Two of the world’s biggest investment banks have warned their profits are likely to be severely affected by a crisis at a US hedge fund.
Switzerland’s second-biggest bank Credit Suisse said it could have a “highly significant” impact on its next quarterly results.
Japan’s Nomura said it could make a $2bn (£1.4bn) loss from a US client.
Both have been hit by problems at hedge fund Archegos, which led to the sale of billions of pounds of shares on Friday.
Hedge funds make money buying and selling shares. It is thought that Archegos made some large investments in certain companies that started to go wrong, and its backers then insisted it raise money in a hurry, in what is known as a margin call, prompting some unusually large share sales.
A margin call is when a bank asks a client to put up more funds if a trade partly funded with borrowed money has dropped steeply.
If they can’t afford to do that, the lender will sell the shares to try to recover what it is owed.
Companies caught up in the selling spree include big names such as ViacomCBS, Discovery, Tencent, Baidu, and UK online retailer Farfetch.
Investors in both banks have been rattled, Credit Suisse shares are down 14% and Nomura’s closed down 16% on the Japanese stock market.
Fears over who else might be affected by the matter has prompted falls in the shares of other banks, including Deutsche Bank and Goldman Sachs, although by far smaller amounts.
Credit Suisse’s fortunes are already facing a hit from its lending to Greensill Capital, the finance firm whose collapse has put at risk the future of the UK’s Liberty Steel.
In a statement issued on Monday, Credit Suisse said: “A significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks.
“Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions.
“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.”
Neither named Archegos Capital Management, which, although not a household name, is a big player in US markets.
It is the family investment firm of Bill Hwang, who was banned in 2014 from trading in Hong Kong, and in 2012 settled insider trading charges in the US.
The surprise default of a US hedge fund will send shivers through world stock markets. Traders will inevitably recall the demise two decades ago of Long Term Capital Management, a hedge fund that was one of the darlings of Wall Street only to collapse in the late 1990s. So big and complicated was its trading book that a bailout had to be organised among the US financial industry’s biggest players, but before they stepped in there was a period of horrible uncertainty over whether the fund’s demise might cause a large market crash.
At first sight Archegos does not look to be another LTCM – it is much smaller, and it appears to have been managing the money only of its founder and traders rather than for external investors. But one of the lessons of the 2008 crash is that the financial world is deeply interconnected, and it is difficult to gauge exactly what risks and trading positions individual hedge funds have built up.
One of the curiosities of Archegos’s default is that it was set up by Bill Hwang, a trader with a chequered past – he was banned from the Hong Kong market in 2014. Why banks like Credit Suisse and Nomura chose to have substantial business with his firm will be a subject of great interest to both institutions’ senior management and shareholders.