Archegos Capital Management, a private investment firm based in New York, resorted to a huge fire sale of stocks worth $20 billion.
This had caused widespread fears in the global financial market, reminding of the ‘Lehman crisis.’
What is the sell-off all about?
Archegos Capital Management is a private investment firm based in New York.
Archegos was founded by Bill Hwang.
He founded and ran Tiger Asia from 2001 to 2012, when he renamed it Archegos Capital and made it a family office.
Tiger Asia was a Hong Kong-based fund.
Archegos Capital Management recently resorted to a huge fire sale of stocks worth $20 billion.
The fund had large exposures to Viacom CBS and several Chinese technology stocks.
It was hit hard after shares of Viacom CBS (US media group) began to tumble.
The decline in stock prices prompted a margin call from one of Archegos’s prime brokers.
This triggered similar demands for cash from other banks.
Traders were braced for further block sell-offs in stocks associated with Archegos and other funds that could also be forced to unwind heavily leveraged positions.
What is a margin call?
Typically, a margin call occurs when the value of an investor’s margin account falls below the broker’s required amount during a market correction or sell-off.
The margin account contains securities bought with borrowed money.
A margin call is usually an indicator that the securities held in the margin account has decreased in value.
So, lenders demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value.
The investor must thus choose to either deposit more money in the account or sell some of the assets held in their account.
If the investor fails to pay up the margin amount, the lender will resort to sale of assets lying in the investor’s account.
The huge margin call on Archegos was the major driver behind the recent steep sell-off and the subsequent hits to several global bank balance sheets.
What is the impact of the sale?
The sale caused big drops in the share prices of companies linked to the investment firm.
This has put markets on the edge about the scale of the possible fallout, raising fears of a possible “Lehman moment”.
The ‘Lehman crisis’ is associated with the bankruptcy of the giant Lehman Brothers Holdings, a global financial services firm in the U.S.
This happened in September 2008.
This was the biggest ever bankruptcy, that triggered a wave of bailout measures from the Federal Reserve and the US Treasury to save the economic structure.
In that case, the event would force multiple lenders - mainly Credit Suisse and Nomura - to suffer huge losses.
The problems at Nomura and Credit Suisse is possibly related to being slower in offloading share blocks into the market compared with their peers.
Nomura said that it faced a possible $2 billion loss due to transactions with a US client.
Credit Suisse said a default on margin calls by a US-based fund could be “highly significant and material” to its first-quarter results.
Credit Suisse is estimated to have lost between $3 bn and $4 bn.
