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The Swiss lender has confirmed that it will lose around $4.7bn from the collapse of Archegos Capital Management, a US-based family office headed by Wall Street veteran Bill Hwang. To put the $4.7bn loss into perspective, a company of that size would waltz into the JSE Top 40. The saga comes weeks after the collapse of Greensill Capital, where undisclosed losses are said to have run into the billions. These events have caused a reshuffle in management with both the chief risk officer, Lara Warner, and head of investment banking, Brian Chin, having resigned along with more than half a dozen executives.
Credit Suisse was one of many investment banks involved in the Archegos drama, with Japanese investment bank Nomura the second biggest loser – with losses totalling approximately $2bn. US investment banking giants Goldman Sachs and Morgan Stanley were the first to react in the sell-off and have announced that losses associated with Archegos are immaterial to their earnings. Archegos’ leveraged bets on concentrated sectors, namely US media and Chinese tech, blew up when one of the family office’s largest holdings, ViacomCBS, announced a capital raise causing its share price to fall sharply.
This was the catalyst to the demise of Archegos. A margin call ensued, which the company defaulted on and then it became a foot race amongst the investment banks to sell the underlying holdings, causing a number of US media and Chinese tech companies’ share prices to plummet dramatically. Unfortunately for Credit Suisse, the lender was the last to react. As a result, the company lost billions for shareholders – resulting in a loss for the first quarter of 2021.
There are still many unanswered questions, with many analysts scrutinising risk management protocols. Credit Suisse has reduced its dividend, suspended its share buyback programme and is undergoing a management overhaul. The Securities and Exchange Commission are looking into the regulation of family offices, with the lack of disclosure required by Archegos being one of the focal points in the fund’s demise.
The importance that banks play in the economy cannot be understated, with the ripple effects of the great financial crisis underpinning lenders’ importance. However, analysts have warned that events such as the collapse of Archegos and Greensill are indications that we are at the top of the cycle.
Time will tell whether the regulatory shifts that were made as a result of the global financial crisis manage to keep banks well capitalised despite the many uncertainties that lie ahead.
- US family office defaults as investment banks bleed billions
- Bill Hwang, the charlatan rocking Wall Street – With insights from The Wall Street Journal
- 36ONE’s Cy Jacobs on the collapse of Archegos
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