Credit Suisse, Nomura warn of ‘significant’ losses from a spectacularly bad trade that caught Wall Street off guard

Swiss banking giant Credit Suisse and Japan’s Nomura Holdings signaled to the markets on Monday that they face possibly “significant” losses as the fallout mounts from the default of a small U.S. hedge fund.

Investors punished the shares of both banks, plus those of others believed to be caught up on the wrong end of a hefty margin call that could run into the tens of billions. The sour trades, which involved Chinese ADRs and also sunk the shares of U.S. media giants ViacomCBS and Discovery, came to light late on Friday.

Neither bank named the fund, but Bloomberg, among others, identified it as Bill Hwang’s Archegos Capital Management.

In a trading update released Monday, Credit Suisse acknowledged that the fund in question defaulted on its margin calls, which Credit Suisse and other banks had executed on behalf of the firm.

“Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions,” Credit Suisse said on Monday.

“While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first quarter results, notwithstanding the positive trends announced in our trading statement earlier this month,” Credit Suisse added.

After a dismal showing in the fourth quarter of 2020, Credit Suisse had pinned hopes of a recovery on increasing lending and capitalizing on trading revenues reaped from the recent stock market rally. The Zurich-based lender was also been caught on the wrong side of the collapse of Greensill Capital, a firm that had furnished short-term financing to companies big and small.

In a separate statement, Japanese bank Nomura said the events stemming from last week’s failed margin call could subject one of its U.S. subsidiaries to a significant loss. In the statement, Nomura was more precise on calling a floor to its possible losses.

“The estimated amount of the claim against the client is approximately $2 billion based on market prices as of March 26. This estimate is subject to change depending on unwinding of the transactions and fluctuations in market prices,” it added.

Nomura said it is evaluating the extent of the possible loss, and its wider implications for company results.

Credit Suisse shares were down 14% while Nomura slumped over 16% in Tokyo.

Other financial institutions involved in the hedge fund fallout are believed to be Morgan Stanley and Goldman Sachs, whose shares were down 4% and 2.5%, respectively, in premarket trading. Meanwhile, UBS and Deutsche Bank were down 4% and 5%, respectively.

Bill Hwang achieved notoriety in 2012 when he pleaded guilty to charges of insider trading in 2012 on behalf of his firm, Tiger Asia Management. According to the U.S. Justice Department, Tiger Asia traded on material non-public information, reaping $16 million in illicit profits in 2008 and 2009.

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