The night before Archegos Capital’s story erupted in public view at the end of last month, the fund’s largest principal broker quietly transferred some of its risk positions to hedge funds, people with knowledge of the business told CNBC.
Morgan Stanley sold about $ 5 billion in Archegos doomed betting stock in the US media and Chinese technology names to a small group of hedge funds on the night of Thursday, March 25, according to the people, who asked to remain anonymous to speak frankly about the transaction.
It is a detail not previously reported that shows the extraordinary measures that some banks have taken to protect themselves from losses resulting from the collapse of a customer. The moves benefited Morgan Stanley, the world’s largest stock trading store, and its shareholders. While the bank escaped the episode without material losses, other companies were less fortunate. Credit Suisse said on Tuesday that it suffered a $ 4.7 billion blow after canceling Archegos’ lost positions; the company also cut its dividends and suspended share repurchases.
Morgan Stanley had the consent of Archegos, led by former Tiger Management analyst Bill Hwang, to buy its shares on Thursday night, these people said. The bank offered the shares at a discount, telling hedge funds that they were part of a margin call that could prevent the collapse of an unidentified customer.
But the investment bank had information it didn’t share with stock buyers: the stock basket it was selling, made up of about eight names, including Baidu and Tencent Music, was just the opening salvo of an unprecedented wave of dozens billions of dollars in sales by Morgan Stanley and other investment banks starting the next day.
Some of the customers felt betrayed by Morgan Stanley because they did not receive this crucial context, according to a person familiar with the business. Hedge funds later discovered, in press reports, that Hwang and his first-rate brokers met on Thursday night to attempt an orderly liquidation of their positions, a difficult task considering the risk that this news will spread. .
This means that at least some bankers at Morgan Stanley knew the extent of the sale that was likely and that the Hwang company was unlikely to be saved, these people say. This knowledge helped Morgan Stanley and rival Goldman Sachs to avoid losses because the companies quickly divested themselves of the shares linked to Archegos. Morgan Stanley and Goldman declined to comment for this article.
Morgan Stanley was the largest holder of the top ten shares traded by Archegos in late 2020, with around $ 18 billion in positions in total, according to an analysis of records from market participants. Credit Suisse was the second most exposed, with about $ 10 billion, these sources noted. This means that Morgan Stanley could have faced losses of around $ 10 billion had it not acted quickly.
“I think it was an ‘oh s —‘ moment when Morgan was predicting potential losses of $ 10 billion just in his book, and they had to move the risk quickly,” said the person with knowledge.
Although Goldman’s $ 10.5 billion sale of Archegos-related shares on Friday, March 26, was widely publicized after the bank sent emails to a broad list of clients, Morgan Stanley’s action on The previous night has not been released so far because the bank has dealt with less than half – a dozen hedge funds, allowing transactions to remain hidden.
Clients, a subgenre of hedge funds sometimes referred to as “capital market strategies”, usually have no opinion on the merits of individual stocks. Instead, they will buy stock blocks from major top-tier brokers, like Morgan Stanley and others, when the discount is big enough, usually to undo trades over time.
After Morgan Stanley and Goldman sold the first blocks of shares with Archegos’ consent, the floodgates opened. Top-tier brokers, including Morgan Stanley and Credit Suisse, exercised their rights under default, confiscating the company’s guarantees and selling positions on Friday, according to the sources.
In a wild stock session that Friday in late March, another twist took place: some of the hedge fund investors who had participated in Thursday’s sales also bought more Goldman shares, which later hit the market at prices which were between 5% and 20% below Morgan Stanley’s sales. Although these positions were deeply submerged that day, several names, including Baidu and Tencent, recovered, allowing hedge funds to offload positions at a profit.
“It was a gigantic cluster of five different banks trying to wrest billions of dollars at risk at the same time, without talking to each other, negotiating where prices were advantageous for them,” said an industry source.
Morgan Stanley largely left its positions at Archegos on Friday, March 26, with the exception of one stake: 45 million shares of ViacomCBS, which it bought for customers on Sunday, according to the people. The delay in the sale of Viacom’s shares by the bank has raised doubts and speculation that he kept the shares because he wanted to close a secondary offer from Morgan Stanley the previous week.
Despite making some of its hedge fund customers less enthusiastic, Morgan Stanley is unlikely to lose them because of the Archegos episode, people said.
That’s because the funds want access to shares in major initial public offerings that Morgan Stanley, as the top banker in the United States’ technology industry, can distribute, they said.