. That wave of selling didn’t give the fund enough assets to post enough collateral.
By Friday morning, many of the banks decided to seize the stock Archegos had already posted as collateral and sell it to cover potential losses, some of the people said. Some of the banks were so concerned about their potential losses that rather than sell in an organized fashion, they chose to sell as quickly as possible.
Goldman Sachs told some hedge funds on Friday that they were selling large blocks of stocks as a result of the involuntary deleveraging of a fund, investors said. The bank’s traders said they would give priority to customers who could buy as much stock as possible or several blocks of stock in different companies. Morgan Stanley similarly marketed a block of stocks in multiple companies Friday, saying buyers couldn’t bid on individual companies in the basket, said investors.
In some instances, Goldman and Morgan Stanley sold slugs of stock in the same company at different times, leaving investors who bought in the earlier trade upset as prices fell further.
Goldman sold 100 million shares of Tencent Music Friday morning in a sale amounting to $1.8 billion; Morgan Stanley followed up with a sale of 36 million Tencent Music shares later in the day for about $600 million, traders said.
More trading-related commentary in Monday's EPJ Daily Alert.
-RW
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