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Morgan Stanley Unveils $900 Million Hit From Archegos Capital Collapse

Morgan Stanley said its exposure to the Archegos Capital collapse loped $911 million from its first quarter earnings.

Morgan Stanley  (MS) - Get Morgan Stanley Report unveiled a $900 million loss linked to last month's collapse of Archegos Capital, with CEO James Gorman noting the cost of de-risking from the failed hedge fund was "money well spent'.

In an otherwise impressive first quarter earnings report that included record inflows for its wealth management division, Morgan Stanley reported a $911 million loss linked to what is described as a "single client event." 

"The current quarter includes a loss of $644 million related to a credit event for a single prime brokerage client," Morgan Stanley noted in its Friday filing and later identifying as Archegos Capital on its conference call with investors. "And $267 million of subsequent trading losses through the end of the quarter related to the same event."

Morgan Stanley shares were marked 3% lower in mid-day trading Friday to change hands at $78.45 each, a move that trims the stock's year-to-date gain to around 15%.

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Archegos Capital, a so-called family office managed by billionaire investor Bill Hwang, collapsed last month amid volatility linked to its use of complicated derivatives known as total return swaps (TRS) that allow a 'buyer' to receive running payments on a basket of reference shares without actually owning them.

Leverage provided by several U.S and European investment banks was used to increase that exposure, which was based on U.S. and China-based media stocks including ViacomCBS  (VIACA) - Get ViacomCBS Inc. Class A Report, Discovery  (DISCA) - Get Warner Bros Discovery Inc Com Ser A Report, Baidu  (BIDU) - Get Baidu Inc. Report and Tencent Music  (TME) - Get Tencent Music Entertainment Group American Depositary Shares each representing two Class A Report, while the shares themselves were held by the banks, which acted as prime brokers New York-based Archegos. 

JPMorgan analysts estimated last week that bank losses could reach $10 billion, twice its original estimate, as lenders such as Credit Suisse  (CS) - Get Credit Suisse Group American Depositary Shares Report and Wells Fargo  (WFC) - Get Wells Fargo & Company Report scrambled to identify their risk to the embarrassing implosion.

"We are still puzzled why Credit Suisse and Nomura have been unable to unwind all their positions at this point, as we would expect to get an announcement as soon as this is the case," JPMorgan said. "We expect full disclosure by the end of the week at the latest from Credit Suisse and would keep an eye on credit agencies' statements as well." 

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