The roar of Morgan Stanley’s record quarter is being drowned out by its prolonged silence over a near billion-dollar loss from the Archegos collapse -- and that’s inviting a tongue-lashing from the most outspoken Wall Street analyst.
The bank didn’t disclose its losses until its earnings report even as peers earlier tallied up their hit from what has been one of the most stunning fund collapses in over two decades. Chief Executive Officer James Gorman said he was pleased with how the company handled the liquidation and said it didn’t feel compelled to announce the hit in the midst of a record quarter.
“Would this be material if it is a bear market? I don’t see how materiality is defined by whether it is a bull market or bear market,” Mike Mayo, an analyst with Wells Fargo & Co., said in an interview. “The instance surrounding Archegos was the talk of the town for a period before earnings. Investors wanted to know.”
Morgan Stanley compounded its $911 million mishap by failing to disclose this issue earlier and then appearing dismissive of the mistake on the earnings call, he said.
“This is not the standard that many investors would like to see,” Mayo said of the lateness in disclosure in a note, adding that it was a rare misstep from Gorman.
Morgan Stanley’s shares were the weakest among major U.S. banks this week, after sliding 2.6% despite its blockbuster first-quarter results.
A representative for the bank declined to comment.
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Morgan Stanley had built up one of the largest exposures to Bill Hwang’s firm, and has now emerged as the only major U.S. bank to be nursing losses from the flame-out of the family office. The New York-based company was one of the early backers of Archegos despite the legal taint tied to Hwang, who was previously accused of insider trading and in 2012, pleaded guilty to wire fraud on behalf of his predecessor hedge fund, Tiger Asia Management.
Mayo, a veteran Wall Street analyst, has built a reputation of taking a more combative approach, in sharp contrast with his peers. He’s known for being unafraid to challenge bank executives and joust with them on public earnings calls every quarter. He’s the author of “Exile on Wall Street: One Analyst’s Fight to Save the Big Banks From Themselves.”
“Whether there were records in equities or the firm as a whole seems irrelevant, in our view, given a risk management mishap that caused this type of loss with just one hedge fund,” he wrote in his note.
“Jamie Dimon is one of the top CEOs of our generation and he made a major misstep -- excusing the losses from the London Whale by calling it a ‘tempest in a teapot’ because they weren’t big in the context of firmwide earnings,” Mayo said of the 2012 incident involving JPMorgan Chase & Co. “You have another strong CEO in James Gorman who seemed dismissive about losses in context of firmwide earnings, even though it seems material.”
The forced liquidation of Archegos’s portfolio that commenced March 25 sent bellwether stocks tumbling and continues to send shock waves across capital markets. Blocks tied to the firm’s holdings were hitting the market even as late as this week.
Credit Suisse Group AG was the worst affected bank, after announcing a nearly $5 billion hit from its exposure to the family office. Japanese bank Nomura Holdings Inc. has also told shareholders their business faces a “significant” loss that could amount to about $2 billion. The securities arm of Japan’s largest bank, Mitsubishi UFJ Financial Group Inc., has also said it will book a $270 million loss.
The unwind has attracted intense attention from the market because it happened during such a favorable time for capital markets, according to Mayo.
“It’s like this huge rose bush with this thorn in the middle,” he said. “Whoever that thorn pricked is really standing out.”
— With assistance by Felice Maranz
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