Hedge fund crisis wipes billions off value of big banks

BILLIONS of pounds have been wiped off the value of big banks after a meltdown at a hedge fund.

Credit Suisse and Nomura of Japan face a huge hit to their profits after bets placed by their client, Archegos Capital, turned sour.

The crisis could cause major losses for British investors exposed through ISAs, pensions or other savings.

Archegos had borrowed heavily from Credit Suisse and Nomura to invest in Viacom CBS and Discovery.

However Viacom shares started to fall last week amid fears that its channels were losing out to rivals such as Netflix and Disney Plus.

That meant Credit Suisse and Nomura asked Archegos for more funds to cover the loans they had granted. When the cash was not forthcoming the banks sold the Viacom shares at a loss, causing the company’s value to fall still further.

Credit Suisse admitted yesterday the incident would have a ‘highly significant’ impact on its profits, estimated at between £2billion and £3billion.

Nomura said the crisis could wipe out its total profits for the past six months, at around £1.5billion.

Bill Hwang, the high-flying financier behind Archegos, scrambled to raise extra cash and was forced into a fire-sale of several stakes in other companies he owns, from UK online retailer Farfetch to Chinese technology titan Tencent.

This in turn caused those stocks to slide, as Archegos struggled to find buyers willing to take on the shares.

The sell-off was estimated to have cost around £20billion. Some traders fear the problems at Archegos could spell trouble for the technology boom.

However Neil Wilson, chief market analyst at trading site Markets.com, said: ‘A fund blowing up is not itself a systemic risk, more of questionable internal risk management.’

But the incident may push regulators including the Bank of England and the Financial Conduct Authority to examine the relationship between hedge funds and prime brokers, in this case specialist arms of Credit Suisse and Nomura.

Prime brokerages lend to hedge funds and other major investors, allowing them to take bigger bets than they would otherwise be able to afford.

Eleanor Creagh, a market strategist at Saxo Bank, said the losses involved would prompt ‘ heightened scrutiny around the disclosures’ that hedge funds have to make.

John Meyer, of UK broker SP Angel, said it might ‘lead to a tightening of lending controls in the prime brokerage and stock lending departments of the major banks’.

IT’S not yet clear whether the meltdown of the Wall Street hedge fund Archegos will have any major impact here, but it sounds chilling echoes of the past.

Archegos, which seems to have avoided scrutiny by declaring itself a ‘family office’, is run by a man named Bill Hwang, who a decade ago admitted to wire fraud relating to Chinese stocks.

The fund’s disintegration has left major banks Nomura and Credit Suisse facing multi-billion-dollar losses and is a reminder of the damage greedy and reckless traders can do unchecked.

Like the Greensill scandal which has engulfed David Cameron, it shows what happens when regulators sleep on the job.