Morgan Stanley Faces $900 Million Blow from Archegos Capital Collapse
Morgan Stanley has revealed that it suffered a $900 million setback as a result of the collapse of Archegos Capital, severely impacting its first-quarter earnings. Despite this, CEO James Gorman notes that the cost of de-risking from the failed hedge fund was “money well spent.”
In its otherwise impressive earnings report for the first quarter, which included record inflows for its wealth management division, Morgan Stanley reported a $911 million loss attributed to what it describes as a “single client event.”
The Friday filing by Morgan Stanley states, “The current quarter includes a loss of $644 million related to a credit event for a single prime brokerage client,” later identified as Archegos Capital during the conference call with investors. “And $267 million of subsequent trading losses through the end of the quarter related to the same event.”
As a result of this news, Morgan Stanley shares dipped 3% in mid-day trading on Friday, lowering their value to $78.45 each, translating to a year-to-date gain of approximately 15%.
Archegos Capital, a family office managed by billionaire investor Bill Hwang, suffered a collapse last month due to the volatility resulting from its use of complex derivatives known as total return swaps (TRS). These swaps allowed Archegos to receive running payments on a portfolio of reference shares without owning them.
Leverage provided by various U.S. and European investment banks amplified Archegos’ exposure, which was primarily based on media stocks from the U.S. and China, including ViacomCBS, Discovery, Baidu, and Tencent Music. The banks held the shares themselves, acting as prime brokers for Archegos.
Analysts at JPMorgan estimated last week that bank losses could reach $10 billion, twice their original estimate. Lenders such as Credit Suisse and Wells Fargo scrambled to assess their risk exposure following this embarrassing implosion in the hedge fund industry.
JPMorgan expressed surprise at the inability of Credit Suisse and Nomura to unwind all their positions at this point, while highlighting the expectation of an announcement once this task is complete. The bank also emphasized the need for full disclosure by the end of the week, urging vigilance in monitoring credit agencies’ statements.
