The night before the Archegos Capital story appeared in public late last month, the fund’s largest leading broker quietly downloaded from its risky hedge fund positions, people with knowledge of the trade told CNBC.
According to the people, Morgan Stanley sold about $ 5 billion in shares of the doomed bets on American media and Chinese technology names to a small group of hedge funds on Thursday, March 25, who, according to the people, requested anonymity to speak honestly about the transaction. .
This is a previously unreported detail that shows the extraordinary steps that some banks have taken to protect themselves from losses due to the collapse of a customer. Morgan Stanley, the world’s largest stock trading store, and its shareholders were favored. While the bank escaped the episode without significant losses, other businesses were less fortunate. Credit Suisse said on Tuesday that it cost a $ 4.7 billion hit after losing the Arkegos positions; the company also cut its dividend and stopped buying back shares.
Morgan Stanley had the permission of Archegos, led by Bill Hwang, former analyst at Tiger Management, to buy his stock around late Thursday, these people said. The bank offered the shares at a discount and told the hedge funds that they were part of a margin call that could have prevented the collapse of an anonymous customer.
But the investment bank has information he did not share with the stock buyers: the basket of shares he sold consisted of eight or so names, including Baidu and Tencent Music, was merely the first salvo of an unprecedented wave of tens of millions dollars sold by Morgan Stanley and other investment banks by the next day.
According to one of the people familiar with the trade, some of the customers were betrayed by Morgan Stanley because they did not get that important context. The hedge funds later learned in press reports that Hwang and his main brokers had met on Thursday night to try to do an orderly settlement of his positions, a difficult task due to the risk that the word would come out.
This means that at least some bankers at Morgan Stanley knew what the sale was likely to be and that Hwang’s business was unlikely to be saved. The knowledge helped Morgan Stanley and rival Goldman Sachs avoid losses as the companies quickly got rid of Archegos’ shares. Morgan Stanley and Goldman declined to comment on this article.
Morgan Stanley was the largest holder of the top ten stocks traded by Archegos at the end of 2020, with a total position of about $ 18 billion, according to an analysis of the submission by market participants. Credit Suisse was the second most exposed with about $ 10 billion, according to these sources. That means Morgan Stanley could have incurred about $ 10 billion in losses if he had not acted quickly.
“I think it was an ‘oh s —‘ moment where Morgan on their book alone looked at potentially $ 10 billion in losses, and that they had to take a quick risk,” the person said knowingly.
While Goldman’s $ 10.5 billion sale in Archegos-related stock was widely reported on Friday, March 26 after the bank blew emails to a broad list of customers, Morgan Stanley’s move was not reported the night before. not because the bank handles less than half-foolish hedge funds so that the transactions can remain hidden.
The clients, a subgenre of hedge funds sometimes referred to as ‘equity capital market strategies’, usually do not have an opinion on the earnings of individual stocks. Instead, they will buy blocks of shares from big prime brokers like Morgan Stanley and others if the discount is deep enough, usually to relax the trade over time.
After Morgan Stanley and Goldman sold the first blocks of shares with the permission of Archegos, the lock opened. Major brokers, including Morgan Stanley and Credit Suisse, then exercised their rights under default and, according to sources, used the firm’s collateral and sold positions.
In a wild session for equities on that Friday at the end of March, another twist came: some of the hedge fund investors who participated in the Thursday sales also bought more shares from Goldman, which later rose by 5% to 20% came on the market. under the sales of Morgan Stanley. While these positions were deep under water that day, several names, including Baidu and Tencent, bounced back so that hedge funds could download positions for a profit.
“It was a huge group – of five different banks trying to settle billions of dollars at the same time and not talking to each other, and trading at prices where they were beneficial,” said one source.
Morgan Stanley largely left its Archegos positions on Friday, March 26, with the exception of one interest: according to the people, 45 million shares of ViacomCBS, which it bought to customers on Sunday. The bank’s delayed sale of Viacom shares has raised questions and speculation that it held the stock because it wanted to close a secondary offer that Morgan Stanley had to manage the week before.
Although some of his hedge fund customers feel less excited, Morgan Stanley is unlikely to lose them over the Archegos episode, people said.
This is because the funds want access to shares of hot initial public offerings that Morgan Stanley, as the best banker in the U.S. technology industry, can hand out, they said.