The night before Archegos Capital’s story went public at the end of last month, the fund’s largest prime broker quietly unloaded some of its risky positions to hedge funds, people with knowledge of transactions told CNBC.
Morgan Stanley sold about $ 5 billion in shares of Archegos’ condemned bets on U.S. media and Chinese technology names to a small group of hedge funds late Thursday, March 25, according to people who asked for anonymity to speak honestly about the transaction.
It is a previously undeclared detail that shows the extraordinary steps that some banks have taken to protect themselves from losses caused by the fall of a customer. The move benefited Morgan Stanley, the world’s largest stock trading store, and its shareholders. While the bank escaped the episode without any material losses, other companies were less fortunate. Credit Suisse said on Tuesday it had a $ 4.7 billion success after losing its Archegos position; the company also reduced its dividend and stopped share repurchases.
Morgan Stanley had the consent of Archegos, led by former Tiger Management analyst Bill Hwang, to buy its shares late Thursday, the people said. The bank offered the shares at a discount, telling hedge funds that they are part of a margin call that could prevent an unnamed client from collapsing.
But the investment bank had information it didn’t share with stock buyers: the stock basket it sold, made up of eight names, including Baidu and Tencent Music, was nothing more than the opening salvo of an unprecedented wave of tens of billions. dollars in sales by Morgan Stanley and other investment banks starting the very next day.
Some of the clients felt betrayed by Morgan Stanley because they did not receive that crucial context, according to one of the people familiar with the trades. Hedge funds later learned in press reports that Hwang and his first brokers convened on Thursday night to try to relax in an orderly manner from his positions, a difficult task given the risk of the word appearing.
This means that at least some bankers at Morgan Stanley knew the extent to which the sale was likely and that it was unlikely that the Hwang company would be saved, these people claim. This knowledge helped Morgan Stanley and its rival Goldman Sachs avoid losses, as companies quickly divested shares in Archegos. Morgan Stanley and Goldman declined to comment on this article.
Morgan Stanley was the largest holder of the first ten shares traded by Archegos at the end of 2020, with about $ 18 billion in general positions, according to an analysis of deposits by market participants. Credit Suisse was the second most exposed, with about $ 10 billion, these sources said. That means Morgan Stanley could have suffered losses of about $ 10 billion if it hadn’t acted quickly.
“I think there was a ‘oh s —‘ time when Morgan was looking at potential losses of $ 10 billion in their book alone and they had to move the risk quickly,” the acquaintance said.
While Goldman’s sale of $ 10.5 billion in Archegos-related shares on Friday, March 26 was widely reported after the bank threw out emails to a wide list of customers, Morgan Stanley’s move with a The night before has not been reported so far, because the bank dealt with less than half-dozen hedge funds, allowing transactions to remain hidden.
Clients, a sub-fund of hedge funds sometimes referred to as ‘equity market strategies’, usually have no opinion on the merits of individual shares. Instead, they will buy blocks of shares from major major brokers, such as Morgan Stanley and others, when the discount is deep enough, usually to conduct transactions over time.
After Morgan Stanley and Goldman sold the first blocks of shares with Archegos’ consent, the gates opened. Leading brokers, including Morgan Stanley and Credit Suisse, exercised their rights in the event of default, lifting the company’s guarantees and selling positions on Friday, according to sources.
In a wild session for stocks on that Friday in late March, another twist came: Some of the hedge fund investors who took part in Thursday’s sales bought even more shares from Goldman, which came later. on the market at prices from 5% to 20% below Morgan Stanley sales. While these positions were deeply underwater that day, several names, including Baidu and Tencent, returned, allowing hedge funds to unload positions for a profit.
“It was a giant group – of five different banks trying to develop billions of dollars in jeopardy at the same time, without talking to each other, trading where prices were advantageous to themselves,” said an industry source.
Morgan Stanley largely left its Archegos positions until Friday, March 26, with the exception of a single stake: 45 million shares of ViacomCBS, which it bought from customers on Sunday, according to people. The late elimination of the stock bank Viacom raised questions and speculation that it held the shares, as it wanted to close a secondary offer led by Morgan Stanley the previous week.
Despite the fact that some of its hedge fund clients felt less excited, Morgan Stanley is unlikely to lose them in the wake of the Archegos episode, people said.
This is because the funds want access to shares of the initial hot offers that Morgan Stanley, as the top banker in the U.S. technology industry, can grant, they said.