Tetris

The prospect of “significant losses” tied to soured positions at the heart of a margin call on Tiger Cub Bill Hwang pressured shares of Nomura and Credit Suisse Monday.

In a brief “trading update,” Credit Suisse appeared to suggest the unwind may have further to go.

“A significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” the update said, adding that,

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. 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, notwithstanding the positive trends announced in our trading statement earlier this month. We intend to provide an update on this matter in due course.

Apparently, Hwang’s total positions may have been at least $50 billion. His assets, meanwhile, were somewhere between $5 billion and $10 billion, according to estimates from market participants.

The leverage came courtesy of swaps, so the positions didn’t show up in any filings for Archegos, Hwang’s family office. That’s an issue if you’re a fan of transparency.

“Swaps fall in a grey area when it comes to 13F reporting. Furthermore, since the counter-party to the swaps is likely the prime broker holding the shares in street name, these liquidation blocks did not hit the tape as a single transaction,” JonesTrading’s Mike O’Rourke said. “The prime brokers are serving as a straw man that allow a major position to be amassed, held and liquidated.”

Credit Suisse tumbled more than 13% Monday (figure below).

For its part, Nomura said it’s “currently evaluating the extent of the possible loss and the impact it could have on its consolidated financial results.” In an update of its own, the bank said “the estimated amount of the claim against the client is approximately $2 billion.”

Obviously, that’s a moving target. It could change “depending on unwinding of the transactions and fluctuations in market prices,” the bank added.

Japan’s financial regulator indicated it may eventually chat with Nomura’s risk management department. The bank should focus on dealing with the aftermath of the matter appropriately, a Financial Services Agency official told reporters. The FSA said Nomura still had positions to unwind.

The shares fell a record 16% (figure below).

“For Credit Suisse, the blow is particularly difficult given the bank still faces considerable uncertainty regarding a possible financial hit related to [Lex Greensill’s trade finance empire] and the reputational damage sustained over the past year following a spying scandal,” Bloomberg wrote, adding that “even before that incident, the firm had contended with a large write down on its stake in hedge fund York Capital, a hit related to a long-standing legal case into residential mortgage-backed securities and incidents of surveillance into former executives.”

S&P Global Ratings reckons Nomura can “absorb the pain of a possible $2 billion loss.” “We also believe that the loss will not have an immediate negative impact on the group’s creditworthiness,” S&P said Monday, continuing as follows:

However, we need to keep monitoring the group’s risk management system, which is part of the basis of our evaluation of the group’s creditworthiness. Meanwhile, we will review the Nomura group’s risk management system from the viewpoint of credit concentration and validity of hedging, if the loss arises from a single client. Our current assessments of the group’s business position and risk position are both moderate. These assessments for the ratings on the group have already incorporated a certain level of expected volatility on its earnings.

“It’s essential to realize this is not a move inspired by economic fundamentals; instead, it’s an isolated case of poor risk management and will ultimately have few if any lasting macroeconomic implications,” AxiCorp’s Stephen Innes wrote Monday.

It’s conceivable that, depending on the scope of the fallout, opportunistic lawmakers in Washington could attempt to capitalize on the debacle. After all, anything that can be couched in terms of transparency (or a lack thereof) on Wall Street is amenable to political grandstanding, especially when it involves hedge funds. We’ve gone from “Roaring Kitty” to Tiger Cubs gone wild in the space of two months.

Deutsche Bank reportedly had some exposure but hasn’t suffered losses. Goldman, which was at the heart of the block trades last week, told clients and shareholders that any losses the bank might incur would likely be immaterial. According to an unnamed source who spoke to Bloomberg, Goldman’s loans to Archegos were fully collateralized.

“Ironically, we suspect the reason the prime brokers were so aggressive and public in the marketing of the blocks was to bring visibility to the opaque situation, so the market would be well aware of the cleanup and the shares will be able to bounce,” JonesTrading’s O’Rourke went on to say. He also suggested that Friday’s late-day ramp in futures “was the primes reducing a market hedge they probably had in place while selling the equity positions.”

As the rest of these positions are unwound by banks, market participants may be in for at least another few days of Tetris — you know, playing with blocks.