Fallout From Hedge Fund’s Defaults Spreads Through Markets: Live Updates

Credit Suisse was in the middle of yet another international financial debacle on Monday after the Swiss bank warned that it faced “highly significant” losses from loans it made to a troubled New York hedge fund, Archegos Capital Management, to finance the hedge fund’s trades.

Credit Suisse is already grappling with losses from funds it managed for Greensill Capital, a SoftBank-backed financial firm that collapsed this month in London. The crisis involving Archegos is the second blow in less than a month to the reputation and finances of Credit Suisse and its chief executive, Thomas Gottstein, who has been in the post for about a year.

Mr. Gottstein succeeded Tidjane Thiam, who was forced out by the bank’s board in February 2020 after another executive admitted to spying on employees. The swift departure of Mr. Thiam, who was born in Ivory Coast and had been one of the very few top banking executives who is Black, also marred the reputation of the bank amid suggestions that he was treated as outsider because of his race and nationality.

Credit Suisse, based in Zurich, said it could not say how big the losses would be from the Archegos trades because it was still selling the assets. Archegos is a family office that manages the wealth of Bill Hwang, a former hedge fund manager at Tiger Asia Management who was found guilty of wire fraud in 2012.

The losses could be “material to our first quarter results,” Credit Suisse said in a statement. The bank’s shares plunged nearly 17 percent in Zurich trading on Monday.

Credit Suisse did not name Archegos in the statement, referring only to “a significant U.S.-based hedge fund” that it said had “defaulted on margin calls made last week by Credit Suisse and certain other banks.” A person with knowledge of the matter confirmed that the hedge fund was Archegos.

The Japanese bank Nomura also warned on Monday of losses from transactions with a client in the United States that it did not name but that was widely reported to be Archegos. Nomura said that the client owed it $2 billion, and that it was still evaluating what the overall losses might be. Nomura’s shares fell 16 percent in Tokyo trading.

Archegos was blamed for steep declines in the share prices last week of some companies on which it had made big bets. Amid a fire sale of shares, ViacomCBS stock plunged more than 50 percent during the week and Discovery shares were down by almost half.

Credit Suisse had warned this month that it was likely to suffer losses on a $140 million loan it made to Greensill Capital. Credit Suisse’s asset management unit oversaw $10 billion in funds that Greensill packaged based on financing it provided to companies. The loans allowed companies to stretch out payments to suppliers. Credit Suisse has returned $3 billion in cash to investors in the funds and said it was working to recover more money.

The fallout from a series of defaults at a New York hedge fund reverberated through markets for a second day on Monday, as global banks tried to size up their exposure to one firm’s string of bad bets.

Shares in Credit Suisse, the Swiss bank, dropped 13.8 percent on Monday, and the Japanese bank Nomura closed 16 percent lower, after the banks said they could face significant losses because of defaults by an American investment firm.

U.S. stocks ticked lower, with the S&P 500 losing less than 0.1 percent and the Nasdaq composite down 0.6 percent. European indexes were mostly higher, with the Stoxx Europe 600 gaining 0.2 percent.

Neither Credit Suisse nor Nomura named the investment firm whose default could lead to big losses, but Bloomberg identified it as Archegos Capital Management, a New York-based family office that manages the wealth of Bill Hwang, a former hedge fund manager at Tiger Asia Management who was found guilty of wire fraud in 2012.

Investment banks that provided services to Archegos, such as Goldman Sachs and Morgan Stanley, dumped huge quantities of stocks including ViacomCBS and Chinese tech companies on Friday.

Archegos was forced into the stock sales, worth about $20 billion, after bets the fund made moved the wrong way, Bloomberg reported. Shares in ViacomCBS, one of Archegos’s positions, dropped 23 percent on Wednesday last week. On Friday, the share price plummeted a further 27 percent as the investment banks liquidated positions. ViacomCBS shares were down more than 5 percent on Monday.

