Kevin Dowd, 29 March 2021
Imagine if Goldman Sachs GS -0.5% lent a billion dollars to RoaringKitty.
News about margin calls is once again roiling markets. Except this time, instead of industry outsiders like Robinhood and RoaringKitty, a leading GameStop bull on WallStreetBets subreddit, the drama centers on traditional giants of the financial establishment.
Last Friday, brokers including Credit Suisse CS -11.5%, Nomura and Goldman Sachs began dumping huge blocks of shares in a few select companies, including ViacomCBS, Discovery Communications and Baidu BIDU -1.9%, with the size of the selloff reportedly reaching $20 billion. In the ensuing days, it emerged that the liquidation came after a hedge fund called Archegos Capital Management defaulted on margin calls, with Bloomberg reporting the defaults were related to a series of complex derivatives and swaps that allowed Archegos to assume significant stakes in companies without directly buying their shares. The nature of those deals meant the fund was also able to largely avoid financial disclosures about its positions.
The fallout has been swift. In the span of two trading days, shares of both ViacomCBS and Discovery have declined some 30%. Archegos’s finances are now “under extreme pressure,” according to The Wall Street Journal. Shares of Credit Suisse are down more than 12%, and Nomura stock has dipped more than 13%. Credit Suisse may have lost between $3 billion and $4 billion in the affair and Nomura suffered a $2 billion hit, the Financial Times reported. As you might expect with numbers like that, both banks have warned investors that the losses could have a serious impact on their first-quarter results.