Caixin
Jul 30, 2021 07:43 PM
BUSINESS

Incompetence Caused Archegos Bust That Wiped Billions From Chinese Edtech Firms, Credit Suisse Probe Reveals

Credit Suisse’s offices in New York on March 29. Photo: VCG
Credit Suisse’s offices in New York on March 29. Photo: VCG

Credit Suisse Group AG said incompetence and management failures were behind the Swiss investment bank’s $5.5 billion loss on U.S. private wealth manager Archegos Capital Management, which collapsed in March and triggered a sell-off that wiped billions from the value of various Chinese education and technology firms.

A report published on Tuesday following a three-month investigation of the crisis that also hit Nomura Holdings Inc. and Morgan Stanley said Credit Suisse “was focused on maximizing short-term profits and failed to rein in and, indeed, enabled Archegos’s voracious risk-taking.”

Archegos, the family office of high profile investor Bill Hwang, had significant positions in companies including GSX Techedu Inc., Tencent Music Entertainment Group, Vipshop Holdings Ltd. and Baidu Inc. that were held in total return swaps, which essentially allowed the firm to make large bets on price movements without owning the underlying securities or disclosing their positions.

A sudden wave of block trades triggered by Archegos’ margin call defaults on March 26 caused the stocks of numerous Chinese tech giants and U.S. media conglomerates to plunge, including a 41.6% dive in New York-listed education technology company GSX Techedu.

Other Chinese edtech firms, including TAL Education Group and New Oriental Education & Technology Group Inc., fell by 7.44% and 11.12% respectively on March 29. The frantic offloads of Baidu and Tencent Music shares resulted in slides as much as 33.5% and 48.5%, according to Reuters.

 Read more  

Billions in Secret Derivatives at Center of Archegos’ $20 Billion Blowup

The report’s release comes as shares of Chinese education firms collapsed last week in New York after the Chinese government issued sweeping new regulations to restrict after-school tutoring services, including bans on IPOs and foreign investments.

The report also revealed that Credit Suisse had transferred billions of dollars to Archegos in the weeks before it collapsed.

“From March 11 through March 19, Archegos called $2.4 billion in excess margin from Credit Suisse, though each call was for less than Archegos was technically entitled to request based on current variation margin calculations,” it said.

Nonetheless, the investigation, which Credit Suisse commissioned, concluded that there had not been “fraudulent or illegal conduct” from the bank’s side and its employees. The bank said it had conducted a detailed review on de-risking and improving limit monitoring and control processes.

Contact reporter Kelsey Cheng (kelseycheng@caixin.com) and editor Flynn Murphy (flynnmurphy@caixin.com)

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