By Christiana Ioannou
On Friday, March 26th, 2021 Archegos Capital Management failed to meet margin calls initiated by many global banks. This caused a fire sale of stocks worth almost $30 billion on Friday as global banks attempted to cut their losses. It is still unclear what the total ramifications will be from this meltdown, but they could be even more severe and have lasting effects on the global stock market.
What Happened?
Archegos had a large number of shares in different American media and Chinese internet companies that reported major losses the week of March 22nd through 26th. It started on the 24th when Baidu dropped 33 percent and Tencent dropped almost 50 percent from their closing levels on the 23rd. Then on the 26th ViacomCBS and Discovery posted losses of more than 25 percent, these were all companies that Archegos Capital’s portfolio was overextended on.
Archegos had a market valuation of $10 billion but through lack of transparency and stock swaps, they managed to expose themselves to more than $50 billion worth of these stocks. They were able to do this by using a large number of global banks to finance swaps and trades and not telling them their current leverage or holdings. Archegos Capital was able to be secretive because it is considered a family office. Family offices are not as heavily scrutinized or regulated by US authorities.
What Has Happened to Global Banks so Far?
Some of the banks that we know Archegos had business with are Credit Suisse, Nomura, Deutsche Bank, Morgan Stanley, UBS, and Goldman Sachs. Some of these global banks escaped unscathed from the massive block trades that occurred like Morgan Stanley and Goldman Sachs. While others such as Nomura and Credit Suisse are expecting to lose $2 billion and $3.5 billion respectively.
The majority of these global banks saw significant stock price losses in the fallout of the margin call. Since Nomura and Credit Suisse were left holding the bag after the fire sale of stocks, they both saw their stocks plunge more than 15 percent from last week’s numbers. Goldman Sachs and Morgan Stanley were able to shore up their losses and only suffer a 4.5 percent drop in share prices. Deutsche Bank and UBS faired the best by only losing 4 percent and 2 percent of their share prices, respectfully.
What Does This Mean for the Future?
As things settle down there could be additional margin calls on other over-leveraged hedge funds as global banks attempt to shore up their losses. Future margin calls will lead to more sell-offs of various stocks, but it will also lead to different funds buying the shares at discounted rates which can lead to growth.
The US Congress will want to perform an investigation of what occurred to see if any changes need to be made. One of the main reasons this occurred was because Archegos Capital Management was considered a family office and thus able to trade and swap stocks and options with minimal transparency. These investigations could lead to new laws and regulations that will treat family offices like hedge funds and require more reports of holdings and transparency of leverage.
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