Archegos / Prime Brokers: leverage induces altitude sickness at market peaks

Lawyer for bankrupt Hertz car rental group said to a judge last year: “There are forces at work that we, the non-financiers. . . can only observe. Paranormal activity usually has a rational explanation, in this case retail purchase. “Forced deleveragingPrivate fund Archegos Capital was also behind a strange drop in ViacomCBS shares.

Archegos faces margin calls on its positions on ViacomCBS and other high-profile stocks. Nomura and Credit Suisse should make big losses. Supposedly sober financial institutions are just as vulnerable to write-offs on reckless investments as brash retail traders.

At current asset price peaks, altitude sickness exacerbated by leverage is a pervasive risk, as evidenced by the collapse of Greensill Capital, another Credit Suisse client.

ViacomCBS, once considered a walking dead man, had made enough progress in streaming to push back questions of his impending demise. However, the big American broadcaster, alongside its rival Discovery Networks, had intrigued observers. They noted that the company needed to double its annual spending to keep your rights for broadcasting matches of the National Football League.

Last week, after its share price nearly tripled since the start of the year, ViacomCBS did the smart thing. It sold $ 3 billion of common and convertible preferred shares at an implied futures price / earnings multiple of 24 times, up from a figure at the end of last year.

Unsurprisingly, once ViacomCBS decided to dilute earnings per share, many investors decided it was time to take the money off the table. Still, the biggest move in the stock came on Friday, two days after the bidding was priced. Shares of ViacomCBS alone fell 27% on trading volume more than 10 times the average level between the previous week and the start of 2021.

The year 2020 marked a revival for trading activities like Goldman Sachs and Morgan Stanley which benefited from the volatility of the financial markets. The prime brokerage units of these two investment banks had apparently extended leverage to Archegos, which they had called on last week. The pair would then have been faster to unload than Nomura and Credit Suisse.

The question for this week is whether taking into account the high valuations of equities will spill over to other equity and investment funds. A massive sell-off can then occur, aggravated by the leverage effect, as is implied in the case of Archegos. When the going at night – or trading day – it’s the poltergeist generally responsible.

The Lex team wants to know more about the readers. Please let us know what you think of the upset Archegos in the comments section below.

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