Fallout From Hedge Fund’s Defaults Spreads Through Markets: Live Updates
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Thomas Gottstein, who has been chief executive of Credit Suisse for about a year, is facing the second blow to the bank’s reputation and finances within a month.Credit…Ennio Leanza/EPA, via Shutterstock
Credit Suisse was in the middle of yet another international financial debacle on Monday after the Swiss bank warned that it faced “highly significant” losses from loans it made to a troubled New York hedge fund, Archegos Capital Management, to finance the hedge fund’s trades.
Credit Suisse is already grappling with losses from funds it managed for Greensill Capital, a SoftBank-backed financial firm that collapsed this month in London. The crisis involving Archegos is the second blow in less than a month to the reputation and finances of Credit Suisse and its chief executive, Thomas Gottstein, who has been in the post for about a year.
Mr. Gottstein succeeded Tidjane Thiam who was forced out by the bank’s board in February 2020 after another executive admitted to spying on employees. The swift departure of Mr. Thiam, who was born in the Ivory Coast and had been one of the very few top banking executives who is Black, also marred the reputation of the bank amid suggestions that he was treated as outsider because of his race and nationality.
Credit Suisse, based in Zurich, said it could not say how big the losses would be from the Archegos trades because it is still in the process of selling the assets. Archegos is a family office that manages the wealth of Bill Hwang, a former hedge fund manager at Tiger Asia Management who was found guilty of wire fraud in 2012.
The losses could be “material to our first quarter results,” Credit Suisse said in a statement. The bank’s shares plunged nearly 17 percent in Zurich trading Monday.
Credit Suisse did not name Archegos in the statement, referring only to “a significant U.S.-based hedge fund” that it said had “defaulted on margin calls made last week by Credit Suisse and certain other banks.” A person with knowledge of the matter confirmed that the hedge fund was Archegos.
The Japanese bank Nomura also warned on Monday of losses from transactions with a client in the United States that it did not name, but was widely reported to be Archegos. Nomura said the client owed it $2 billion, and it was still evaluating what the overall losses might be. Nomura’s shares fell 16 percent in Tokyo trading.
Archegos was blamed for steep decline in the share prices last week of some companies on which it had made big bets. Amid a fire sale of shares, ViacomCBS stock plunged more than 50 percent during the week and Discovery shares were down by almost half.
Credit Suisse warned earlier this month that it was likely to suffer losses on a $140 million loan it made to Greensill Capital. Credit Suisse’s asset management unit oversaw $10 billion in funds that Greensill packaged based on financing it provided to companies. The loans allowed companies to stretch out payments to suppliers. Credit Suisse has returned $3 billion in cash to investors in the funds and said it was working to recover more money.
A Credit Suisse branch in Basel, Switzerland. After the bank warned of significant losses on Monday, its shares fell 14 percent.Credit…Arnd Wiegmann/Reuters
The fallout from a series of defaults at a New York hedge fund reverberated through markets for a second day on Monday, as global banks tried to size up their exposure to one firm’s string of bad bets.
Shares in Credit Suisse, the Swiss bank, dropped 14 percent on Monday, and the Japanese bank Nomura closed 16 percent lower, after the banks said they could face significant losses because of defaults by an American investment firm.
U.S. stocks fell on Monday, with the S&P 500 down 0.4 percent by midday led lower by financial stocks. European indexes were mixed.
Neither Credit Suisse nor Nomura named the investment firm whose default could lead to big losses, but Bloomberg identified it as Archegos Capital Management, a New York-based family office that manages the wealth of Bill Hwang, a former hedge fund manager at Tiger Asia Management who was found guilty of wire fraud in 2012.
Investment banks that provided services to Archegos, such as Goldman Sachs and Morgan Stanley, dumped huge quantities of stocks including ViacomCBS and Chinese tech companies on Friday.
Archegos was forced into the stock sales, worth about $20 billion, after bets the fund made moved the wrong way, Bloomberg reported. Shares in ViacomCBS, one of Archegos’s positions, dropped 23 percent on Wednesday last week. On Friday, the share price plummeted a further 27 percent as the investment banks liquidated positions. ViacomCBS shares were down more than 5 percent on Monday.
