Seduced by the growth of Archegos, Nomura risked Hwang’s return

NEW YORK / HONG KONG (Reuters) – American investor Sung Kook “Bill” Hwang was looking for a second chance on Wall Street after falling out of favor and closing his multi-billion dollar hedge fund firm. Japan’s Nomura Holdings Inc gave it one.

Nomura had previously maintained a relationship with Hwang’s Tiger Asia Management LLC before the investment firm closed in 2012, after being punished by regulators in the United States and Hong Kong for insider trading in Chinese stocks.

Like other banks, it initially did not resume commercial relations with the new family office of the Korean-American investor, Archegos Capital Management, according to a person familiar with the situation. But Hwang’s appetite for big bets on technology, media and other company stocks in the United States and Asia has proved too profitable to resist.

“It was, ‘They paid the fines, everything is settled … they are open for business,'” said a former Nomura employee with knowledge of the reactivated relationship. “It was like, ‘OK … what are you looking to do?'”

It took executives in Tokyo to approve the renewed relationship, around 2016, the person said. But as soon as they did, Archegos grew to become one of the ten most profitable customers for the bank’s operations in the United States, according to the same two people.

An American Nomura spokesman declined to comment on the relationship with Hwang.

Hwang and Archegos did not respond to requests for comment. A family office representative said earlier in a statement that “This is a challenging time for the family office … our partners and employees”.

The story of how Hwang regained Nomura’s goodwill with the promise of a profitable business relationship, the details of which are reported here for the first time, highlights the risks that Nomura was prepared to take to advance in the world’s most competitive capital market.

This story is based on interviews with nearly a dozen people with knowledge of Hwang and Archegos and their relationships on Wall Street, including two people familiar with Nomura’s relationships with the fund.

Last week, that relationship seemed like a terrible miscalculation, as a drop in ViacomCBS Inc’s shares left Archegos – which had a highly leveraged stock bet – facing a massive margin call from its banks seeking to cover the increased exposure.

These banks, including Goldman Sachs and Morgan Stanley, who helped finance the Hwang trades, initially argued about postponing their liquidation.

But as the stocks that underpinned Hwang’s positions continued to decline, its banks quickly began to struggle to sell those shares to try to contain losses.

Two banks – Credit Suisse and Nomura – are facing losses of billions.

IT’S NOT ABOUT MONEY

Wall Street bankers describe Hwang as a practical and polite person. Married and with children, he was not seen indulging in a flashy lifestyle, Wall Street sources who knew him said.

Hwang, who said he was inspired by his Christian faith, lives in a house in the suburb of Tenafly, New York, New York, with an estimated value of $ 3.1 million, according to Zillow, where he was photographed this week in according to the Daily Mail here. This is modest compared to many billionaire fund managers.

Hwang did not have to “buy mega mansions and appear on TV,” said the same source.

“I am not afraid of death or money. People on Wall Street wonder about the freedom I have, “said Hwang in a video here posted by his foundation in 2019.” In the end, the most important thing is the Bible. “

This contrasts with investor Hwang, who was “super aggressive” and “considered a guy who was willing to do incredibly bold things,” said a professional hedge fund investor who followed his career.

Hwang used leverage to expand his bets, holding equity positions worth more than $ 50 billion, while his funds had assets of around $ 10 billion, said three sources familiar with the deal.

He did this by buying derivatives known as total return swaps, which allow investors to bet on stock price movements without owning the underlying securities, according to the sources. Instead, the bank buys the shares and promises the investor a performance-related return. This customer, in turn, offers guarantees to guarantee negotiations with the bank.

A banker said Hwang’s business, which produced “surprising returns”, was a highly profitable account for banks.

Another source said that Hwang would exploit his status as an important customer to pressure banks to reduce their collateral requirements – an important way for banks to mitigate the risks posed by customers.

The competition to win Hwang’s business was particularly fierce among banks trying to challenge the dominance of top-tier “first-tier” brokers, such as Goldman Sachs and Morgan Stanley.

This included Nomura, which currently ranks 23rd in Preqin’s global ranking of top tier brokers. After deciding to do business with Hwang once again, the Japanese bank quickly increased its business with him, seeing it as a strategy to win more business from other major US hedge funds.

Greater market share in the United States is central to the ambitions of Japan’s largest brokerage to become a global investment bank, an objective fueled by the acquisition of Lehman Brothers’ operations in Europe, Asia and the Middle East after the financial crisis of a decade ago.

“The relationship has really blossomed in the past four to five years, as a result of (Nomura’s) effort to gain a larger share of the market in the United States,” said another person familiar with Nomura and Archegos.

Representatives for Credit Suisse, Goldman and Morgan Stanley declined to comment on Friday.

BIG BUSINESS, BIG RISK

Archegos’ risk-taking has increased because it has commercial relationships with several banks. This means that his leverage has been increased in certain equity positions, with exposure in some of Hwang’s trades reaching up to 20 times the guarantee he had offered, the sources said.

As a family office, Archegos had limited disclosure requirements, so banks may not be aware of how leveraged it was, the source said.

Even so, some banks approached Archegos with more caution.

Bank of America has not accepted Hwang as a client in recent years because of the leverage of the family office, concentration on certain securities and Hwang’s contact with regulators, according to a person familiar with the bank’s thinking.

Goldman’s compliance executives were suspicious of Hwang, and the bank only agreed to negotiate with him again last year, as long as his positions were highly guaranteed, one of the sources said.

As some banks have been smart about liquidating, attention is now focused on whether top-tier brokers need to step up their due diligence on customers.

Japan’s finance minister said on Friday that the government is investigating the financial losses incurred by Mitsubishi UFJ Financial Group (MUFG) and Nomura, and that it will share information on the matter with the Bank of Japan and foreign officials.

The United States Securities and Exchange Commission and the Financial Conduct Authority of Great Britain have also launched preliminary investigations into the collapse of Archegos, according to another source familiar with the situation. The SEC declined to comment on Friday and the FCA did not respond immediately.

In Nomura, the question of whether the bank fell into the client’s due diligence is especially serious after he laid off risk and compliance professionals in the United States in 2019. One of the sources familiar with the matter linked these cuts to the risks the bank took on with Archegos.

“They probably felt they could manage the risk,” said the source. “They were wrong.”