A financial crisis at a United States based hedge fund will likely have severe impact on the profits of two of the largest investments banks, the banks have warned recently.
The crisis is likely to have a large and significant effect on the results for its next quarter, said Switzerland’s second largest bank Credit Suisse.
Going a step further, Japan’s Nomura has said it expects the hedge fund crisis to completely wipe out its profits for the next quarter.
A huge problem at hedge fund Archegos, which has resulted in a major sale off of shares on Friday worth billions of dollars, has hit both the firms. Big companies including ViacomCBS, Discovery, Tencent, Baidu, and UK online retailer Farfetch are among those that have been affected by the sale off of stocks.
The warnings by the banks have rattled the investors of both with the stocks of Credit Suisse falling by 14 per cent while there was a 16 per cent drop in the share price of Nomura on the Japanese stock market.
There have also been drops in stocks of other banks including those of Deutsche Bank and Goldman Sachs, even though at a much smaller level, because of fears among investors about who else might be affected by the crisis in the hedge fund.
The lending that it had made to Greensill Capital, the finance company that collapsed recently and which has put at risk the future of Liberty Steel of the United Kingdom, has already hit the profits and fortunes of Credit Suisse.
“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,” Credit Suisse said in a statement issued on Monday.
Its transactions with a US client could cost the bank as much as $2 billion, Nomura said.
None of the banks however named the firm at the centre of the crisis – Archegos Capital Management, which is not even close to being a household name but is considered to be a big player in US markets. This firm essentially is the family investment firm of Bill Hwang – trader who was banned from trading in Hong Kong in 2014 and who had settled insider trading charges in the US in 2012.
According to analysts, the world stock markets will be rattled by the surprise default of a US hedge fund. It is likely that the case of Long Term Capital Management, the hedge fund that was one of the favourites of Wall Street and one that collapsed suddenly in the late 1990s, will inevitably be recalled by traders as this crisis develops. The US financial industry’s biggest players had to organize a bailout of the firm because the trading book of Long Term Capital Management was huge and very complicated. However prior to the involvement of the bailout package, there was a period when there was a huge uncertainty about whether a large market crash would happen because of the fund possible collapse.
(Adapted from FT.com)