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The swift unwinding of New York-based private investment firm Archegos Capital Management and forced liquidation of its holdings worth US$ 20 billion has sent tremors across global financial markets. There has also been follow-up heavy selling of associated Chinese and US stocks. Archegos’ top lenders -- Credit Suisse and Nomura Holdings – suffered have also suffered a rude shock.
Many analysts are now comparing the sinking of Archegos to the collapse of Lehman Brothers in 2008.
Investors, set to suffer massive losses, have acknowledged that the leverage offered to the fund had created irreversible risk.
Margin calls on Archegos were the main catalyst behind last Friday’s sharp sell-off, amounting to huge losses on the balance sheet of global banks.
Under a margin call, a bank asks its borrower to add more collateral if a business is partly financed with loaned money and has dropped steeply in net worth.
If the borrower is unable to follow through, the creditor will sell the guarantees to recover the loan amount.
The margin calls on Archegos also triggered the unravelling of leveraged equity risks.
Japanese investment bank Nomura and Swiss lender Credit Suisse sounded the warning bells as the New York-based capital management company failed to add collateral on their margin calls.
In 2008, Lehman Brothers held US$ 639 billion in assets – more than sufficient to repay its US$ 613 billion outstanding debt. However, the holdings were challenging to sell. Hence, the American investment banking company failed to raise money from its assets that led to its bankruptcy.
Lehman Brothers also did not get any bailout from the US government as it had only $1 billion in cash available against its massive debt. Consequently, it had to cease operations.
Will Archegos Lead To Wider Financial Crisis?
The Credit Default Swap Index has been calm so far even though investors are asking a higher cost to hedge.
On Monday, stocks of Credit Suisse Group (CS:US or NYSE: CS) and Nomura Holdings Inc (NMR:US or NYSE: NMR) plunged by over 11 per cent and 14 per cent, respectively. Share prices of both lenders were down in the pre-market trading on March 30.
Image Source: Kalkine Group @2020
Both banks have estimated heavy financial losses in the current quarter.
However, the net debt amount is yet to be disclosed by the investment banks, but Nomura has provided a rough estimate of US$ 2 billion debt against Archegos.
Investors would be on their toes this week amid the uncertainty around Archegos meltdown.
