While Goldman Sachs and Morgan Stanley very able to sell most of the stock related to Archegos' margin calls, avoiding losses. It was mainly Nomura and Credit Suisse that took a hit.
Before analysing the present scenario, it is important to understand the past relationship of Archegos Capital Management’s Bill Hwang with financial institutions like Nomura, Goldman Sachs, Morgan Stanley, Credit Suisse and Bank of America.
Before Archegos Capital Management, Hwang was running Tiger Asia Management, an Asia-focused hedge fund. In 2012, Hwang and his firm were pleaded guilty to insider trading of Chinese bank stocks. He had to pay settlement charges of USD 44 million, as per the Securities and Exchange Commission (SEC) order.
After this incident, many bankers were unsure about associating with Hwang’s family office, Archegos Capital Management. But the bets placed by this American-Korean investor on various stocks in the United States and Asia drew the bankers back to him. Hwang’s bets were not only huge but also lucrative for the bankers to resist.
After four years, in 2016, Nomura with the blessings from Japan’s office happily accepted Hwang’s association with the bank. It is alleged that Archegos grew to become one of the ten most profitable clients for the bank’s US operations of Nomura. This exposure has cost the Japanese bank dearly. For Nomura, who was aspiring to become a global investment bank, having a strong foothold in the US market was the key. So taking risks like Archegos become part of the business. But the lack of transparency in family office's things were not that easy .
Nomura was not the only one who was able to get Archegos Capital on board as their client. Goldman Sachs, Morgan Stanley, Credit Suisse and others were competing to win Hwang as their client due to the staggering returns Archegos Capital made. However, some banks were cautious about working with Hwang and his firm. One such bank was Bank of America. The insider trading verdict of 2012 had put off Bank of America from working with Hwang. Adding to it is was Archegos Capital’s structure, the family office’s leverage, and concentration in certain securities. This decision of Bank of America saved it.
It is estimated that this fallout of the hedge fund will cost global banks over $6 billion. From that sum, a large share is coming from Nomura and Credit Suisse.
