- Morgan Stanley faced a raft of questions on its earnings call about its handling of Archegos.
- Analysts questioned the $911 million loss tied to the fiasco, which caught Wall Street by surprise.
- CEO James Gorman suggests agencies take a closer look at family offices, defends risk management.
Morgan Stanley took a nearly $1 billion hit from its exposure to the Archegos collapse, catching Wall Street analysts who expected a smaller loss off guard and leading to tough questions during the bank's earnings call on Friday.
The bank disclosed a loss of $644 million that it said was tied to a "credit event" for a single prime brokerage client, as well as $267 million of additional trading losses through the end of the first quarter.
"We decided we would be out of the risk as rapidly as possible, and in so doing, incurred an incremental loss of $267 million," Morgan Stanley CEO James Gorman said, referring directly to Archegos. "I regard that decision as necessary and money well spent."
Archegos, the family office that collapsed last month and sent shockwaves through lenders and firms exposed to it around the world, dominated much of the call.
Morgan Stanley CEO James Gorman says family offices could be better regulated
Earlier news reports suggested the firm's losses were going to be relatively minor, and some analysts were surprised by the magnitude of the Archegos fallout. Five of the nine analysts dialed into the call asked Gorman and Jon Pruzan, Morgan Stanley's chief financial officer, what went wrong.
Gorman suggested agencies could start taking a closer look at the way opaque family offices are regulated and defended the firm's risk management controls.
"What was so complex about this one?" asked Glenn Schorr, an analyst with Evercore ISI, wondering why the losses were not disclosed earlier than Friday. "Why didn't this meet the materiality test, and what do you think regulators want to change going forward?"
"The equities business where this resided was having a record quarter," Gorman responded. "You've got to be at a level where it's material to the overall quarter, and I'll leave that up to the lawyers. But we're very comfortable with that."
Mike Mayo, the Wells Fargo Securities analyst known for his colorful exchanges with bank executives, wondered how much of the bank's prime-brokerage business was tied to family offices, which are less regulated than other firms.
Press reports suggested losses were minor, Mayo said, "so I think it's a little bit of a surprise, and does speak to risk management."
"Why do you think it was that you were the only large bank to call out losses of this magnitude, when others didn't?" Mayo asked, according to a transcript on investment research platform Sentieo. "I don't know what you guys did differently versus Citibank, Bank of America, JPMorgan, and Goldman Sachs?"
Gorman said the firm was in a quiet period leading up to earnings, and that he would not comment at this point on other firms.
Overall equities trading revenues were up 17% from the year-ago quarter even with the Archegos losses, with the bank calling out strength in derivatives trading as an outsized driver. And the bank overall posted a record quarter of revenue and profit.
Some analysts were surprised by the size of Morgan Stanley's Archegos hit
The family office founded by hedge-fund billionaire Bill Hwang saw some $8 billion in assets evaporate in March when big bets via swaps positions moved against it. That in turn left banks that worked with Archegos scrambling to unwind their side of the trades.
Morgan Stanley's Archegos losses were "higher than we were expecting," the UBS analyst Brennan Hawken said in a note to clients on Friday morning. "But results were still solid despite those losses." Credit Suisse analyst Susan Roth Katzke said in a report that the $911 reported loss "is not going to be well received given peer performance on this matter."
Previous media reports had indicated that Morgan Stanley had emerged largely unscathed from the Archegos mess. Bloomberg reported on April 6 that the bank had dumped $5 billion worth of shares a day ahead of block trades that upended markets.
Other banks have seen even bigger hits. Credit Suisse has disclosed it expects a nearly $5 billion blow from the fiasco. The firm has been grilled by senior bankers and seen a raft of recent leadership changes. Brian Chin, firm's the investment banking CEO, and Lara Warner, the chief risk and compliance officer, are stepping down from their roles and leaving the bank. Credit Suisse's head of equities sales and trading at Credit Suisse is also stepping down.
Nomura has said it could face a loss of $2 billion as a result of its Archegos ties, and has formed an internal team to investigate the situation, Reuters reported last week.
Analysts have probed other banks' management this week about their Archegos exposure. When Goldman Sachs reported first-quarter earnings on Wednesday, CEO David Solomon told an analyst the situation was "unusual" when asked how Archegos compared to other prime brokerage clients.
Solomon also addressed the matter in prepared remarks, saying Archegos was a case of "an investor with highly concentrated and leveraged positions."
"This is not the first time we've seen a situation like this, and it likely won't be the last," Solomon said. "We have robust risk management that governs the amount of financing we provide for these types of portfolios."
Gorman was the highest-paid bank CEO on Wall Street last year, with some peers seeing a pay cut thanks to regulatory issues. Goldman Sachs' David Solomon saw his comp shrink following big settlements tied to the 1MDB scandal. Citi's former CEO Mike Corbat stepped down as the bank's risk controls and compliance have came under scrutiny and could require a costly cleanup.
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