Shares in Morgan Stanley were down more than 3 percent, and Goldman Sachs was nearly 2 percent lower on Monday. Shares in Deutsche Bank fell more than 3 percent, after it was said to also have some exposure to Archegos.
Credit Suisse has already been roiled this month by the collapse of Greensill Capital, a London-based financial firm it sold funds for, and to whom it extended loans of $140 million. The Swiss bank told investors it would probably report some losses on the loan.
“A significant U.S.-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” Credit Suisse said on Monday. It did not yet know the exact size of the loss from exiting its positions but “it could be highly significant and material to our first quarter results,” the statement said.
Elsewhere in markets
Oil prices bounced around on Monday following news about the fate of the container ship that had been blocking the Suez Canal for nearly week. The ship was finally freed on Monday, raising the prospect that trade flows would be restored, but authorities said more work was needed before maritime traffic could restart.
Bill Hwang, right, with his lawyer in 2012. Archegos Capital Management manages the personal fortune of the former hedge fund mogul.Credit…Emile Wamsteker/Bloomberg
The fallout from risky investments made by Archegos Capital Management continued to spread through the global markets on Monday, and it could spur more attention from regulators on the murky world of swaps and investor borrowing, the DealBook newsletter reports.
But how did one firm’s bad bets cascade to become a multibillion-dollar fire sale of stocks by banks around the world? Here’s what we know so far:
Archegos manages the personal fortune of the former hedge fund mogul Bill Hwang, who won Wall Street’s business despite having pleaded guilty to insider trading years ago. It amassed huge positions in media giants like ViacomCBS and in several Chinese tech companies — largely with borrowed money.
The Archegos strategy included using swaps, contracts that gave Mr. Hwang financial exposure to companies’ shares while hiding both his identity and how big his positions really were. (It is also becoming increasingly apparent that several Wall Street banks lent Archegos money without knowing that others were doing the same thing for the same trades.)
Trouble for Mr. Hwang, and his banks, arose when the prices of those stocks started to fall. That prompted some of his lenders to demand cash to cover his bets. When they began to question his ability to do so, some of them, including Goldman Sachs and Morgan Stanley, seized some of his holdings and kicked off the sale $20 billion worth in huge block trades.
That forced selling led to even bigger drops in the prices of those stocks, starting a vicious circle.
Goldman Sachs has told investors that its potential losses are “immaterial,” having covered its exposure, but other investment banks faced a reckoning:
Credit Suisse told investors that a “U.S.-based hedge fund” had defaulted on its margin calls, which could lead to losses that were “highly significant and material to our first-quarter results.”
Nomura said that one of its U.S. arms could suffer “a significant loss” because of the forced sales.
One person who is surely paying attention is Gary Gensler: President Biden’s pick to lead the S.E.C. has been an advocate for market transparency, having argued that unregulated dark pools could cause a broader risk to the U.S. economy.
Lara Trump with her husband, Eric, in January. “I sort of feel like I’ve been an unofficial member of the team for so long,” Ms. Trump told the co-hosts of “Fox & Friends” on Monday.Credit…Pete Marovich for The New York Times
Fox News just hired a Trump. But not Donald.
Lara Trump, the daughter-in-law of former President Donald J. Trump, is joining the cable channel as a paid on-air contributor, the network announced on Monday. The move was not exactly a surprise, as Ms. Trump acknowledged during a morning appearance on “Fox & Friends.”
“I sort of feel like I’ve been an unofficial member of the team for so long,” Ms. Trump told the show’s co-hosts, Steve Doocy, Ainsley Earhardt and Brian Kilmeade. “Over the past five years, I would come there so often that the security guards were like, ‘Maybe we should just give you a key.’”
Mr. Doocy, Mr. Earhardt and Mr. Kilmeade welcomed their new colleague with an on-air round of applause.
Ms. Trump, who is married to the former president’s younger son Eric, was a frequent guest on Fox News during the 2020 campaign, when she served as a surrogate for her father-in-law. Recently, Ms. Trump floated the possibility of running for a U.S. Senate seat in North Carolina, her home state. On Monday, she told “Fox & Friends” that she had not “officially made a decision, but hopefully sometime soon.”
She is the second member of Donald Trump’s inner circle to join the Fox News payroll in recent weeks. Kayleigh McEnany, the former White House press secretary, signed on earlier this month as a contributor.
