Hedge fund failure slams Credit Suisse, Nomura and other banks

(CNN Business) Major global banks could be hit with billions of dollars in losses after US investment firm Archegos Capital was forced to dump shares last week when it got into financial trouble.

Nomura (NMR) and Credit Suisse (CS) said Monday that earnings might take "significant" hits after a client of their broking services defaulted on margin calls last week, roiling Wall Street. Shares in both banks plunged on Monday, wiping billions of dollars off their market capitalization.

A margin call by a broker requires a client to add funds to its account if the value drops below an agreed level. If it can't, the broker can dump the client's shares and liquidate its holdings to makeup the shortfall.

Neither bank identified the client that defaulted on the margin calls. But a person familiar with the matter told CNN Business that New York-based Archegos was the firm causing losses for Credit Suisse. A spokesperson for the Swiss bank declined to comment.

Bloomberg and other media outlets previously reported that losses at Japan's Nomura were triggered by Archegos, which was founded by Bill Hwang, a former Tiger Asia trader and protégé of hedge fund pioneer Julian Robertson.

"This is a challenging time for the family office of Archegos Capital Management, our partners and employees," a spokesperson for Archegos said on Tuesday. "All plans are being discussed as Mr. Hwang and the team determine the best path forward."

Shares in other investment banks, such as Goldman Sachs (GS), Morgan Stanley (MS) and Deutsche Bank (DB) also fell Monday. Goldman Sachs and Deutsche Bank declined to comment. Morgan Stanley could not be reached for comment.

A source familiar with the situation told CNN Business that Deutsche's exposure to Archegos was a fraction of that reported by other banks. The financial impact for Goldman Sachs, another lender to Archegos, was immaterial because the bank proactively managed its risk by seizing collateral and selling shares on Friday, another person familiar with the matter told CNN Business.

On Tuesday, Japan's Mitsubishi UFJ Securities (MBFJF) said in a statement that it was expecting a loss of about $300 million "in relation to a US client." It did not name the client.

Wall Street regulators are paying attention.

"We have been monitoring the situation and communicating with market participants since last week," said a spokesperson for the Securities and Exchange Commission.

US media stocks hit

On its LinkedIn profile page, Archegos Capital Management says it is a family investment office specializing in public equities primarily in the United States, China, Japan and Korea, employing "a disciplined, research-driven approach to fundamental stock selection, while taking a multi-year approach to investing."

According to Bloomberg, which cited anonymous sources, ViacomCBS (VIACA) and Discovery (DISCA) were among the companies hit by the forced liquidation of Hwang's positions: Shares of each plunged more than 25% on Friday.

Credit Suisse said in a statement that a "significant US-based hedge fund" failed to meet its margin commitments. It said the default affected "certain other banks" as well, though did not name them.

"Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions," Credit Suisse said.

"While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first quarter results," the bank added.

Nomura said its losses could be as much as $2 billion, attributing the hit to "transactions with a US client." Asked for further detail, the company declined to comment to CNN Business.

"Nomura is currently evaluating the extent of the possible loss and the impact it could have on its consolidated financial results," the company said in a statement, adding that its estimate was calculated based on market prices that day.

"Given that this is a net rather than gross exposure, we believe it almost certainly means Nomura will recognize a bottom-line loss in its fiscal fourth quarter ending March 31," Michael Makdad, a senior equity analyst at Morningstar in Tokyo, said in a note on Monday.

Nomura's shares plunged more than 16% in Tokyo, the stock's worst day in at least 20 years. The move wiped more than $3 billion off its market value. Credit Suisse shares fell by 16% in early trading, wiping about $5 billion off its market cap.

— Rob North, Charles Riley, Michelle Toh and Laura He contributed to this article.