Seduced by the growth of Archegos, Nomura risked Hwang’s comeback

NEW YORK / HONG KONG (Reuters) – US investor Sung Kook “Bill” Hwang was looking for a second chance on Wall Street after falling out of grace and closing his multimillion-dollar hedge fund company. Nomura Holdings Inc. of Japan gave him a.

Nomura had previously had a relationship with Hwang’s Tiger Asia Management LLC before the investment firm closed in 2012 after being punished by U.S. and Hong Kong regulators for privileged trading in Chinese stocks.

Like other banks, it initially failed to resume business relations with the new family office of the Korean-American investor, Archegos Capital Management, according to a person familiar with the situation. But Hwang’s appetite for huge bets on technology, media and other company actions in the United States and Asia proved too lucrative to resist.

“It was ‘They paid the fines, everything has been resolved … they are open to business,'” a former Nomura employee with knowledge of the revived relationship said. “It was like” Okay … what do you want to do? “”

Tokyo executives took a while to approve the new relationship, around 2016, the person said. But once they did, Archegos became one of the top ten most profitable customers for the bank’s operations in the U.S., according to the same two people.

A U.S. spokesman for Nomura declined to comment on the relationship with Hwang.

Hwang and Archegos did not respond to requests for comment. A family office representative said earlier in a statement that “it is a difficult time for the family office … our partners and employees.”

The story of how Hwang returned to Nomura’s good graces with the promise of a lucrative business relationship, the details of which are reported here for the first time, highlights the risks Nomura was willing to take to advance the most competitive world. capital market.

This story is based on interviews with nearly a dozen people with knowledge of Hwang and Archegos and their relationships on Wall Street, including two people familiar with Nomura’s relationships with the background.

Last week, that relationship seemed a terrible miscalculation, as a jump in the shares of ViacomCBS Inc left Archegos (which had a very leveraged bet on the shares), faced with a massive margin call from its banks that wanted cover the increase in exposure.

These banks, including Goldman Sachs and Morgan Stanley, which had helped fund Hwang’s operations, initially discussed retaining them.

But as the shares that supported Hwang’s positions continued to fall, his banks quickly began to struggle to sell those shares in an attempt to curb losses.

Two banks (Credit Suisse and Nomura) face billions in losses.

NOT ABOUT MONEY

Wall Street bankers describe Hwang as a cheeky and polite person. Married and with children, he was not seen indulging in a flashy lifestyle, Wall Street sources said they knew him.

Hwang, who is said to be inspired by his Christian faith, lives in a suburban home in Tenafly, New Jersey, New York City, valued at $ 3.1 million, according to Zillow, where was photographed this week according to the Daily Mail here. This is modest compared to many multimillion-dollar fund managers.

Hwang didn’t need to “buy mega mansions and be on TV,” the same source said.

“I am not afraid of death or money. People on Wall Street wonder about the freedom I have, “Hwang said in a video posted here by his foundation in 2019.” In short, the most important thing is the Bible. “

This contrasts with investor Hwang, who was “super aggressive” and “considered a guy who was willing to do incredibly daring things,” said a professional hedge fund investor who has followed his career.

Hwang used leverage to expand its bets, holding stock positions worth more than $ 50 billion, while its funds had assets of about $ 10 billion, according to three sources familiar with the trades.

It did so by buying derivatives known as full-return swaps, which allow investors to bet on stock price movements without owning the underlying securities, according to sources. Instead, the bank buys the shares and promises the investor a return related to the yield. This customer, in turn, issues guarantees to secure transactions with the bank.

One banker said Hwang’s business, producing “amazing returns”, was a very profitable account for banks.

Another source said Hwang would exploit its primary customer status to push banks to reduce their collateral requirements, a key way for banks to mitigate the risks to customers.

The competition to win Hwang’s business was particularly fierce among banks trying to challenge the dominance of top tier brokers such as Goldman Sachs and Morgan Stanley.

This included Nomura, which currently ranks 23rd in Preqin’s global ranking of top brokers. After deciding to deal with Hwang again, the Japanese bank quickly increased its business with him, seeing it as a strategy to gain more business with other large U.S. hedge funds.

A larger market share in the United States is key to Japan’s largest brokerage ambitions to become a global investment bank, a goal driven by the acquisition of Lehman Brothers ’operations in Europe, Asia and the Middle East after the financial crisis of the last decade. .

“The relationship has really flourished in the last four or five years, as it was related to (Nomura)’ s push to achieve a larger market share in the United States, ”said another person familiar with Nomura and Archegos .

Credit Suisse, Goldman and Morgan Stanley representatives declined to comment Friday.

GREAT BUSINESS, GREAT RISK

Archegos’ risk-taking intensified because he had business relationships with several banks. This meant that their leverage was expanded in certain positions of the shares, with an exposure in some of Hwang’s operations reaching up to 20 times the guarantee he had promised against them, sources said.

As a family office, Archegos had limited disclosure requirements, so banks may not have been aware of the extent of the leverage it had, the source said.

However, some banks had approached Archegos with more caution.

Bank of America has not taken on Hwang as a customer in recent years due to family office leverage, concentration on certain securities and Hwang’s relationship with regulators, according to a person familiar with the bank’s thinking.

Goldman’s compliance executives had been suspicious of Hwang and the bank only agreed to start dealing with him last year, as long as his positions were highly secured, one source said.

As some banks are smart at selling fires, the focus is now on whether major brokers need to intensify their due diligence on clients.

The Finance Minister of Japan said on Friday that the government is studying the financial losses suffered by the Japanese financial group Mitsubishi UFJ (MUFG) and Nomura and will share information on this issue with the Bank of Japan and foreign authorities.

According to a different source familiar with the situation, the U.S. Securities and Exchange Commission and the UK Financial Conduct Authority have also launched preliminary surveys of the Archegos thaw. The SEC declined to comment Friday and the FCA did not respond immediately.

In Nomura, the question of whether the bank fell into customer due diligence is especially serious after it fired risk and compliance professionals in the United States in 2019. One of the sources familiar with the matter related these cuts to the risks that the bank took with Archegos.

“They probably felt they could manage the risk,” the source said. “They were wrong.”