Shares in Morgan Stanley dropped 2.6 percent, and Goldman Sachs fell 0.5 percent on Monday. Shares in Deutsche Bank fell 2.4 percent after it was said to also have some exposure to Archegos.

Credit Suisse has already been roiled this month by the collapse of Greensill Capital, a London-based financial firm it sold funds for, and to whom it extended loans of $140 million. The Swiss bank told investors it would probably report some losses on the loan.

“A significant U.S.-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” Credit Suisse said on Monday. It did not yet know the exact size of the loss from exiting its positions but “it could be highly significant and material to our first quarter results,” the statement said.

Elsewhere in markets

• Oil prices rose on Monday following news about the fate of the container ship that had been blocking the Suez Canal for nearly week. The ship was finally freed on Monday, raising the prospect that trade flows would be restored, but authorities said more work was needed before maritime traffic could restart. Brent crude, the global benchmark, rose 0.6 percent to $64.98 a barrel, and West Texas Intermediate, the U.S. marker for oil prices, rose 1 percent to $61.56.

• Yields on 10-year Treasury notes rose to 1.70 percent.

The fallout from risky investments made by Archegos Capital Management continued to spread through the global markets on Monday, and it could spur more attention from regulators on the murky world of swaps and investor borrowing, the DealBook newsletter reports.

But how did one firm’s bad bets cascade to become a multibillion-dollar fire sale of stocks by banks around the world? Here’s what we know so far:

Archegos manages the personal fortune of the former hedge fund mogul Bill Hwang, who won Wall Street’s business despite having pleaded guilty to insider trading years ago. It amassed huge positions in media giants like ViacomCBS and in several Chinese tech companies — largely with borrowed money.

The Archegos strategy included using swaps, contracts that gave Mr. Hwang financial exposure to companies’ shares while hiding both his identity and how big his positions really were. (It is also becoming increasingly apparent that several Wall Street banks lent Archegos money without knowing that others were doing the same thing for the same trades.)

Trouble for Mr. Hwang, and his banks, arose when the prices of those stocks started to fall. That prompted some of his lenders to demand cash to cover his bets. When they began to question his ability to do so, some of them, including Goldman Sachs and Morgan Stanley, seized some of his holdings and kicked off the sale $20 billion worth in huge block trades.

That forced selling led to even bigger drops in the prices of those stocks, starting a vicious circle.

Goldman Sachs has told investors that its potential losses are “immaterial,” having covered its exposure, but other investment banks faced a reckoning:

• Credit Suisse told investors that a “U.S.-based hedge fund” had defaulted on its margin calls, which could lead to losses that were “highly significant and material to our first-quarter results.”

• Nomura said that one of its U.S. arms could suffer “a significant loss” because of the forced sales.

One person who is surely paying attention is Gary Gensler: President Biden’s pick to lead the S.E.C. has been an advocate for market transparency, having argued that unregulated dark pools could cause a broader risk to the U.S. economy.

Southwest Airlines is doubling down on Boeing’s troubled 737 Max jet, adding 100 new orders for the plane just months after regulators began allowing it to fly again.

The airline, already the largest customer of the Max, said on Monday that it had ordered a total of 349 Max jets over the next decade. Southwest, which resumed flights aboard the Max this month, also said it had more than doubled the number of planes it had options to buy, to 270.

“Southwest Airlines has been operating the Boeing 737 series for nearly 50 years, and the aircraft has made significant contributions to our unparalleled success,” Gary Kelly, Southwest’s chief executive, said in a statement. “Today’s commitment to the 737 Max solidifies our continued appreciation for the aircraft.”

Regulators around the world grounded the Max, which is quieter and more fuel-efficient than its predecessors, in March 2019 following fatal crashes in Ethiopia and Indonesia that killed 346 people. The Federal Aviation Administration lifted its ban on the plane in November, requiring various changes and upgrades. It was soon followed by other aviation regulators and the plane has been used on thousands of flights since.

