Bill Hwang in 2012
Emile Warnsteker | Bloomberg | Getty Images
Morgan Stanley posted blockbuster results in the first quarter, but a single prime brokerage client cost the company nearly $ 1 billion.
In its earnings results, Morgan Stanley said Friday that it had a loss of $ 644 million from a “credit event” to that customer and $ 267 million in related trading losses.
That client was Bill Hwang’s Archegos, Morgan Stanley CEO James Gorman said during a conference call with analysts, confirming what a person with knowledge of the situation had previously told CNBC.
While Morgan Stanley was Archegos’ largest prime broker, other banks suffered greater losses. Credit Suisse, which CNBC has reported to be Archegos’ second largest broker, scored a $ 4.7 billion hit to handle the losing bets and shuffled top executives due to the breakdown. Nomura said there could be losses of $ 2 billion.
During his scheduled interview with analysts to discuss the quarter, Gorman said Archegos owed him $ 644 million after its collapse in late March.
“We liquidated some very large single stock positions through a series of block sales that culminated on Sunday evening, March 28,” said Gorman. “This resulted in a net loss of $ 644 million, which is the amount the customer owed us on the transactions they failed to pay us.”
He added, “We then made a management decision to fully compromise the remaining smaller long and short positions,” said Gorman. “We decided to get out of the risk as quickly as possible, incurring an additional loss of $ 267 million. I think this decision is necessary and the money is well spent.”
Morgan Stanley may have been misled by the family office, CFO Jon Pruzan said during the call. The bank held collateral for Archegos based on facts that were found to be untrue, he said.
Archegos representatives could not be immediately found for comment. The former communications company said it no longer represents the family office.
At least part of the Archegos loss was due to the fact that Morgan Stanley had been an underwriter for ViacomCBS stock for the past week. As a result, he withheld selling a block of the company’s stock until Sunday, causing the bank to sell later than others, Gorman said.
During the call, an analyst asked Gorman if the episode would change the company’s approach to risk management in the prime brokerage business.
“I think we will certainly look deeply into family office relationships where they are very concentrated and you have multiple prime brokers. In all honesty, the transparency and lack of disclosure regarding these institutions is only different from hedge funds “said Gorman. “I’m sure the SEC will look into this, and that’s probably good for the industry as a whole.”
– CNBC’s Dawn Giel contributed to this report.