Tankers and freight ships near the entrance of the Suez Canal.Credit…Ahmed Hasan/Agence France-Presse — Getty Images
Oil prices fell on Monday as word spread that the giant cargo ship blocking the Suez Canal had been set free, raising hopes that hundreds of vessels, many carrying oil and petroleum products, could soon proceed through the critical waterway.
Oil prices had swirled earlier in the day, as prospects of an end to the logjam brightened, and then dimmed. But following the announcement that the containership Ever Given had been freed, the price of Brent crude, the international benchmark, fell about 2.5 percent, to $63.90 a barrel.
Since the vessel got stuck early last week, tankers have been lining up at the entrances to the canal waiting to deliver their cargoes to Europe and Asia.
The Suez Canal is a crucial choke point for oil shipping, but so far the impact on the oil market of this major interruption of trade flows has been relatively muted. Though prices jumped after shipping on the canal was halted, oil prices still remain below their nearly two-year highs of about $70 a barrel reached earlier this month.
Traders are now expected to focus on broader threats to the oil market, including whether the imposition of new lockdowns in Europe may hold back the recovery of oil demand from the pandemic.
From a global perspective, oil supplies are considered adequate, and the Organization of the Petroleum Exporting Countries, Russia and other producers, the group known as OPEC Plus, are withholding an estimated eight million barrels a day, or about 9 percent of current consumption, from the market. Officials from OPEC Plus are expected to meet by video conference on Thursday to discuss whether to ease output cuts.
Southwest Airlines, the largest buyer of Boeing’s 737 Max jet, said that it had ordered a total of the planes over the next decade.Credit…Jim Watson/Agence France-Presse — Getty Images
Southwest Airlines is doubling down on Boeing’s troubled 737 Max jet, adding 100 new orders for the plane just months after regulators began allowing it to fly again.
The airline, already the largest customer of the Max, said on Monday that it had ordered a total of 349 Max jets over the next decade. Southwest, which resumed flights aboard the Max this month, also said it had more than doubled the number of planes it had options to buy, to 270.
“Southwest Airlines has been operating the Boeing 737 series for nearly 50 years, and the aircraft has made significant contributions to our unparalleled success,” Gary Kelly, Southwest’s chief executive, said in a statement. “Today’s commitment to the 737 Max solidifies our continued appreciation for the aircraft.”
Regulators around the world grounded the Max, which is quieter and more fuel-efficient than its predecessors, in March 2019 following fatal crashes in Ethiopia and Indonesia that killed 346 people. The Federal Aviation Administration lifted its ban on the plane in November, requiring various changes and upgrades. It was soon followed by other aviation regulators and the plane has been used on thousands of flights since.
The expanded Southwest order comes as more passengers start flying again. More than 1.5 million people were screened at airport security checkpoints on Sunday, according to the Transportation Security Administration, the most since the coronavirus pandemic began. Still, that was about 37 percent fewer people than the agency had screened on the same day in 2019.
Southwest did not say how much it will pay for its new Max order. The airline is spending more than $10 billion in new and existing airplane orders. The airline expects to receive 28 Max planes this year and at least 30 each year after through 2025.
By acquiring Houghton Mifflin, HarperCollins, which is owned by Rupert Murdoch’s News Corp, will be better able to compete as publishing has come to be dominated by the biggest players.Credit…Richard Drew/Associated Press
HarperCollins, one of the five largest publishing companies in the United States, has made a deal to acquire Houghton Mifflin Harcourt Books and Media, the trade publishing division of Houghton Mifflin Harcourt, for $349 million.
The acquisition will help HarperCollins expand its catalog of backlist titles at a moment of growing consolidation in the book business. Houghton Mifflin publishes perennial sellers by well-known authors such as J.R.R. Tolkien, George Orwell, Philip Roth and Lois Lowry, as well as children’s classics and best-selling cookbooks and lifestyle guides.
News of the sale was reported earlier by The Wall Street Journal.
By acquiring Houghton Mifflin, HarperCollins, which is owned by Rupert Murdoch’s News Corp, will be better able to compete as publishing has come to be dominated by the biggest players.
