Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks | Wolf Street

The implosion of an undisclosed hedge fund, now widely reported to be Archegos Capital Management, is hitting the stocks of banks that served as prime brokers to the fund. The highly leveraged derivative positions, based on stocks, had blown up spectacularly. Banks get into these risky leveraged deals because they generate enormous amounts of profit – until they blow up and banks get hit as counterparties.

Credit Suisse [CS] is down 13% at the moment in US trading after it warned this morning that “a significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” and that it and “a number of other banks are in the process of exiting these positions,” and that the loss resulting from this exit “could be highly significant and material to our first quarter results.” The bank deemed it “premature to quantify” the loss.

Nomura Holdings [NMR] is down 14% at the moment in US trading after it warned this morning that “an event occurred that could subject one of its US subsidiaries to a significant loss arising from transactions with a US client.” It estimated the loss from this one client at “approximately $2 billion, based on market prices as of March 26.”

The secretive nature of these trades had the effect that the prime brokers to the fund, such as Credit Suisse, didn’t know about the involvement of other prime brokers, such as Nomura, Deutsche Bank, and Goldman Sachs. And when the forced selling started, each prime broker wasn’t alone in unwinding the positions but was doing so against the other prime brokers trying to do the same thing.

Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks | Wolf Street