Morgan Stanley dumped $5 billion in Archegos’ shares earlier than hearth sale

The night time earlier than the Archegos Capital story burst into public view late final month, the fund’s greatest prime dealer quietly unloaded a few of its dangerous positions to hedge funds, folks with data of the trades advised CNBC.

Morgan Stanley offered about $5 billion in shares from Archegos’ doomed bets on U.S. media and Chinese language tech names to a small group of hedge funds late Thursday, March 25, based on the folks, who requested anonymity to talk frankly in regards to the transaction.

It is a beforehand unreported element that reveals the extraordinary steps some banks took to guard themselves from incurring losses from a consumer’s meltdown. The strikes benefited Morgan Stanley, the world’s greatest equities buying and selling store, and its shareholders. Whereas the financial institution escaped from the episode with out materials losses, different corporations had been much less lucky. Credit score Suisse mentioned Tuesday that it took a $4.7 billion hit after unwinding dropping Archegos positions; the agency additionally reduce its dividend and halted share buybacks.

Morgan Stanley had the consent of Archegos, run by former Tiger Administration analyst Invoice Hwang, to buy round its inventory late Thursday, these folks mentioned. The financial institution provided the shares at a reduction, telling the hedge funds that they had been a part of a margin name that might stop the collapse of an unnamed consumer.

Signage is displayed exterior Morgan Stanley & Co. headquarters within the Instances Sq. neighborhood of New York.

Michael Nagle | Bloomberg | Getty Pictures

However the funding financial institution had data it did not share with the inventory patrons: The basket of shares it was promoting, comprised of eight or so names together with Baidu and Tencent Music, was merely the opening salvo of an unprecedented wave of tens of billions of {dollars} in gross sales by Morgan Stanley and different funding banks beginning the very subsequent day.

Among the purchasers felt betrayed by Morgan Stanley as a result of they did not obtain that essential context, based on one of many folks aware of the trades. The hedge funds realized later in press reviews that Hwang and his prime brokers convened Thursday night time to aim an orderly unwind of his positions, a troublesome process contemplating the danger that phrase would get out.

That implies that a minimum of some bankers at Morgan Stanley knew the extent of the promoting that was probably and that Hwang’s agency was unlikely to be saved, these folks contend. That data helped Morgan Stanley and rival Goldman Sachs keep away from losses as a result of the corporations shortly disposed of shares tied to Archegos. Morgan Stanley and Goldman declined to remark for this text.

Morgan Stanley was the largest holder of the highest ten shares traded by Archegos on the finish of 2020 with about $18 billion in positions general, based on an evaluation of filings by market individuals. Credit score Suisse was the second most uncovered with about $10 billion, these sources famous. That implies that Morgan Stanley may’ve confronted roughly $10 billion in losses had it not acted shortly.

“I believe it was an ‘oh s—‘ second the place Morgan was taking a look at doubtlessly $10 billion in losses on their ebook alone, and so they needed to transfer threat quick,” the individual with data mentioned.

Whereas Goldman’s sale of $10.5 billion in Archegos-related inventory on Friday, March 26 was extensively reported after the financial institution blasted emails to a broad listing of purchasers, Morgan Stanley’s transfer the night time earlier than went unreported till now as a result of the financial institution handled fewer than a half-dozen hedge funds, permitting the transactions to stay hidden.

The purchasers, a subgenre of hedge funds typically dubbed “fairness capital markets methods,” usually do not have views on the deserves of particular person shares. As an alternative, they’re going to buy blocks of inventory from large prime brokers like Morgan Stanley and others when the low cost is deep sufficient, often to unwind the trades over time.

After Morgan Stanley and Goldman offered the primary blocks of shares with the consent of Archegos, the floodgates opened. Prime brokers together with Morgan Stanley and Credit score Suisse then exercised their rights below default, seizing the agency’s collateral and promoting off positions on Friday, based on the sources.

In a wild session for shares on that Friday in late March got here one other twist: Among the hedge fund traders who had participated within the Thursday gross sales additionally purchased extra inventory from Goldman, which got here later to market at costs that had been 5% to twenty% under the Morgan Stanley gross sales. Whereas these positions had been deeply underwater that day, a number of names together with Baidu and Tencent rebounded, permitting hedge funds to unload positions for a revenue.

“It was a huge clusterf— of 5 totally different banks attempting to unwind billions of {dollars} in danger on the similar time, not speaking to one another, buying and selling at wherever costs had been advantageous to themselves,” one trade supply mentioned.

Morgan Stanley largely exited its Archegos positions by Friday, March 26 apart from one holding: 45 million shares of ViacomCBS, which it shopped to purchasers on Sunday, based on the folks. The financial institution’s delayed disposal of Viacom shares has sparked questions and hypothesis that it held onto the inventory as a result of it needed a secondary providing run by Morgan Stanley the week earlier than to shut.

Regardless of leaving a few of its hedge fund purchasers feeling less-than-thrilled, Morgan Stanley is not more likely to lose them over the Archegos episode, the folks mentioned.

That is as a result of the funds need entry to shares of sizzling preliminary public choices that Morgan Stanley, as the highest banker to the U.S. tech trade, can dole out, they mentioned.

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