The book business has been transformed by consolidation in the past decade, with the merger of Penguin and Random House in 2013, News Corp’s purchase of the romance publisher Harlequin, and Hachette Book Group’s acquisition of Perseus Books. Last fall, ViacomCBS agreed to sell Simon & Schuster to Penguin Random House for more than $2 billion, in a deal that has drawn scrutiny from antitrust regulators and has raised concerns among booksellers, authors and agents.
Book sales across the industry have remained strong during the pandemic, but Houghton Mifflin saw its revenue fall sharply last year because of a steep drop in sales in its education division. Its revenue fell by more than 46 percent in the nine months that ended on Sept. 30 of last year, compared with the same period in 2019. The company put its trade publishing division up for sale last fall, as it aims to focus on its core business of K-12 educational publishing, and to pay down its debt.
“There is incredible demand for our expertise as schools across the country plan for post-pandemic learning and recovery,” Houghton Mifflin’s president and chief executive, Jack Lynch, said in a news release. “This is an inflection moment for K-12 education in our country and for HMH as a trusted partner to schools and teachers in advancing learning for every student.”
Christopher Waller, a member of the Federal Reserve’s Board of Governors.Credit…Erin Schaff/The New York Times
The Federal Reserve’s independence from partisan politics is essential and must be protected, Christopher Waller, a member of Fed’s Board of Governors, said in his first speech as a top central bank official.
Mr. Waller, who previously worked in research at the Federal Reserve Bank of St. Louis, was nominated to the Fed by President Donald J. Trump and confirmed to the job late last year.
He used his first extensive public remarks in the role to push back on the idea that the Federal Open Market Committee, which sets interest rates, might keep them steady just to make interest costs on the government’s huge debt pile low in the wake of the economic downturn caused by the pandemic.
“Going forward, the monetary policy choices of the F.O.M.C. will continue to be guided solely by our mandate to promote maximum employment and stable prices,” Mr. Waller said. “Partisan policy preferences or the debt-financing needs of the Treasury will play no role in that decision.”
Mr. Waller noted that the government’s pandemic response spending packages — which totaled more than $5 trillion — have pushed the U.S. debt to a level last seen in World War II, relative to the nation’s output.
At the same time, the Fed has been keeping short-term policy interest rates near zero while buying up huge amounts of government debt to make financing of all kinds cheaper, helping to stoke demand and fuel an economic recovery.
That has contributed to a narrative that “the Federal Reserve will succumb to pressures” to keep rates low and continue buying bonds, Mr. Waller said, policies that would make it easier for the government to borrow and spend.
“It is simply wrong,” he said. “Monetary policy has not and will not be conducted for these purposes.”
Instead, the Fed will focus on fostering maximum employment and price stability — its two Congress-given goals. The Fed is politically independent, and although it has traditionally cooperated with the Treasury Department during times of crisis, elected officials and those with close ties to the presidential administration do not have a say in how it sets monetary policy to achieve its targets.
Mr. Waller’s remarks do not mean interest rates are poised to rise soon, though. The Fed has signaled that it will leave them near rock-bottom until inflation has moved higher and looks poised to stay there, and until the economy has returned to what they see as full employment.
Mr. Waller’s comments come at a time when the Fed’s prized independence has faced questions from a different direction: Republican lawmakers have begun to ask whether Fed research into climate change and racial equity, especially at a regional level, has been too partisan and oversteps the central bank’s intended role.
Senator Patrick J. Toomey, Republican of Pennsylvania, said in a letter on Monday that the Federal Reserve Bank of San Francisco has had a “seemingly sudden and alarming inclusion of social research that risks being of a bitterly partisan nature” and asked for both a briefing and documents related to the regional branch’s climate and racial equity work and expenses.
The Fed has received and is reviewing Mr. Toomey’s letter, said a spokesman for the San Francisco Federal Reserve Bank, who indicated that officials would discuss its contents with Mr. Toomey’s office.
Office buildings in Manhattan have remained quiet as about 90 percent of their workers continue working remotely.Credit…Jonah Markowitz for The New York Times
A year after the coronavirus spurred an extraordinary exodus of workers from New York City office buildings, what had seemed like a short-term inconvenience is now becoming a permanent shift in how and where people work. Employers and employees have both embraced the advantages of remote work, including lower office costs and greater flexibility for employees, especially those with families.
