People familiar with the matter told CNBC that at the end of last month, on the eve of the Archegos Capital story being exposed to the public, the fund’s largest broker quietly sold some of its risky positions to hedge funds.
According to people familiar with the matter, Morgan Stanley sold about $5 billion in stock to a handful of hedge funds from Archegos’ doomed bets on American media and Chinese technology companies late on Thursday, March 25.
This is a detail that has not been reported before and shows the special steps that some banks have taken to protect themselves from the losses incurred by the collapse of their customers. This move benefits Morgan Stanley and its shareholders, the world̵
People familiar with the matter said Morgan Stanley agreed to buy back shares of Archegos, run by former Tiger Management analyst Bill Hwang, on Thursday night. The bank offered shares at a discount and told hedge funds that this was part of the margin call to prevent unnamed customers from going bankrupt.
However, the investment bank has information that is not shared with stock buyers: the basket of stocks it sells (including Baidu and Tencent Music) consists of about eight stocks, which is just the beginning of an unprecedented wave of tens of billions of dollars. . From the second day on, sales of Morgan Stanley and other investment banks reached $1.
A person familiar with the transaction said that some customers felt betrayed by Morgan Stanley because they did not receive key background information. Hedge funds later learned in news reports that Huang and his main agent held a meeting on Thursday night to try to undo his position in an orderly manner. Considering the risk of this news being withdrawn, this is a difficult task. .
These people argue that this means that at least some bankers at Morgan Stanley know the possibility of a sale, and Huang’s company is unlikely to be saved. This knowledge helped Morgan Stanley and rival Goldman Sachs avoid losses because the two companies quickly disposed of shares linked to Archegos. Morgan Stanley and Goldman Sachs declined to comment for this article.
According to the analysis of market participants’ documents, Morgan Stanley is the largest holder of the top ten stocks traded by Archegos at the end of 2020, with a total holdings of approximately US$18 billion. These sources pointed out that Credit Suisse (Credit Suisse) is the second largest risk exposure, with assets of approximately US$10 billion. This means that if action is not taken quickly, Morgan Stanley may suffer losses of approximately $10 billion.
A person familiar with the matter said: “I think this is an’oh-‘ moment. Morgan lost about $10 billion on the books alone, and they had to transfer the risk quickly.”
Although Goldman Sachs sold shares related to Archegos for $10.5 billion on Friday, it was reported that after the bank sent emails to a large number of customers, the transaction on March 26 was widely reported, but Morgan Stanley (Morgan Stanley) One night’s move has not been reported so far because the bank processed less than half of the six hedge funds, keeping the transactions hidden.
Clients are a sub-category of hedge funds, sometimes referred to as “equity capital market strategies,” and they usually have no idea about the advantages and disadvantages of individual stocks. Instead, when the discount is large enough, they will buy stocks from major major brokers such as Morgan Stanley, and usually close their positions over time.
After obtaining Archegos’s consent, Morgan Stanley and Goldman Sachs sold the first batch of shares, and the floodgates opened. Sources said that major brokers including Morgan Stanley and Credit Suisse subsequently exercised their default rights, seized the company’s collateral and sold positions on Friday.
In the frantic trading on that Friday in late March, another change occurred: some hedge fund investors who participated in the Thursday sale also bought more stocks from Goldman Sachs, and later listed at 5% to 20% Morgan Stanley’s sales. When these positions fell deep that day, several stocks such as Baidu and Tencent bounced back, allowing hedge funds to sell their positions to make a profit.
An industry source said: “This is a huge cluster where five different banks are trying to release billions of dollars of risk at the same time, instead of talking to each other to trade in favor of their own prices.”
People familiar with the matter said that Morgan Stanley basically withdrew from the Archegos position before Friday, March 26, except for its holdings: 45 million Viacom CBS shares, which it bought from customers on Sunday. The bank’s delay in selling Viacom’s shares sparked skepticism and speculation. The company held the shares because it wanted to issue a second offering a week before Morgan Stanley closed.
People familiar with the matter said that although some hedge fund clients feel less excited, Morgan Stanley is unlikely to lose them in the Archegos incident.
They say this is because these funds want to get stocks in popular initial public offerings, and Morgan Stanley, the top banker in the US technology industry, can come up with these stocks.