Swiss multinational Credit Suisse has announced a “highly significant and material” loss resulting from a “US-based hedge fund defaulting on margin calls.” Likewise Japan’s biggest investment bank, Nomura, has warned of a “significant loss” at its US subsidiary due to a transaction related to an unknown client with that loss estimated at $2 billion.
Many are saying that client is Archegos Capital Management, a family office hedge fund, who some estimate had $10 to $15 billion in assets under management.
“Things started going wrong for Archegos when shares of companies such as Viacom started to slide mid-last week,” said Michael Brown, a senior market analyst at Caxton Business. “It was at that point that margins were called, and couldn’t be provided, hence the block sales seen Friday.”
About $20 billion was sold off on Friday in Baidu, Tencent Music, ViacomCBS and Discovery with this hedge fund apparently betting through derivatives. Some estimates say they were using 5x leverage, which would indicate a total loss of about $50 to $70 billion.
Goldman Sachs apparently experienced only “immaterial” losses because they were fully collateralized and Goldman was among the first to begin reducing its exposure. The bank has now exited most of its Archegos-related positions.
Morgan Stansley is believed to have gotten early too, with Deutsche Bank having only a small exposure to Archegos.
According to Financial Times “bankers in Tokyo familiar with the circumstances surrounding the heavy sell-off of Archegos assets described the event as a possible ‘Lehman moment’ that would force multiple lenders to recognise that leverage extended to the fund had created excessive risk.”
Other analysts say this is unlikely to develop to anything serious, but this is the biggest blow up of a hedge fund in two decades since Long-Term Capital Management went under in 1998. Currently there are lingering questions on whether there are other funds in trouble, with many wondering whether the losses can be isolated.
In addition some worry banks may now exercise more caution with their leverage offers, potentially closing other positions to reduce exposure.
The biggest beneficiary of all this currently appears to be bitcoin. This has jumped overnight (euro time) since much of the above became known. Bitcoin rose by about 5% most likely because it is the only usable money outside of the banking system.
These turbulences in the banking system therefore have most probably led to trading houses hedging or diversifying with bitcoin just in case. Gold instead has fallen from $1,724 to $1,710 presumably because bitcoin is taking its position as a hedge.
These price movements today will probably solidify that shift, with bitcoin’s sudden jump having no ‘internal’ reasons as far as we can see.
Some are suggesting Visa allowing the dollar pegged USDC to settle transactions on its payment network is perhaps behind this move but that appears to be extremely unlikely because it is pretty much non news and because USDC has almost nothing to do with bitcoin.
Of course a rise for bitcoin was expected after its dip prior to the derivatives contract expiries this Friday, but the overnight jump is surprising. Not, however, in light of this banking news because that traders would run to bitcoin in light of even the slightest hint of potential banking troubles is what you’d expect.