Goldman Sachs CEO David Solomon said Tuesday that his bank’s risk management systems performed well after the forced liquidation of a highly indebted fund replenished several stocks in the US and China and took a billion dollar bite off other banks.
Discovery and ViacomCBS stocks fell dramatically in March after investment banks began buying large blocks of shares at sharply discounted prices when a client failed to meet margin requirements. It was widely reported that this client was the family office Archegos Capital Holdings, a heavily indebted fund operated by Bill Hwang.
The forced sale caused an estimated loss of $ 4.7 billion at Credit Suisse, where two executives announced their resignation on Tuesday. However, Goldman has not reported any material losses from the deals.
“From my point of view, our risk controls worked well. We recognized the risk early on. We took corrective action immediately to reduce our risk under the contract with the customer,” Solomon said on CNBC’s “Squawk on the Street”. “And I can’t really talk about what other banks have done and how they dealt with the situation, but I am very happy with how our team dealt with it.”
Hwang made his concentrated bets on stock swaps, where the investment banks he worked with officially owned the stocks and used high leverage on his trades. When stocks fell and he couldn’t meet his capital requirements, the banks held large chunks of the stocks.
“I think this is a classic case of an investor with concentrated positions that have leverage against them. And when price moves against them, it is important to reduce risk … This is not the first time this has happened and it certainly won’t be the last, “said Solomon.
The Archegos explosion has renewed the debate about the possible need for closer scrutiny of family offices and swap positions. Solomon said the discussion of transparency regarding more complex equity positions “deserves debate” but declined to say whether it was appropriate to partner with Bill Hwang at all, given his past problems with insider trading.
“I don’t think the answer is going back and guessing decisions like this one,” he said.