(Reuters) -Morgan Stanley lost nearly $ 1 billion from the collapse of the family offices of Archegos Capital Management, the bank said on Friday, clouding a 150% jump in first-quarter profit supported by a boom in trade and deal-making.
Morgan Stanley is one of several banks with exposure to Archegos, which failed to pay a margin call late last month and sparked a stock sale fire across Wall Street.
Morgan Stanley lost $ 644 million selling shares held in relation to the Archegos position, and another $ 267 million trying to “demean” them, Morgan Stanley Chief Executive James Gorman said by phone with analysts.
“I consider the decision necessary and money well spent,” he said.
The bank did not immediately disclose the loss because it was deemed immaterial in the context of the overall results, he added.
Morgan Stanley is not alone in dealing with losses as the main broker for Archegos. Switzerland’s Credit Suisse Group AG and Japan’s Nomura Holdings Inc. bore the brunt, having lost $ 4.7 billion and $ 2 billion, respectively.
Goldman Sachs Group Inc, Deutsche Bank and Wells Fargo & Co also handled the Archegos position but left without a loss, Reuters and other media outlets have reported.
Morgan Stanley was unaware that Archegos had similar positions and was concentrated in several banks on Wall Street, Chief Financial Officer Jonathan Pruzan told Reuters. As such, the collateral requirements imposed reflect only Archegos’ specific Morgan Stanley risks, not risks across a broader portfolio of mutual funds.
Morgan Stanley has reviewed its main brokerage business for similar issues but found none, Pruzan said. The bank is looking more broadly at its methods for stress testing, and will recalibrate positions with clients if needed.
“We are never happy when we have a loss,” he said. “But the show is over … and we will learn from that experience.”
Archegos’ story likely had regulatory implications, however, with multiple US watchdogs as well as the Senate Banking Committee all investigating the incident to better understand why multiple banks were so exposed to one client.
Gorman occasionally seems exasperated during phone calls when he faces repeated questions from analysts about Archegos, distracting from the bank’s otherwise reversed performance.
Morgan Stanley shares fell 1%.
“This is not a financial event in the grand scheme of things, but is likely to raise concerns,” Oppenheimer analyst Chris Kotowski wrote in a note to clients.
Although Archegos Morgan Stanley’s losses dominated discussions on Friday, first-quarter earnings beat expectations. The report closed a strong quarter for the biggest US banks, which benefited from the release of reserves and record capital market activity.
The surge in trading, driven in part by the trading frenzy sparked by Reddit in “meme” stocks such as GameStop Corp., boosted a 66% jump in revenue in Morgan Stanley’s institutional securities business.
Unlike rivals JPMorgan Chase & Co and Bank of America, Morgan Stanley and Goldman Sachs lacked large consumer lending units, which limited their exposure to lending problems during the pandemic and allowed them to focus on investment banking and trade.
Morgan Stanley earnings rose to $ 3.98 billion, or $ 2.19 per share, in the quarter ended March 31, from $ 1.59 billion, or $ 1.01 per share, a year ago.
Analysts are looking for a gain of $ 1.70 per share, according to IBES data from Refinitiv.
Net income jumped 61% to $ 15.72 billion.
Like its larger rival, Goldman Sachs, Morgan Stanley is benefiting from an unprecedented boom in deal-making through special-purpose acquisitions (SPAC) companies.
Global investment banking costs hit an all-time record of $ 39.4 billion during the March quarter, according to data from Refinitiv.
Morgan Stanley has also made good payouts from a series of mergers and by pledging many IPOs for well-known companies including Affirm Holdings and AppLovin Corp.
Its investment bank revenue more than doubled to $ 2.6 billion.
Reporting by Elizabeth Dilts in New York, Additional reporting by Ambar Warrick in Bengaluru and Matt Scuffham in New York Writing by Anirban Sen and Michelle PriceEditing by Saumyadeb Chakrabarty and Lauren Tara LaCapra