Bill Hwang, founder of Tiger Asia Management LLC, is leaving federal court in Newark, New Jersey, USA, on Wednesday, December 12, 2012.
Emile Warnsteker | Bloomberg | Getty Images
Morgan Stanley posted blockbuster results for the first quarter, but a single major brokerage client cost the company nearly $ 1 billion.
The firm had a loss of $ 644 million due to a “credit event” for the customer, as well as $ 267 million in related trading losses, the New York bank said on Friday in earnings results that easily exceeded expectations for that quarter.
The client was Bill Hwang’s Archegos, according to a person with direct knowledge of the problem, who added that the bank was no longer exposed to the collapse of the fund.
During his scheduled call with analysts to discuss the quarter, Morgan Stanley CEO James Gorman confirmed that the client is Archegos and said the fund owes him $ 644 million after its fall in late March.
“We liquidated some very large single-share positions through a series of block sales that culminated on Sunday evening, March 28,” Gorman said. “This resulted in a net loss of $ 644 million, which is the amount the customer gave us in transactions he did not pay.”
He added: “Subsequently, we made a leadership decision to completely risk the remaining short, long and short positions,” Gorman said. “We have decided that we will be out of risk as soon as possible, and in doing so we have suffered an incremental loss of $ 267 million. I believe the decision is necessary and the money well spent.”
At least part of the loss in Archegos was due to the fact that Morgan Stanley had been a subscriber to ViacomCBS shares the previous week, so it withheld the sale of a block of the company’s shares until Sunday, which led the bank to sell later than others, said Gorman.
Later, an analyst asked Gorman if the episode would change his approach to risk management in the core brokerage business.
“I think we will definitely look closely at family office relationships, where they are very concentrated and you have more primary brokers, and honestly, the transparency and lack of disclosure about these institutions is just different from hedge fund institutions.” Gorman said. “It’s something I’m sure the SEC will pursue and it’s probably good for the entire industry.”
With the assistance of Dawn Giel of CNBC.