Nomura, Credit Suisse Face 'Significant' Losses Following Hedge Fund's Default On Margin Calls

Shares in Nomura Holdings Inc. NMR and Credit Suisse Group AG CS were both down more than 10% Monday morning after the banks said they face the potential loss of billions of dollars due to a hedge fund's default on margin calls late last week.

What Happened: Nomura issued a trading update Monday that highlighted a "a significant loss arising from transactions with a U.S. client," adding that it is "currently evaluating the extent of the possible loss."

Credit Suisse issued a statement warning of a loss that "could be highly significant and material to our first quarter results."

Neither company publicly identified the client responsible for the mayhem, but multiple media sources have pegged the New York City-based hedge fund Archegos Capital Management LLC as the responsible party, adding that banks have liquidated more than $20 billion in holdings liked to this hedge fund.

Related Link: Who Was Behind Friday's Massive Block Trades?

Why It's Important: Hedge funds borrow money from banks for investing, which is known as margin trading.

If these investments run into problems, the banks typically require the hedge fund to ante up more money as collateral as a means of limiting losses — a process known as margin calls.

Archegos is the family office of Sung Kook "Bill" Hwang, a so-called "Tiger cub," as protégés of Julian Robertson's Tiger Management hedge fund are known.

In 2012, Hwang pleaded guilty to wire fraud in connection with illegal trading of two Chinese bank stocks when he was running the Tiger Asia Management hedge fund. Hwang and his head trader, Raymond Park, paid a total of $44 million to settle the criminal and civil charges. The settlement did not require an admission of wrongdoing.

The Financial Times reports that Archegos faced margin calls on its positions last week but could not provide the funds needed to cover the transaction, forcing banks to jettison the stocks held on Archegos' behalf.

As a result of this situation, banks including Goldman Sachs GS and Morgan Stanley MS sold off large volumes of shares in ViacomCBS VIAC, Discovery DISCA and the Chinese companies Baidu Inc. BIDU and Tencent Music TME, resulting in $20 billion in sales.

This digital equivalent of a fire sale came at the worst time for ViacomCBS and Discovery, which were among the stocks downgraded in a withering report by a Wells Fargo WFC analyst.

What Happens Next: Archegos's website was offline Monday morning. The website's mission statement defines the company as "a purposeful community of investment industry professionals whose goal is to be a model investment management firm consistently delivering industry leading returns while being recognized for our commitment to the professional growth of our team, and service to the wider community."

Benzinga reached out to Hwang via his LinkedIn page for comment on the story, but has yet to receive a response.

Bloomberg is reporting that Tencent Music Entertainment Group will execute a $1-billion share buyback, which represents 2.9% of the company's market value. The company's stock tumbled by nearly 20% on Friday after Goldman Sachs sold off shares in the company.

Related Link:The S&P 500 Soared Today. Here's Why.

Photo via iXimus/Pixabay.