© Reuters. FILE PHOTO: A view of the Goldman Sachs booth on the floor of the New York Stock Exchange
By Elizabeth Dilts Marshall
NEW YORK (Reuters) – Goldman Sachs Group Inc (NYSE 🙂 executives are investigating how well the bank has handled several key market events that have resulted in extreme volatility this year, people familiar with the matter told Reuters.
The review will include a market-wide fire sale of stocks triggered by Archegos Capital Management's default on margin calls with banks, including Goldman.
The collapse of Archegos, a New York mutual fund run by former Tiger Asia executive Bill Hwang, sent shock waves across Wall Street and triggered regulatory scrutiny on three continents.
Goldman Sachs also examines more broadly how it has handled recent market events, with a particular focus on compliance and best practices, the sources said.
This could include what happened during the Reddit-fueled trading frenzy in the stock markets, including stocks of GameStop Corp. (NYSE 🙂 as well as the decision of the US Federal Reserve to end the pandemic-induced capital relief for banks, which led to problems in the bond markets. Energy markets were again in chaos in mid-February this year after a freezer in Texas drove up fuel and electricity costs.
Goldman Sachs declined to comment.
Although Goldman didn't make or lose any significant amount of money to the Archegos failure, and the CEO said the bank's controls were working well, the surge in volatility in several markets this year prompted management, its risks and hedges, sources said.
These types of reviews are routine at major Wall Street banks, especially when under scrutiny by regulators and politicians. The events at GameStop and Archegos have led financial regulators to take a closer look at what caused the volatility.
The Fed sees it as a "breakdown of risk management" for companies that have run Archegos' business, Chairman Jerome Powell told CBS's "60 Minutes," https://www.cbsnews.com/news/federal-reserve-jerome -powell-60 -minutes-2021-04-11, which aired on Sunday and promises the regulator won't allow it again.
Goldman chief executive David Solomon said last week that the bank's risk controls "worked well" for Archegos.
As part of their review, the bank's compliance department looked at its decision to do business with Archegos in late 2020 and found that the family office needed to increase the collateral that needed to be deposited earlier this year, one of the sources said.
This helped Goldman avoid losses on positions that rival those of the Japanese bank Nomura Holdings (NYSE 🙂 Inc and Switzerland Credit Suisse (SIX 🙂 Group AG are now facing.
Goldman and several banks avoided doing business with Archegos in the early days because Hwang's previous firm entered into an insider trading agreement for $ 44 million with the Securities and Exchange Commission in 2012. They warmed up for the customer last year after the time ran out and realized that rivals were doing business with Hwang again.
However, Archegos had six prime brokers to handle its trades with different leverage and margin requirements for a handful of focused bets. When some of his positions were exhausted in late March, banks had to seize collateral and sell billions of dollars worth of shares to cover Archegos' positions.
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