The expanded Southwest order comes as more passengers start flying again. More than 1.5 million people were screened at airport security checkpoints on Sunday, according to the Transportation Security Administration, the most since the coronavirus pandemic began. Still, that was about 37 percent fewer people than the agency had screened on the same day in 2019.

Southwest did not say how much it will pay for its new Max order. The airline is spending more than $10 billion in new and existing airplane orders. The airline expects to receive 28 Max planes this year and at least 30 each year after through 2025.

The Federal Reserve’s independence from partisan politics is essential and must be protected, Christopher Waller, a member of Fed’s Board of Governors, said in his first speech as a top central bank official.

Mr. Waller, who previously worked in research at the Federal Reserve Bank of St. Louis, was nominated to the Fed by President Donald J. Trump and confirmed to the job late last year.

He used his first extensive public remarks in the role to push back on the idea that the Federal Open Market Committee, which sets interest rates, might keep them steady just to make interest costs on the government’s huge debt pile low in the wake of the economic downturn caused by the pandemic.

“Going forward, the monetary policy choices of the F.O.M.C. will continue to be guided solely by our mandate to promote maximum employment and stable prices,” Mr. Waller said. “Partisan policy preferences or the debt-financing needs of the Treasury will play no role in that decision.”

Mr. Waller noted that the government’s pandemic response spending packages — which totaled more than $5 trillion — have pushed the U.S. debt to a level last seen in World War II, relative to the nation’s output.

At the same time, the Fed has been keeping short-term policy interest rates near zero while buying up huge amounts of government debt to make financing of all kinds cheaper, helping to stoke demand and fuel an economic recovery.

That has contributed to a narrative that “the Federal Reserve will succumb to pressures” to keep rates low and continue buying bonds, Mr. Waller said, policies that would make it easier for the government to borrow and spend.

“It is simply wrong,” he said. “Monetary policy has not and will not be conducted for these purposes.”

Instead, the Fed will focus on fostering maximum employment and price stability — its two Congress-given goals. The Fed is politically independent, and although it has traditionally cooperated with the Treasury Department during times of crisis, elected officials and those with close ties to the presidential administration do not have a say in how it sets monetary policy to achieve its targets.

Mr. Waller’s remarks do not mean interest rates are poised to rise soon, though. The Fed has signaled that it will leave them near rock-bottom until inflation has moved higher and looks poised to stay there, and until the economy has returned to what they see as full employment.

Mr. Waller’s comments come at a time when the Fed’s prized independence has faced questions from a different direction: Republican lawmakers have begun to ask whether Fed research into climate change and racial equity, especially at a regional level, has been too partisan and oversteps the central bank’s intended role.

Senator Patrick J. Toomey, Republican of Pennsylvania, said in a letter on Monday that the Federal Reserve Bank of San Francisco has had a “seemingly sudden and alarming inclusion of social research that risks being of a bitterly partisan nature” and asked for both a briefing and documents related to the regional branch’s climate and racial equity work and expenses.

The Fed has received and is reviewing Mr. Toomey’s letter, said a spokesman for the San Francisco Federal Reserve Bank, who indicated that officials would discuss its contents with Mr. Toomey’s office.

A year after the coronavirus spurred an extraordinary exodus of workers from New York City office buildings, what had seemed like a short-term inconvenience is now becoming a permanent shift in how and where people work. Employers and employees have both embraced the advantages of remote work, including lower office costs and greater flexibility for employees, especially those with families.

Beyond New York, some of the country’s largest cities have yet to see a substantial return of employees, even where there have been less stringent lockdowns, and some companies have announced that they are not going to have all workers come back all the time.

In recent weeks, major corporations, including Ford in Michigan and Target in Minnesota, have said they are giving up significant office space, while Salesforce, whose headquarters occupies the tallest building in San Francisco, said only a small fraction of its employees would be in the office full time.

