The fallout from the exceptional losses on Friday may be way under-reported according to several major banks and huge announcements from global lenders about further losses connected to Archegos blowup. Many banks are warning the losses are shocking, far exceeding the normal market losses during any systemic financial crisis. The biggest threat the markets face from these shadowy dealings of global megabanks is actually increased regulations.
Tuesday morning. Mitsubishi Financial Group has just become the latest major bank to warn about losses tied to the Archegos blowup, reporting that $300MM might be at risk. Of course, that’s a paltry sum compared to the potential $2 billion claim reported by Nomura, Bloomberg.
MUFG’s securities arm said in a statement on Tuesday that it is evaluating the extent of the loss at its European subsidiary, which may change depending on market prices and the unwinding of transactions.
Mitsubishi UFJ Securities Holdings Co. said any loss won’t have a material impact on the firm’s business capability or financial soundness. A representative for the firm declined to comment beyond what it said in the statement.
Mitsubishi wasn’t among the prime brokers who met last week to try and manage the unwind of Archegos’s positions in a way that wouldn’t saddle them all with huge losses
JP Morgan says they’re surprised by the size of the Archegos losses, they far exceed the norm
JPMorgan bank analyst Kian Abouhossein admits he is quite “puzzled” by the recent fallout from the Archegos implosion (or maybe JPM simply was not a Prime Broker of the notorious Tiger cub), which however does not prevent him from trying to calculate the capital at risk from the Archegos collapse.
In a note published this morning, Kian writes after Nomura yesterday confirmed (at least) a $2Nn potential claim and fellow Japanese bank Mitsubishi UFJ Securities Holdings announcing today of another potential $300MM loss – which as the JPM strategist admits “for a likely non-material PB player is surprising to us” – JPMorgan now expects losses well beyond normal unwinding scenario for the industry: and explains that it now sees “the losses as very material in relation to lending exposure for a business that is mark-to-market and holds liquid collateral” and makes Nomura’s indication of potentially losing $2bn and press speculation of CSG $3-4bn losses “as not an unlikely outcome” according to the JPM strategist.
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So why is JPM surprised?
Because as Abouhossein writes, “in normal circumstances… we would have suspected industry losses of $2.5-5bn. We now suspect losses in the range of $5-10bn.” In other words, JPM has doubled its max loss estimate to as much as $10BN, a number which could yet rise.
To get there, JPM estimates that Archegos was highly leveraged at 5-8x (i.e. $50-80bn of exposure for $10bn of equity) – using Total Return Swaps and Certificates for Difference to lever up so massively as we discussed yesterday – and it was this use of equity-swaps tha “tincreased the inability of PBs to see the concentration risk in holdings within the hedge fund in question.”
Even so, Kian admits that he remains “puzzled why Credit Suisse (CSG) and Nomura have been unable to unwind all their positions at this point – as we would expect to get an announcement as soon as this is the case, on the scale of potential losses (especially in the case of CSG which hasn’t provided numerical impact)” although we have gotten some headlines suggesting the total loss could be as big as $7 billion.
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