Sunday Times

Billions lost in default by Archegos


Morgan Stanley disclosed an almost $1bn (R14.3bn) loss from the collapse of private fund Archegos on Friday, muddying a 150% jump in first-quarter profit that was powered by a boom in trading and dealmaking.

Morgan Stanley was one of six banks that had exposure to Archegos Capital Management, a family office fund that defaulted on margin calls late last month and triggered a fire sale of stocks across Wall Street.

The bank initially lost $644m on stocks it held related to Archegos’s positions, which it sold. It decided to “derisk” remaining positions, which triggered another $267m loss, Morgan Stanley CEO James Gorman said. “I regard that decision as necessary and money well spent.”

A handful of major banks that partly financed Archegos’s derivative trades were also left nursing major losses. Switzerlan­d’s Credit Suisse, with $4.7bn losses, and Japan’s Nomura, with $2bn, bore the brunt.

Other Wall Street banks, including

Morgan Stanley, which acted as a prime broker to the fund, were quick to exit their Archegos positions, it was reported.

Regulatory repercussi­ons

However, the saga is likely to have regulatory repercussi­ons, with a slew of US watchdogs as well as the Senate banking committee all probing the incident to better understand why some banks were so exposed to a single client.

“It’s not a financial event in the grand scheme of things, but it will likely raise concerns,” Oppenheime­r analyst Chris Kotowski wrote in a note to clients.

Despite the Archegos loss, overall results comfortabl­y beat expectatio­ns, wrapping up a robust quarter for Wall Street’s biggest banks that benefitted largely from reserve releases, record capital markets activity and a surge in trading volumes in the first quarter of 2021.

The spike in trading, partly led by a Reddit-fuelled trading frenzy in “meme” stocks like GameStop, drove a 66% jump in revenue at Morgan Stanley’s institutio­nal securities business.

Net revenue jumped 61% to $15.72bn.

Like bigger rival Goldman Sachs, Morgan Stanley benefitted from an unpreceden­ted boom in deal-making through special purpose acquisitio­n companies.

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