Bank stocks drop on hedge fund fears; Deutsche extends Sewing’s contract

Receiving Wide Coverage ...

Fears on Wall Street

Financial stocks led the broader market down on Monday after Credit Suisse and Nomura Holdings said they faced big losses on loans to a large hedge fund client, Bill Hwang’s Archegos Capital Management, who was forced to sell $30 billion in stocks last week, “triggering concern that global banks that dealt with the firm could face sharp losses.” Nomura dropped 16% while Credit Suisse fell 14%. Elsewhere, Deutsche Bank lost 3.3% and Morgan Stanley shed 2.6%. Other large U.S. banks lost between 2% and 3% “as investors grew worried that more financial intermediaries may struggle to recoup money lent to this client,” the Wall Street Journal said. Wall Street Journal, Financial Times

“Profits at Nomura, Japan’s largest investment bank, could be wiped out for the second half of the financial year, while Credit Suisse said on Monday that the wave of selling may have a ‘highly significant and material’ impact on its first-quarter results,” the Financial Times said.

“As markets around the world digested the shock announcements, bankers and investors were left scrambling to answer a series of questions,” the FT said. “Why had banks bent over backwards to deal with a hedge fund manager with such a checkered history? How had Archegos managed to stay largely beneath the radar despite amassing large positions in blue-chip names? And what will be the regulatory fallout from the debacle?”

“It’s the latest sign of the fragility of the global markets, and could spur more attention from regulators on the murky world of swaps and investor borrowing,” the New York Times commented.

“The huge sell-off of stocks linked to Archegos Capital Management also raised questions about how and why some of the biggest Wall Street banks were willing to do business with someone who, less than a decade ago, was fined and penalized by securities regulators,” the Times added. It “exposes banks to billions of dollars in losses and highlights yet again the potential of individual players to hobble an intricately connected but largely opaque financial system.”

After earning “bumper profits” last year, “this year some unexpected bills are turning up” for investment banks, as the Archegos Capital Management debacle reveals, the Journal said. “Investors should brace for a wider fallout as it is unclear if all of Archegos’ positions have yet been unwound.”

“The losses come just weeks after many global banks announced full-year results boosted by billions of dollars in earnings from investment banks capitalizing on last year’s market volatility. The news is a reminder that there is lingering risk associated with those outsize gains. As the 2008 financial crisis made clear, costs in banking can come long after profits are booked and celebrated.”

Burden of proof

The Supreme Court heard oral arguments Monday on “whether Goldman Sachs’s generic assertions of corporate ethics and integrity, undermined when the company’s role in the 2008 financial crisis was revealed, could expose it to a shareholder class action over false statements,” the Journal reported.

“Investors in Goldman, led by the Arkansas Teacher Retirement System, sued the Wall Street firm in 2011, alleging that it had propped up its stock price by falsely asserting its safeguards would prevent conflicts of interest while the firm was actually working against its clients. The case has traveled up and down the court system since, and at one point it appeared the justices might rule on whether general statements like Goldman’s assertion of ethical conduct could be actionable at all.”

Several justices on a “frustrated” Supreme Court “indicated puzzlement about what they were meant to do in light of both parties seeming to agree about the governing legal standard,” the New York Times said. “The case was brought by pension funds that said they had lost as much as $13 billion as a consequence of what they called false statements about the investment bank’s sales of complex debt instruments before the 2008 financial crisis.”

Wall Street Journal

Bucking the odds

“Bankruptcy filings by consumers under chapter 7 were down 22% last year compared with 2019, while individual filings under chapter 13 fell 46%, as government aid propped up income and staved off housing and student-loan obligations. The downward trend in personal bankruptcies bucks predictions by analysts and economists that disruptions from Covid-19 lockdowns and restrictions early in the pandemic would lead to a sharp increase in filings.”

“By contrast, commercial bankruptcy filings rose 29%, with more than 7,100 businesses seeking chapter 11 protection last year.”

Financial Times

Vote of confidence

Deutsche Bank has extended CEO Christian Sewing’s contract for another five years, until 2026. “Under Sewing, the Frankfurt-based lender has embarked on the most radical restructuring in decades as it ditched equities trading, earmarked a sizeable chunk of its balance sheet for divestment and pledged 18,000 job cuts by 2022. Shares in Deutsche have increased more than 50% since the restructuring was unveiled in July 2019. Sewing earlier this month came under criticism from unions after he received a 46% pay increase last year, to €7.4 million, on the back of a pandemic-led trading boom.”

Quotable

“At the end of the day we’ve proven we can work in a hybrid situation. We can work from home. There’s got to be the balance.” — Sara Wechter, Citigroup’s global head of human resources, on the company’s plan to label each job in the company as “resident,” “remote” or “hybrid,” with the vast majority falling into the last category.