Morgan Stanley world headquarters in New York City.
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Morgan Stanley may have posted record first-quarter results, but it also posted a massive loss from the blowup of Archegos Capital last month.
Morgan Stanley (ticker: MS) incurred a loss of $911 million tied to Archegos–$644 million of which was tied to the family office’s inability to meet a margin call and an $267 million that was incurred as the bank worked to quickly unwind the rest of its exposure to the fund.
Going into earnings, Morgan Stanley was thought to have emerged from the Archegos battle relatively unscathed, as it was believed to be one of the first of Archegos’ prime brokers to unwind its positions. Goldman Sachs Group (GS) also moved swiftly, avoiding massive losses, while Credit Suisse Group (CS) didn’t fare as well, moving slower and posting a $4.7 billion loss.
Analysts peppered Morgan Stanley CEO James Gorman with questions about Archegos during Friday’s earnings call, asking why the bank didn’t disclose the losses earlier, as other banks had. He explained that the bank knew that even with the Archegos loss, it would still be posting a record quarter.
“The equities business where this resided was having a record quarter. So 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,” Gorman said.
Morgan Stanley was also an underwriter of ViacomCBS (VIAC), which was completing a secondary offering. The bank felt it was best to complete the underwriting before clearing up the Archegos situation, which made it difficult to unwind its positions as quickly as it would have liked.
“We had to hold off, which caused us to be later than some, if you will,” Gorman said. “And the reason for that was not that we weren’t aware of what was going on, we just felt we had an underwriting obligation to deal with.”
Even with the Archegos situation largely behind it, questions still remain about the risks banks’ prime brokerage desks take, as well as the lack of regulatory disclosure family offices have to provide. Archegos maintained similarly leveraged positions at several banks, amounting to a reported $30 billion of positions for a firm that managed roughly $10 billion.
“Frankly, the transparency and lack of disclosure relating to [family offices] is just different from the hedge fund institutions. And that’s something I’m sure the SEC is going to be looking at, and that’s probably good for the whole industry,” Gorman said.
Even so, Gorman defended the bank’s continued business with family offices.
“Let’s not throw the baby out with the bathwater here,” he said. “This is not a judgment call on family offices. This is a very idiosyncratic event.”
Morgan Stanley stock was down 0.7%, at $80.29, in recent trading. The S&P 500 was up 0.2%.
Write to Carleton English at [email protected]
