Despite a nearly one-billion-dollar loss from the Archegos scandal, Morgan Stanley revealed record-breaking first-quarter profits for 2021, crushing analysts’ expectations.
As one of the few big banks to act quickly, Morgan Stanley steered towards a more conservative action to recognize Archegos’s margin call default. James Gorman, CEO of Morgan Stanley, announced, “we liquidated some very large single stock positions through a series of block sales culminating on Sunday night, March 28th.” This resulted in a loss of around $644 million.
Following a massive initial $644 million loss from the Archegos margin call default, the investment bank also hedged their risk position to de-risk their remaining short and long positions entirely. When inquired about their decision to spend more money, Gorman responded, “We decided we would be out of the risk as rapidly as possible, and in doing, incurred an incremental loss of $267 million. I regard that decision as necessary and money well spent.”
Though the defunct hedge fund might have deceived Morgan Stanley, the firm posted record-breaking first-quarter profits of $4.1 billion and a 30% earnings-per-share increase. Moreover, their revenue was up 61% from last year’s first quarter. Their investment banking segment experienced a profit growth of 66% to $8.6 billion due to increased merger-and-acquisition activity and high IPO volumes.
The financial services firm had also announced their future actions of diversifying their revenue streams away from investment banking and more towards growing their wealth management segment. Reflective of this assertation is their acquisition of the infamous electronic trading platform, E*TRADE, and investment management firm Eaton Vance. According to Gorman, these acquisitions have already exceeded their expectations as Morgan Stanley’s stock price has risen with retail engagement.
Morgan Stanley has proved to be one of the major big banks to partially avoid one of the most damaging margin call defaults in financial history. As opposed to their competitors, such as Credit Suisse, which suffered an approximate $1.5 billion in losses and will be expecting a quarterly loss, Morgan Stanley bit the bullet and looked towards other means to recover their loss position.
In a conference call with analysts, Gorman concludes the capital management debacle: “I think we’ll certainly be looking hard at family office-type relationships where they are very concentrated, and you have multiple prime brokers, and frankly, the transparency and lack of disclosure relating to those institutions is just different … that’s something I’m sure the SEC is going to be looking at, and that’s probably good for the whole industry.”
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