Morgan Stanley Books Archegos Loss, but Profit Hits New High -- 3rd Update
By Peter Rudegeair
Morgan Stanley lost $911 million when Archegos Capital
Management imploded last month, tarnishing a record-setting quarter
for the Wall Street firm.
The New York-based bank reaped big gains from the euphoric
market conditions of early 2021. But record performance across many
of its businesses was offset by credit and trading losses Morgan
Stanley booked following a fire sale of more than $30 billion worth
of stocks tied to Archegos, the family office run by former Tiger
Asia manager Bill Hwang.
Archegos used billions of dollars it borrowed from banks to
acquire big stakes in ViacomCBS Inc., Discovery Inc. and a handful
of other media and technology companies. To amass its positions,
the fund entered into derivative contracts with different banks, an
arrangement that concealed the size of Archegos's total portfolio
from each lender. When some of its holdings started to lose value
in March, Archegos was asked to post additional collateral that it
didn't have, prompting banks to seize and sell Archegos's assets at
More than two-thirds of Morgan Stanley's losses on Archegos
resulted from collateral the bank sold at lower values after
Archegos was unable to repay its margin loans. The remainder of the
Archegos losses came when the bank closed out smaller positions the
fund had that weren't subject to margin calls, Chief Executive
James Gorman said on a conference call with analysts Friday.
While those positions weren't especially problematic for the
bank, Mr. Gorman said, it chose not to take the risk that they
could later sour and lead to bigger losses. "I regard that decision
as necessary and money well spent," he said. "We didn't want this
thing to be lingering."
Archegos losses notwithstanding, Morgan Stanley rounded out an
all-time great first quarter from the nation's big banks. Asset
prices rallied, millions of investors traded stocks with abandon
and scores of technology and special-purpose acquisition companies
listed their shares publicly, creating an optimal environment for
banks' Wall Street divisions. On Wednesday, Morgan Stanley rival
Goldman Sachs Group Inc. posted record quarterly revenue and net
Morgan Stanley on Friday reported quarterly profit of $4.1
billion, or $2.19 a share, on revenue of $15.7 billion. That beat
the consensus estimates of analysts polled by FactSet by a wide
margin, thanks in part to the $5.8 billion it generated in stock-
and bond-trading revenue, a 29% increase over last year's first
Morgan Stanley's E*Trade business also benefited from the burst
of trading activity among individual investors. The number of
retail-trading clients at Morgan Stanley increased 7% from the end
of 2020 to 7.2 million, and the average daily number of retail
trades the company handled for the quarter exceeded 1.6
Revenue at Morgan Stanley's wealth-management division, which
includes E*Trade, increased 47% to roughly $6 billion. The firm
attracted a record $105 billion in net new assets, thanks to a 6%
increase in both assets in accounts overseen by Morgan Stanley
financial advisers and in assets on its do-it-yourself investing
platforms such as E*Trade.
In the early days of 2021, small-time investors who traded tips
on internet forums like Reddit's WallStreetBets catapulted shares
in GameStop Corp. and other meme stocks to new heights. E*Trade
handled more than 2 million trades on a few different days in
February, Jonathan Pruzan, Morgan Stanley's finance chief, said in
an interview. But activity has cooled since.
In investment banking, fees more than doubled to $2.6 billion.
Morgan Stanley earned a record $1.5 billion in revenue from
arranging initial public offerings and stock offerings, and its
revenue from advising on deals rose by a third to $480 million.
It was Morgan Stanley's obligations to an investment-banking
client that prevented it from acting sooner to avoid losses on
Archegos, Mr. Gorman said.
During the last week of March, the bank had a lead role
arranging a sale of stock for ViacomCBS, a company in which
Archegos held a large stake. Morgan Stanley waited until that
offering closed before it liquidated Archegos's holdings of
ViacomCBS, ceding first-mover advantage to Archegos's other
lenders. Still, Morgan Stanley's losses paled in comparison to the
$4.7 billion hit that Credit Suisse Group AG booked related to the
"We had collateral based on a certain set of facts that turned
out not to be true," Mr. Pruzan said.
A review of other clients' portfolios didn't turn up any others
that the kind of large, concentrated positions that brought down
Archegos, he said.
Morgan Stanley doesn't plan to scale back in its dealings with
hedge funds or family offices as a result of its Archegos losses.
Mr. Gorman said the bank's prime-brokerage unit generated $40
billion in revenue over the past decade and, as best as executives
can tell, hadn't taken a loss until now.
"We're never happy taking a loss, but our job is to deal with
the facts as reality and get on top of it," he said.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
April 16, 2021 14:31 ET (18:31 GMT)
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