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Zurich, Denver After the collapse of Archegos Capital Management, politics have intervened. The incident, which resulted in billions in losses at big banks, “had everything a dangerous situation would need: a largely unregulated hedge fund, opaque derivatives, trading in shady private groups, high leverage and a trader. That the influential Democratic senator Elizabeth Warren, who called for more transparency regarding the role of hedge funds, escaped US securities regulators.
Supervisors “have to be able to rely more than luck if they want to avoid risks from the financial system,” said the former presidential candidate, who already earned a reputation as a “banking horror” during the financial crisis.
The SEC had called meetings with banking representatives on Monday. US President Joe Biden will also be regularly briefed on the case, his spokesman said. Politicians and supervisors want to point out that they will not simply dismiss events as individual cases. Both Biden and Warren and SEC Chief Designate Gary Gensler were shaped by the 2008 financial crisis, which helped clarify important roles.
Until the end of last week, Archegos remained a largely unknown family office that had struggled with high-risk bets on certain stocks and was unable to meet bank security requirements. It was one of the largest margin calls in Wall Street history. Since Hwang was unable to comply, the institutes sold their multi-million dollar stock blocks. That had pushed the prices of papers like ViacomCBS, Discovery and Chinese stocks Baidu and GSX down.
Meanwhile, analysts have significantly increased the potential damage to Archegos financiers. JP Morgan Chase, the largest bank in the United States, now estimates that the incident could cost between 5 and 10 billion dollars for the entire industry. Earlier this week there was talk of $ 2.5 billion to $ 5 billion. JP Morgan is one of the few large Wall Street houses that did not do business with the investor known for his gambling mentality.
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Credit Suisse im Fokus
Credit Suisse could incur particularly high losses. In addition to Goldman Sachs and Morgan Stanley, Wells Fargo announced Tuesday that it had sold blocks of shares in Hwang without significant losses. The Japanese bank Nomura estimates the losses at two billion dollars. The exact number of Swiss is not yet known. The two institutes apparently need much longer to sell the newspapers. It is not clear why this is so. “We are still surprised that Nomura and Credit Suisse have not yet closed all of their positions,” JP-Morgan analyst Kian Abouhossein said on Tuesday.
Rating agency Standard & Poor’s also intervened on Tuesday. The incident “raises questions about the quality of risk management, willingness to take risks and the appropriateness of the risk-return profile,” according to an agency report. He lowered his outlook to negative. This is seen as a sign that a downgrade could follow. Financial circles speak of losses of between one and four billion dollars. The crisis would have the potential to consume all of Credit Suisse’s earnings for the year.
That weighs on the share price: Credit Suisse’s shares fell four percent on Tuesday, after falling 14 percent on Monday.
Bondholder risk
Troubles threaten the Swiss in other areas as well: Analysts are now warning that the bank’s so-called leverage ratio could drop significantly as well. This would make the Archegos crisis a risk for some Credit Suisse bondholders as well.
The share capital index establishes the share capital in relation to the bank’s turnover, but without taking into account the risks of individual transactions. According to the company, the share capital ratio was 4.4 percent at the end of 2020. The legal minimum requirement is 3.5 percent.
But according to analysts at British bank NatWest, CS’s capital ratio fell to 3.9 percent at the beginning of the year due to a special regulatory effect. This means that the financial cushion for the minimum regulatory requirement is still around $ 3.5 billion. “Credit Suisse’s capital buffer is significantly smaller than it appears at first glance,” NatWest analysts conclude.
In the focus of financial supervision
Depending on how high Archegos’ loss is, the cushion on legal capital requirements could melt. Especially since CS is involved in another scandal with the Greensill case, the cost of which to the bank cannot yet be quantified.
In the extreme, the bank could be forced to suspend coupon payments on certain bonds that are converted to stocks in the event of a crisis. The prices of these so-called Credit Suisse Coco bonds have also fallen in the wake of the latest series of scandals.
Furthermore, Swiss financial regulator Finma has already verified whether Credit Suisse has to have additional capital ready due to its involvement in the Greensill scandal. With the series of bad news, it is increasingly uncertain whether the bank can carry out its 2021 share buyback program with a volume of 1.5 billion francs as planned.
NatWest analysts also expect Credit Suisse to halt the share buyback program or cut the dividend if Greensill or Archegos’ losses turn out to be too high. The bank will definitely want to avoid suspending coupon payments on Coco bonds, according to analysts at NatWest.
Credit Suisse had already closed the fourth quarter of 2020 with a significant loss. At the time, write-offs of a stake in a US hedge fund and additional provisions for a legal dispute over home loans had a negative impact on earnings. At the time it was still easy for Gottstein to dismiss this as a burden from the past.
The Greensill case and the now-known Archego collapse, however, put pressure on core areas of the bank, such as asset management and investment banking.
Plus: How things continue after US investor Archegos defaults.
