Credit Suisse and Nomura Holdings warned this morning that they faced huge losses from a multibillion-dollar fire sale of stocks held by just one investment firm, Archegos Capital Management. It’s the latest sign of the fragility of the global markets, and could spur more attention from regulators on the murky world of swaps and investor borrowing.

Archegos manages the personal fortune of former hedge fund mogul Bill Hwang, who won Wall Street'’s business despite having pleaded guilty to insider trading years ago. It amassed huge positions in media giants such as ViacomCBS and in several Chinese tech companies — largely with borrowed money.

The Archegos strategy included using swaps, contracts that gave Hwang financial exposure to companies’ shares while hiding both his identity and how big his positions really were.

It is also becoming increasingly apparent that several Wall Street banks lent

Archegos money without knowing that others were doing the same thing for

the same trades.

Trouble for Hwang and his banks arose when the prices of those stocks started to fall. That prompted some of his lenders to demand cash to cover his bets. When they began to question his ability to do so, some of them, including Goldman Sachs and Morgan Stanley, seized some of his holdings and kicked off the sale $20 billion worth in huge block trades.

That forced selling led to even bigger drops in the prices of those stocks, starting a vicious circle.

Credit Suisse and Nomura acknowledged being hit especially hard.

Credit Suisse told investors that a “US-based hedge fund” had defaulted on its margin calls, which could lead to losses that were “highly significant and material to our first-quarter results”.

Nomura said that one of its US arms could suffer “a significant loss” because of the forced sales.

Shares in Credit Suisse were down 14 per cent this morning; those in Nomura were down 16 per cent.

Goldman, on the other hand, has told investors that its potential losses are “immaterial”, having covered its exposure.

Some bankers told The Financial Times that Archegos’s downfall highlighted the risk of one firm taking on so much leverage from multiple banks.

It also raises fresh questions about whether the mania for meme stocks, largely attributed to day traders, was actually fueled by hedge funds jumping into the trading.

New York Times News Service