The night before the Archegos Capital story came to light late last month, the fund’s biggest major broker quietly dumped some of its risk positions to hedge funds, people with knowledge of the operations told CNBC. .
Morgan Stanley sold about $ 5 billion worth of Archegos’ doomed gamblers to American media and Chinese tech names to a small group of hedge funds late Thursday, March 25, according to the people, who requested anonymity to speak frankly about the transaction.
It’s a previously unreported detail that shows the extraordinary steps some banks took to protect themselves from incurring losses from a customer collapse. The measures benefited Morgan Stanley, the world’s largest stock trading store, and its shareholders. Although the bank escaped the episode without material losses, other companies were less fortunate. Credit Suisse said Tuesday it took a hit of $ 4.7 billion after shedding Archegos’ lost positions; the company also cut its dividends and halted share buybacks.
Morgan Stanley had the consent of Archegos, led by former Tiger Management analyst Bill Hwang, to compare its actions Thursday night, these people said. The bank offered the shares at a discount, telling the hedge funds they were part of a margin call that could prevent an unidentified client from collapsing.
But the investment bank had information it did not share with share buyers: The basket of stocks it was selling, made up of about eight names, including Baidu and Tencent Music, was simply the opening salvo in an unprecedented wave of tens of thousands. of millions of dollars. dollars in sales from Morgan Stanley and other investment banks as of the next day.
Some of the clients felt betrayed by Morgan Stanley because they did not receive that crucial context, according to one of the people familiar with the trades. Hedge funds later learned in news reports that Hwang and his top brokers met Thursday night to attempt an orderly liquidation of their positions, a difficult task considering the risk of word getting out.
That means that at least some Morgan Stanley bankers knew the extent of the sale that was likely and that Hwang’s company was unlikely to be saved, these people argue. That knowledge helped Morgan Stanley and its rival Goldman Sachs avoid losses as the firms quickly dumped shares linked to Archegos. Morgan Stanley and Goldman declined to comment for this story.
Morgan Stanley was the largest holder of the top ten stocks traded by Archegos at the end of 2020 with about $ 18 billion in positions overall, according to an analysis of submissions from market participants. Credit Suisse was the second most exposed at around $ 10 billion, these sources noted. That means Morgan Stanley could have faced roughly $ 10 billion in losses had it not acted quickly.
“I think it was an ‘oh s —‘ moment where Morgan was considering potential losses of $ 10 billion on his book alone, and they had to move risk quickly,” the person with knowledge said.
While Goldman’s sale of $ 10.5 billion in Archegos-related stock on Friday, March 26, was widely reported after the bank emailed a broad list of clients, Morgan Stanley’s move the night before was not reported. so far because the bank handled less than half. -Dozen hedge funds, allowing transactions to remain hidden.
Clients, a sub-genre of hedge funds sometimes referred to as “equity markets strategies,” generally have no opinions on the merits of individual stocks. Instead, they will buy blocks of stocks from big top brokers like Morgan Stanley and others when the discount is deep enough, usually to roll back over time.
After Morgan Stanley and Goldman sold the first blocks of shares with Archegos’ consent, the floodgates opened. Major brokers, including Morgan Stanley and Credit Suisse, exercised their rights in the event of default, confiscating the company’s collateral and selling positions on Friday, according to sources.
In a wild session for stocks that Friday in late March, another twist occurred: Some of the hedge fund investors who had participated in Thursday’s sales also bought more Goldman stock, which then hit the market at prices that they were 5% to 20%. below Morgan Stanley sales. While these positions were deeply submerged that day, several names, including Baidu and Tencent, rallied, allowing hedge funds to unload positions for profit.
“It was a gigantic group of five different banks trying to get rid of billions of dollars in risk at the same time, without talking to each other, negotiating where prices were advantageous to them,” said an industry source.
Morgan Stanley largely ditched its positions in Archegos on Friday, March 26, with the exception of one stake: 45 million ViacomCBS shares, which it bought from clients on Sunday, according to the people. The bank’s delayed divestiture of Viacom shares has prompted questions and speculation that it held onto the shares because it wanted a secondary offering led by Morgan Stanley to close the week before.
Although some of its hedge fund clients are less excited, Morgan Stanley is not likely to lose them to the Archegos episode, the people said.
That’s because the funds want access to hot IPO shares that Morgan Stanley, as the top banker in America’s tech industry, can distribute, they said.