Hedge fund margin call hits banks, sparks contagion fears
Stock markets were weighed down by fears that there could be more to come after a Wall Street hedge fund dragged down two well-known investment banks with bad bets gone bad.
On Friday, a number of Chinese tech companies holding shares of New York hedge fund Archegos Capital sold off strongly. The reason for this selling pressure was a so-called margin call by the fund’s lenders. Margin calls occur when brokers tell a client to put in liquidity after borrowing beyond a certain threshold to complete trades.
The hedge fund did not put in liquidity, so trades were made to sell stocks and get liquidity to fall below an acceptable level.
The loss in market value of the affected stocks was around $ 35 billion on Friday, including US media companies ViacomCBS and Discovery, both of which lost around 15% of their value.
Monday started with fears there could be more forced sales, but by the end of the trading day most of the losses were limited to a handful of financial names.
Japanese bank Nomura and European bank Credit Suisse were facing billions of dollars in losses due to transactions with an anonymous customer.
Nomura estimated that the claim against his client could amount to around $ 2 billion.
Credit Suisse said it “and a number of other banks” are abandoning transactions they made with a US-based hedge fund, which it also declined to name.
Shares of Credit Suisse and Nomura have each fallen at least 16% in their home country, and U.S. banks have been caught in the downstream as investors question whether sour trades will remain isolated or have a more generalized effect across the system.
“It’s kind of an example of leverage that you don’t see,” Martin said. “We all know there’s good debt out there, but what we don’t know is how much of it is over there.”
Morgan Stanley shares fell 2.5% after the Financial Times said it also sold billions of shares. “There are still discussions as to whether, and which, US banks could be affected. It’s a lurking question. But so far the market has basically taken (the news) in stride.” said Quincy Krosby, chief Prudential Financial strategist in Newark, New Jersey.
Wall Street’s fear gauge, the VIX, has risen. “It’s high, which indicates people are nervous, but it’s not panic,” said Tom Martin, senior portfolio manager at Globalt Investments.