Prime Brokers Pounded: Credit Suisse, Nomura Crash On Archegos Margin Call Shockwave

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by Tyler Durden
Sunday, Mar 28, 2021 - 08:53 PM

Update (615am ET): Just around the time Nomura closed down 16.3%, its biggest drop on record after warning it faces around $2 billion in prime brokerage losses (see below) tied to a single US client - the now infamous Archegos tiger cub hedge fund - Swiss banking giant, Credit Suisse, was also swept up in the Archegos vortex after the Swiss bank said it faces a potentially “highly significant” loss from a U.S. hedge fund client defaulting on margin calls, sending the Swiss bank's share plunging as much as 16%, the most since March last year and wiping out all 2021 gains.

While the actual loss number was not defined, estimates pegged it in the $2-3 billion ballpark, and one commentator said that "Credit Suisse $CS lost its entire year profit because it is out-smart by Goldman aka the Sharks on the street and by a One Day."

"While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first quarter results,” the bank said in an emailed statement, without naming the fund, although the name was quite clear.

Credit Suisse also said it was in the process of exiting positions after the client default.

The loss comes at an awkward time for Credit Suisse, as the Greensill matter is still far from being resolved, and Credit Suisse faces "yet another issue that has the potential to result in a material impact on its results," Vontobel analyst Andreas Venditti wrote in a note

“There’s yet another problem case,” Zuercher Kantonalbank analyst Georg Marti writes in a note. “Although CEO Gottstein spoke at a recent conference of an excellent start to 2021, the first-quarter results are already overshadowed by the Greensill affair with potential losses that still need to be clarified. Now there is also this hedge fund matter.”

Credit Suisse CEO Thomas Gottstein had vowed to start the year with a clean slate, but is now seeing the firm play a central role in a major financial blow up for the second time in weeks. At the beginning of the month, the bank roiled investors by suspending -- and then deciding to liquidate -- $10 billion of supply chain finance funds it managed with Greensill.

Even before that incident, the firm had contended with a large write down on its stake in hedge fund York Capital, a hit related to a long-standing legal case into residential mortgage-backed securities and incidents of surveillance into former executives, Bloomberg reported.

As we said last night, while the turmoil has so far had only a limited impact on broader financial markets, banks and people familiar with the matter indicated the unwinding of Archegos-related bets may have further to go. Credit Suisse and other lenders are still in the process of exiting positions, the bank said in a statement on Monday that didn’t mention Archegos by name. Morgan Stanley was shopping a large block of ViacomCBS shares on Monday morning, with Bloomberg reporting that the ViacomCBS Block of 45MM shares priced at $47 each, a small discount to the premarket price of $48.23.

Other lenders are also embroiled in Archegos. Deutsche Bank has some exposure, though it hasn’t yet incurred any losses and is still managing the portfolio, according to a person with knowledge of the matter. Meanwhile Goldman Sachs - which reportedly was the first prime broker to break ranks and make a margin call on Archegos - is telling shareholders and clients that any losses it faces from Archegos are likely to be immaterial.

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Back in May 2016, Japanese mega-bank Nomura, announced that it had suffered its biggest-ever loss in history (of a rather tame by Western standards $40 million) from a single client, and which it then quickly blamed on an "incompetent" bond trader.  Fast forward to today, when Nomura just suffered a far, far greater loss from a single client, this one is anything but boring.

Early on Monday local time, Nomura Holdings said it may have incurred a “significant loss" arising from transactions with a U.S. client.
The estimated amount of the claim against the client is about $2 billion based on market prices as of March 26, the Japanese brokerage said in a statement. The estimate is "subject to change depending on unwinding of the transactions and fluctuations in market prices."

Nomura is currently evaluating the extent of the possible loss and the impact it could have on its consolidated financial results.
The Japanese brokerage also canceled plans to sell dollar-denominated bonds.

The news, incomplete as it may be, was enough to send Nomura stock crashing 15%, wiping out all March gains, and the biggest one day drop in a decade.

While it wasn't immediately clear if Nomura's loss is linked to the spectacular margin call at Tiger Cub Bill Hwang's Archegos Capital which we noted earlier (accurately noting that the unwind is probably not yet done), the two are almost certainly linked especially as some have noted that in the case of Nomura, the bank owned some $10MM shares in Chinese tech firm GSX which imploded, via leveraged swaps to clients. Since GSX was one of the firms aggressively dumped by Hwang, one can see how the house of cards, having crippled Prime Brokers, may be spreading down the investment bank foodchain next.

Meanwhile, as we asked earlier, the real question is whether the liquidation of the handful of highly concentrated stocks is over, or whether the selling cascade is only just starting.

One thing we do know: as of Sunday night, the seller was not done yet, as this Bloomberg headline confirms:


Some more details:

Morgan Stanley was shopping a large block of ViacomCBS Inc. shares on Sunday, according to a person familiar with the matter, the latest in a flurry of block trades that began before the weekend.

About 45 million shares were offered Sunday on behalf of an undisclosed holder, the person said. The media giant was also the subject of at least one large block trade on Friday through Goldman Sachs, a person familiar with the matter told Bloomberg at the time.

Incidentally, just last Monday, ViacomCBS sold $3BN in common and preferred stock, including 20mm shares of VIAC stock at $85. With the stock now trading at roughly 50% of this price, the company should immediately announce a 20MM shares (or more) stock buyback to i) take advantage of the plunge in the price and ii) to contain investor panic due to one shareholder's forced liquidation. Indeed, moments ago, Tencent just announced a $1BN share buyback to offset just this liquidation-driven drop in the stock price.

And while we wait for that to happen at VIAC, DISCA and other, we still have two big questions: i) is Archegos still dumping, or is this now a fellow Hedge funders who was also margined out on a similar portfolio, and ii) just how bad is the pain - as more prime brokers issue urgent margin calls - and how widespread will the liquidation chain stretch...