Margin call at hedge fund hits banks, prompts contagion fears

Stock markets were weighed down by fears that there could be more to come after a Wall Street hedge fund dragged down two well known investment banks with bad bets that went wrong.

On Friday, a number of Chinese technology companies with shares owned by N.Y. hedge fund Archegos Capital sold off heavily. The reason for that selling pressure was a so called margin call by the fund’s lenders. Margin calls happen when brokers tell a client to put up cash after they borrow over a certain threshold to make trades.

The hedge fund did not put up cash, so the trades were made to sell stocks and get cash to get back below an acceptable level.

The lost market value in stocks affected came it at around $35 billion on Friday, including U.S. media companies ViacomCBS, and Discovery, which both lost about 15 per cent of their value.

Monday began with fears that there could be more forced selling, but nearing the end of the trading day, most of the losses were limited to a handful of financial names.

Japanese bank Nomura and European bank Credit Suisse were facing billions of dollars in losses due to dealings with an unnamed client.

Nomura estimated the claim against its client could be about $2 billion.

Credit Suisse said that it “and a number of other banks” are exiting trades they made with a U.S.-based hedge fund, which it also declined to name.

Shares of Credit Suisse and Nomura each fell at least 16 per cent in their home countries, and U.S. banks got caught in the downdraft as investors question whether the soured trades will stay isolated or have a more widespread effect through the system.

“This is sort of an example of the leverage you don’t see,” Martin said. “We all know there’s a fair amount of debt out there, but what we don’t know is how much of this is out there.”

Shares of Morgan Stanley were down 2.5 percent after the Financial Times reported it had also sold billions of shares.  “There’s still chatter as to whether or not, and which, American banks may be affected. That is a question that’s lurking. But so far the market has taken (the news) in stride essentially,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.

Wall Street’s fear gauge, the VIX, rose. “It’s high, which indicates people are nervous, but it’s not panicky,” said Tom Martin, senior portfolio manager with Globalt Investments. 


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