Beyond New York, some of the country’s largest cities have yet to see a substantial return of employees, even where there have been less stringent lockdowns, and some companies have announced that they are not going to have all workers come back all the time.
In recent weeks, major corporations, including Ford in Michigan and Target in Minnesota, have said they are giving up significant office space, while Salesforce, whose headquarters occupies the tallest building in San Francisco, said only a small fraction of its employees would be in the office full time.
But no city in the United States, and perhaps the world, must reckon with this transformation more than New York, and in particular Manhattan, an island whose economy has been sustained, from the corner hot dog vendor to Broadway theaters, by more than 1.6 million daily commuters.
About 90 percent of Manhattan office workers are working remotely, a rate that has remained unchanged for months, according to a recent survey of major employers by the Partnership for New York City, which estimated that less than half of office workers would return by September.
Across Midtown and Lower Manhattan, the country’s two largest central business districts, there has never been a greater proportion of office space for lease — 16.4 percent, much higher than in past crises, including after the Sept. 11 terror attacks in 2001 and the Great Recession in 2008.
As more companies push back dates for returning to offices and make at least some remote work a permanent policy, the consequences for New York could be far-reaching, not just for the city’s restaurants, coffee shops and other small businesses, but for municipal finances, which depend heavily on commercial real estate.
Some of the largest and most enduring companies, including JPMorgan Chase & Co., which has more than 20,000 office employees in the city, have told their work forces that the five-day office workweek is a relic. The bank is considering a model in which employees would rotate between working remotely and in the office.
Other large businesses, including the accounting firm PricewaterhouseCoopers, the marketing group Omnicom Group and the advertising giant WPP, have searched for subtenants to take over significant chunks of their Manhattan offices.
The loss of workers has caused the market value of commercial properties that include office buildings to plunge nearly 16 percent, prompting a sharp decline in the tax revenue that pays for essential city services.
Goldman Sachs’s headquarters in New York. A group of investors is suing the Wall Street bank over claims of fraud. Credit…Johannes Eisele/Agence France-Presse — Getty Images
The Supreme Court will hear arguments on Monday from Goldman Sachs and pension funds over a claim that the Wall Street giant misled investors about its work selling complex debt investments in the prelude to the 2008 financial crisis.
In its latest brief, Goldman makes an interesting argument, the DealBook newsletter reports: Investors shouldn’t rely on statements such as “honesty is at the heart of our business” or “our clients’ interests always come first” that appear in Securities and Exchange Commission filings and annual reports.
The case is a test of shareholders’ ability to sue over claims of investment fraud. The pension funds sought to sue as a class over Goldman’s statements, saying they belied those statements of honesty, and lower courts agreed to let them proceed. Goldman has argued that the investors are engaged in “guerrilla warfare” and aren’t providing “serious legal arguments,” relying on support from the federal government instead.
However, the Biden administration isn’t taking sides, technically. It will argue as a “friend of the court” on Monday that “meritorious private securities-fraud suits” are “an essential complement” to enforcing securities laws.
“I expect the court to be troubled by the claim that companies cannot be held accountable for saying that clients come first and then acting otherwise,” Robert Jackson Jr., who served on the S.E.C. from 2018 to 2020 and is now an N.Y.U. law professor, told DealBook.
The justices probably won’t agree with the claim that making a company “mean what it says” will lead to a tsunami of meritless lawsuits,” he added. Regardless, Goldman is right that the stakes are high, because the case is likely to decide whether shareholders can “hold corporate insiders accountable when they tell investors one thing and do another,” Mr. Jackson said.
President Nicolás Maduro of Venezuela promoted an unproven remedy for Covid-19 on Facebook, which prompted the company to freeze his page. Credit…Manaure Quintero/Reuters
The Facebook page of Venezuela’s president, Nicolás Maduro, was frozen for “repeated” violations of its misinformation policies, including a post about an unproven remedy for Covid-19, the company said on Sunday, the latest example of the social media giant cracking down on political figures who violate its content policies.
Mr. Maduro’s Facebook page will be frozen for 30 days in a “read-only” mode, the company said, “due to repeated violations of our rules.”
