Archegos fiasco thwarts Nomura’s push to join Wall Street elite

News of the blowup spread through financial circles in Tokyo to the pulse of a familiar refrain: "Not again."

Nomura Holdings Inc. had run into trouble far from home, this time, with the giant implosion of Archegos Capital Management in New York. Few institutions have been as humbled by the Archegos debacle as Nomura, the forever-striving giant of Japanese finance.

The question now is how, or perhaps whether, Nomura can shake off this latest blow and press on with its global ambitions. Analysts wonder if heads will roll over the Archegos losses or if Nomura will quit certain businesses.

Whatever happens, breaking into the big leagues in New York looks as daunting as ever for a brokerage that’s been eyeing Wall Street ever since founder Tokushichi Nomura first toured the city in 1908.

"Nomura has yet to be able to join the Wall Street club,” said Hideyasu Ban, a finance analyst at Jefferies Financial Group Inc. in Tokyo. "Even those well-established financial firms in the European continent haven’t had many successes in the U.S.”

Nomura likely trails only Credit Suisse Group AG among banks posting the biggest losses from the family office collapse that saw almost $20 billion vanish in two days. Nomura has only said its claim was about $2 billion. More details on the extent of the damage may emerge Tuesday when the firm reports fourth-quarter results.

While Nomura wasn’t the only firm caught out by the debacle at Archegos, the setback adds to a list of stumbles for the Japanese firm as it takes on global risk to offset slower growth at home and vies to compete with its larger, more agile U.S. rivals.

Next steps

Nomura, joined by Japanese peers Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. in facing losses linked to Archegos, is already taking steps to deal with the fallout. The firm is tightening credit for hedge fund clients as part of a review of its prime brokerage, which may result in a scaled-back business, people familiar with the matter have said. Nomura is also drawing up a list of clients that will be encouraged to move their business elsewhere because they don’t use the full spectrum of its services, one person said. Japanese regulators are conducting their own review.

A representative for Nomura declined to comment. A spokesman for MUFG said the risk controls were working, "but we take it seriously that we were not able to detect it early. We will work to improve and enhance risk management.” The bank declined to name the client behind the loss. A Mizuho spokeswoman declined to comment beyond saying no events would affect its profit forecast.

The Nomura losses add to the pressure on Kentaro Okuda, a company lifer who took over as chief executive officer a year ago and once ran the North American business. As recently as December, Okuda was downplaying the risk of his global operations.

"I still feel that our international business is seen as unstable,” he said at a conference. "Thanks to continued efforts over the past few years, we are transforming into an organization capable of delivering consistent revenues in spite of market turbulence.”

Okuda led a restructuring of the wholesale division starting in 2019 to focus on businesses that Nomura is good at, following three rounds of similar overhauls and cutbacks. The conclusion: the prime brokerage should remain, allowing the firm to lend money and securities to hedge funds and other institutional investors.

Since it lacks the balance sheet and deposit-taking heft of its bigger U.S. rivals, Nomura also saw an opportunity in small corners of the derivatives markets such as structured finance.

Despite the push, Nomura has never been a big player in the prime broker space, making the massive Archegos hit all the more surprising. Archegos founder Bill Hwang put on so many bets with so many banks, the lenders weren’t aware of how over leveraged he was until some of the underlying stocks including ViacomCBS Inc. crashed.

While firms such as Goldman Sachs Group Inc. and Wells Fargo & Co. were able to unload their shares without suffering much damage, the Japanese banks — along with Credit Suisse and Morgan Stanley — were slower off the mark and took bigger hits.

The Archegos mess signals Nomura is repeating past mistakes of taking on too much risk in a single market, said JPMorgan Chase & Co. analyst Wataru Otsuka.

"The latest case indicates that there has been some unbalanced risk-taking,” said Otsuka, adding the firm needs to once again determine where in the U.S. market it’s truly competitive. "What investors want to know is whether Nomura’s business is sustainable.”

Nomura has had other setbacks abroad, and has posted pretax losses in the Americas for three of the past five years. Once the largest investment bank in the world by market value in the late 1980s, Nomura tried to leverage the expertise of Lehman Brothers by taking over its European and Asian units in 2008, though that contributed to an ¥81 billion ($750 million) writedown two years ago. It suffered one of its biggest trading losses from the collapse of a bond firm in London in 2015, and closed a real estate finance business in San Francisco two decades ago after posting a $700 million loss.

Archegos-linked losses at MUFG and Mizuho — estimated at about $270 million and $93 million — were much smaller but also highlight the risks of stepping out of their comfort zone.

MUFG and Mizuho have said they aren’t in the prime broker business. Yet they were exposed to Archegos.

MUFG was thwarted from offloading its exposure just as the block-trade frenzy hit the market by its own lawyers, according to a person familiar with the matter. The firm’s legal team concluded that the terms of its contract with Archegos didn’t allow for an immediate unwind and the bank would have to wait a couple of days before they could sell. The firm was stuck with the exposure even as the holdings continued to tank, a situation that ultimately left them tallying outsized losses relative to their total exposure to the family office.

The MUFG spokesman declined to comment on the unwinding.

Even with the losses, the Japanese firms are unlikely to resist the siren call of Wall Street, home to the biggest pool of bank fees. Risk-taking comes with the territory.

"You can never become a major international player without doing business in the U.S.,” said Ban.