Bill Hwang, founder of Tiger Asia Management LLC, is leaving federal court in Newark, New Jersey, USA, on December 12, 2012.
Emile Warnsteker | Bloomberg | Getty Images
Morgan Stanley posted first-quarter blockbuster results, but a single prime brokerage client cost the company nearly $ 1 billion.
The company had a loss of $ 644 million as a result of a “credit event” for that client, as well as $ 267 million in related trade losses, the New York-based bank said Friday in earnings results that far exceeded expectations for the quarter.
That client was Bill Hwang’s Archegos, according to a person with direct knowledge of the case, who added that the bank had lost exposure to the fund’s collapse.
During his scheduled call with analysts to discuss the quarter, Morgan Stanley CEO James Gorman confirmed that the client was Archegos and said the fund owed it $ 644 million following its late March collapse.
“We liquidated some very large individual stock positions through a series of block sales that culminated on Sunday evening, March 28,” said Gorman. “That resulted in a net loss of $ 644 million, which is the amount the customer owed us for the transactions they failed to pay us.”
He added, “We then made a management decision to fully reduce the risk of the remaining smaller long and short positions,” said Gorman. “We decided that we would get out of risk as soon as possible, and as a result we incurred an incremental loss of $ 267 million. I see that decision as necessary and the money well spent.”
At least part of Archegos’s loss was caused by Morgan Stanley having been an underwriter on ViacomCBS stock the previous week, so it delayed the sale of a block of the company’s stock until Sunday, causing the bank to later would sell. than others, Gorman said.
Later, an analyst asked Gorman if the episode would change their approach to risk management in the prime brokerage business.
“I think we will definitely look closely at family office type relationships where they are very concentrated and you have multiple prime brokers, and frankly the transparency and lack of disclosure regarding those institutions is just different from the hedge fund institutions. , ”Said Gorman. “That’s something I’m sure the SEC will look into, and it’s probably good for the entire industry.”
With help from CNBC’s Dawn Giel.