Finance

Morgan Stanley dumped $5 billion in Archegos’ stocks before fire sale

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The night before Archegos Capital’s story became public late last month, the fund’s largest prime broker quietly dumped some of its risky positions into hedge funds, CNBC experts told CNBC.

Morgan Stanley sold approximately $ 5 billion worth of shares in Archegos’ doomed bets on US media and Chinese tech names to a small group of hedge funds late Thursday, March 25th.

It’s a previously unreported detail that shows the extraordinary steps some banks have taken to protect themselves from losses from a customer’s collapse. The moves benefited Morgan Stanley, the world’s largest stock trading company, and its shareholders. While the bank escaped the episode without significant losses, other firms were less fortunate. Credit Suisse announced Tuesday that it had suffered $ 4.7 billion in success after shedding its lost Archegos positions. The company also cut its dividend and stopped buying back shares.

Morgan Stanley had approval from Archegos, led by former Tiger management analyst Bill Hwang, to buy in its shares late Thursday, these people said. The bank offered the shares at a discount, telling the hedge funds that they were part of a margin call that could prevent the collapse of an undisclosed client.

The signage is displayed outside the Morgan Stanley & Co. headquarters in Times Square, New York.

Michael Nagle | Bloomberg | Getty Images

However, the investment bank had information it did not pass on to the stock buyers: the basket of shares they sold, including about eight names, including Baidu and Tencent Music, was merely the opening salvo of an unprecedented wave of tens of billions in sales of Morgan Stanley and other investment banks in US dollars starts the next day.

Some of the clients felt betrayed by Morgan Stanley for not receiving this crucial context, according to one of the people familiar with the craft. The hedge funds later learned in press reports that Hwang and his prime brokers met on Thursday evening to attempt an orderly liquidation of his positions, a difficult task given the risk that the word would get out.

That means at least some bankers at Morgan Stanley knew the extent of the sale that was likely, and that it was unlikely that Hwang’s company would be saved, these people claim. Knowing this helped Morgan Stanley and rival Goldman Sachs avoid losses as the companies quickly sold off Archegos-linked shares. Morgan Stanley and Goldman declined to comment on this article.

Morgan Stanley was the largest holder of the top 10 stocks traded by Archegos in late 2020, with positions totaling approximately $ 18 billion. This emerges from an analysis of the documents submitted by market participants. Credit Suisse was the second most exposed at around 10 billion US dollars. That means Morgan Stanley could have taken roughly $ 10 billion in losses if it hadn’t acted quickly.

“I think it was an ‘oh s —‘ moment when Morgan was looking at the potential $ 10 billion in losses in their book alone and they had to take the risk fast,” said the person with the knowledge.

While Goldman’s sale of $ 10.5 billion worth of Archegos-related shares on Friday, March 26th, was rampant after the bank sent emails to a wide list of clients, Morgan Stanley’s move became Not reported the night before, with the bank servicing less than one stock and half a dozen hedge funds, so the transactions remain hidden.

The clients, a sub-genre of hedge funds sometimes referred to as “equity capital market strategies,” usually have no opinion of the merits of individual stocks. Instead, they buy blocks of stocks from big prime brokers like Morgan Stanley and others when the discount is deep enough to clear the trades over time.

After Morgan Stanley and Goldman sold the first blocks of shares with the approval of Archegos, the floodgates opened. Prime brokers, including Morgan Stanley and Credit Suisse, then exercised their default rights, seized the company’s collateral and, according to sources, sold positions on Friday.

Another twist came in a wild session for stocks that Friday in late March: some of the hedge fund investors who had participated in Thursday’s sales also bought more shares of Goldman, which were later priced at 5% to 20%. entered the market under the Morgan Stanley sales. While those positions were deeply underwater that day, several names including Baidu and Tencent rebounded, allowing hedge funds to unload positions at a profit.

“It was a gigantic conglomeration of five different banks simultaneously trying to transact billions of dollars at risk, not talking to each other and trading where prices were advantageous for themselves,” said an industry source.

Morgan Stanley has largely left its Archegos positions by Friday, March 26, with the exception of one stake: 45 million shares of ViacomCBS, which according to the population were bought to customers on Sunday. The bank’s belated sale of Viacom shares has sparked questions and speculation that it was holding on to the stock because it wanted a secondary offer from Morgan Stanley to close the week before.

Although some of its hedge fund clients are less enthusiastic, Morgan Stanley is unlikely to lose them because of the Archegos episode, people said.

That’s because the funds want access to hot IPO stocks that Morgan Stanley can hand out as the top banker in the U.S. tech industry, they said.

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Robert Dunfee