“We removed a video posted to President Nicolas Maduro’s Page for violating our policies against misinformation about Covid-19 that is likely to put people at risk for harm,” a Facebook spokesman said. “We follow guidance from the W.H.O. that says there is currently no medication to cure the virus.” The spokesman was referring to the World Health Organization.
Facebook’s move came after Mr. Maduro posted a video on his page that promoted Carvativir, a drug derived from thyme. He said in January that the medicine was a “miracle,” but did not provide evidence of its effectiveness — and declined to release the name of the “brilliant Venezuelan mind” that created the drug. In the video, Mr. Maduro falsely claimed that Carvativir can be used preventively and therapeutically against the coronavirus.
In the past, Facebook has been criticized for its inaction against political figures who test the boundaries of the company’s content policies by spreading misinformation. Mark Zuckerberg, the founder and chief executive of Facebook, has said he does not want to be the “arbiter of truth” in public discourse.
But in recent months, Facebook has cracked down on certain types of misinformation across the network. The company has banned posts containing false or misleading information regarding the coronavirus, and has shown willingness to take action against some political figures. And in the past, it has removed at least one post by Jair Bolsonaro, the president of Brazil, for false coronavirus remedy claims regarding the malaria drug hydroxychloroquine.
In January, after insurgents stormed the United States Capitol, President Donald J. Trump’s account was banned indefinitely for inciting his supporters to violent action using the social network.
In response to his account restriction, Mr. Maduro has said Facebook is practicing a form of “digital totalitarianism,” according to Reuters, which first reported Mr. Maduro’s suspension.
Mr. Maduro said on Twitter on Sunday that he would continue to broadcast his regular coronavirus briefing from his other digital accounts, including Instagram, YouTube and Twitter. And to circumvent his suspension, he said he would use the Facebook account belonging to his wife, Cilia Flores, to broadcast Covid-19 information. Facebook would not comment on whether it would suspend Ms. Flores’s account.
A rally on Friday in support of the Amazon workers outside the Retail, Wholesale and Department Store Union’s building in Birmingham, Ala.Credit…Charity Rachelle for The New York Times
One of the most closely watched union elections in recent history is wrapping up on Monday, one that could alter the shape of the labor movement and one of America’s largest employers.
Almost 6,000 workers at an Amazon warehouse near Birmingham, Ala., one of the company’s largest, are eligible to vote in this election. After years of fierce resistance from the company, they could form the first union at an Amazon operation in the United States.
The outcome of the vote may not be known for days, but the union drive has already succeeded in roiling the world’s biggest e-commerce company and spotlighting complaints about its labor practices, The New York Times’s Karen Weise and Michael Corkery write. If the Retail, Wholesale and Department Store Union succeeds, it would be a huge victory for the labor movement, whose membership has declined for decades. A victory would also give it a foothold inside one of the country’s largest private employers. The company now has 950,000 workers in the United States, after adding more than 400,000 in the last year alone.
If the union loses, particularly by a large margin, Amazon will have turned the tide on a unionization drive that seemed to have many winds at its back. A loss could force labor organizers to rethink their overall strategy and give Amazon confidence that its approach is working.
“We are in a hyper-growth industry,” said Dhivya Suryadevara, Stripe’s chief financial officer.Credit…Richard Drew/Associated Press
Thousands of financial technology start-ups are riding an investor frenzy driven by a growing realization that the industry is ripe for a tech makeover, writes Erin Griffith of The New York Times.
When the pandemic forced businesses to speed up their usage of digital tools, including e-commerce and online banking, the demand for what is known as fintech exploded.
Now start-ups with names like Blend, Brex and Dave that provide decidedly unglamorous banking, lending and payment processing offerings are hot tickets. That was punctuated this month when Stripe, a payments company, raised $600 million in a financing that valued it at $95 billion, the highest ever for a private start-up in the United States.
Financial technology companies are also making a splash on the stock market. On Tuesday, Robinhood, a stock trading app popular with young adults, filed for an initial public offering. And Coinbase, a cryptocurrency start-up, is scheduled to go public in the next few weeks in what could be a $100 billion listing.
In total, venture capital investors poured $44.4 billion into financial technology start-ups last year, up from $1.1 billion in 2009, according to PitchBook, which tracks private financing. Many investors are now making bold predictions that these start-ups will upend big banks, established credit card providers — and in some cases, the entire financial system.