But no city in the United States, and perhaps the world, must reckon with this transformation more than New York, and in particular Manhattan, an island whose economy has been sustained, from the corner hot dog vendor to Broadway theaters, by more than 1.6 million daily commuters.

About 90 percent of Manhattan office workers are working remotely, a rate that has remained unchanged for months, according to a recent survey of major employers by the Partnership for New York City, which estimated that less than half of office workers would return by September.

Across Midtown and Lower Manhattan, the country’s two largest central business districts, there has never been a greater proportion of office space for lease — 16.4 percent, much higher than in past crises, including after the Sept. 11 terror attacks in 2001 and the Great Recession in 2008.

As more companies push back dates for returning to offices and make at least some remote work a permanent policy, the consequences for New York could be far-reaching, not just for the city’s restaurants, coffee shops and other small businesses, but for municipal finances, which depend heavily on commercial real estate.

Some of the largest and most enduring companies, including JPMorgan Chase & Co., which has more than 20,000 office employees in the city, have told their work forces that the five-day office workweek is a relic. The bank is considering a model in which employees would rotate between working remotely and in the office.

Other large businesses, including the accounting firm PricewaterhouseCoopers, the marketing group Omnicom Group and the advertising giant WPP, have searched for subtenants to take over significant chunks of their Manhattan offices.

The loss of workers has caused the market value of commercial properties that include office buildings to plunge nearly 16 percent, prompting a sharp decline in the tax revenue that pays for essential city services.

The Supreme Court will hear arguments on Monday from Goldman Sachs and pension funds over a claim that the Wall Street giant misled investors about its work selling complex debt investments in the prelude to the 2008 financial crisis.

In its latest brief, Goldman makes an interesting argument, the DealBook newsletter reports: Investors shouldn’t rely on statements such as “honesty is at the heart of our business” or “our clients’ interests always come first” that appear in Securities and Exchange Commission filings and annual reports.

The case is a test of shareholders’ ability to sue over claims of investment fraud. The pension funds sought to sue as a class over Goldman’s statements, saying they belied those statements of honesty, and lower courts agreed to let them proceed. Goldman has argued that the investors are engaged in “guerrilla warfare” and aren’t providing “serious legal arguments,” relying on support from the federal government instead.

However, the Biden administration isn’t taking sides, technically. It will argue as a “friend of the court” on Monday that “meritorious private securities-fraud suits” are “an essential complement” to enforcing securities laws.

“I expect the court to be troubled by the claim that companies cannot be held accountable for saying that clients come first and then acting otherwise,” Robert Jackson Jr., who served on the S.E.C. from 2018 to 2020 and is now an N.Y.U. law professor, told DealBook.

The justices probably won’t agree with the claim that making a company “mean what it says” will lead to a tsunami of meritless lawsuits,” he added. Regardless, Goldman is right that the stakes are high, because the case is likely to decide whether shareholders can “hold corporate insiders accountable when they tell investors one thing and do another,” Mr. Jackson said.

One of the most closely watched union elections in recent history is wrapping up on Monday, one that could alter the shape of the labor movement and one of America’s largest employers.

Almost 6,000 workers at an Amazon warehouse near Birmingham, Ala., one of the company’s largest, are eligible to vote in this election. After years of fierce resistance from the company, they could form the first union at an Amazon operation in the United States.

The outcome of the vote may not be known for days, but the union drive has already succeeded in roiling the world’s biggest e-commerce company and spotlighting complaints about its labor practices, The New York Times’s Karen Weise and Michael Corkery write. If the Retail, Wholesale and Department Store Union succeeds, it would be a huge victory for the labor movement, whose membership has declined for decades. A victory would also give it a foothold inside one of the country’s largest private employers. The company now has 950,000 workers in the United States, after adding more than 400,000 in the last year alone.

If the union loses, particularly by a large margin, Amazon will have turned the tide on a unionization drive that seemed to have many winds at its back. A loss could force labor organizers to rethink their overall strategy and give Amazon confidence that its approach is working.