Not long before the implosion that would rock Wall Street and threaten Bill Hwang with life in prison, he tapped out an email to a bank that had been vital to the success of his investment fund, Archegos Capital Management.
Hwang appreciated the "corporate partnership and friendship" of Nomura Holdings Inc.'s executives for 25 years, he wrote in December 2020, and he was "so glad to see our partnership is growing even stronger." He was eager to host them at his penthouse apartment — "I know all the good Korean restaurants in NJ and NY! :)"
He was responding in kind to an email sent by Yo Akatsuka, the head of Nomura's Americas unit who had met with Hwang the night before with Kentaro Watanabe, another of the Japanese bank's officials.
"I recognized again how much you have supported our business globally and I appreciated this kind of strong institutional relationship between us," Akatsuka wrote. "I enjoyed Italian, wine and various topics to talk. And I love the PH room with great views of the park and the city!!"
Just three months later, Archegos had collapsed and Nomura had lost almost $3 billion, one of the biggest losses in the history of the prime-broker industry that caters to investment funds. Several Wall Street banks also lent to Hwang's firm, collectively losing about $10 billion. But only Credit Suisse Group AG lost more than Tokyo-based Nomura, which housed one of the smallest prime brokers.
It's an episode so painful that Chief Executive Officer Kentaro Okuda and his deputies have avoided uttering Archegos's name, instead referring to it as a "U.S. prime-brokerage client" or simply the "U.S. incident."
Top Level
Interviews with more than a dozen people familiar with the matter and documents reviewed by Bloomberg show Hwang cultivated ties at the top of the Tokyo-based lender, frequently meeting Okuda and other senior officials in the years leading up to Archegos' collapse. He and the CEO were scheduled to meet again in April 2021 and he was "grateful" for how their relationship extended "throughout the rest" of the bank.
"Nomura disagrees with the narrative portrayed in this article, which is based on anonymous sources and mischaracterization of the facts," Aoife Reynolds, a spokesperson for Nomura in London, said in an emailed statement. "We have publicly documented our response to the Archegos default, which included a comprehensive review of risk management to further enhance our risk controls and framework."
As Archegos became the biggest client of Nomura's prime-broker unit, risk-management missteps followed, the documents show. Among them was a decision in late 2020 to reclassify the fund as its safest kind of customer, and then cut the amount of collateral Archegos needed to post. At one point, Nomura charged Hwang's firm some $2 billion less than internal guidelines suggested.
The bank had received multiple warnings about risk failures across its global-markets business. One internal report zeroing in on the prime-broker unit circulated just weeks before Archegos fell, the documents show.
Nomura's risk management failures were a "disaster," said Jonathan Aikman, a finance lecturer at Queen's University in Canada and author of the 2010 book "When Prime Brokers Fail." "When you fall in love with a client, you let their losses run and you don't reel them in."
Lingering Impact
The effects linger more than two years later as Okuda tries to bolster Nomura's controls and help its stock recover. Profits have dropped for three straight years, and the firm has slashed earnings targets.
Okuda announced an overhaul of Nomura's risk management in the wake of Archegos and formed a new unit to help manage threats to the bank, outlining his efforts in presentations to investors during 2021. The firm scaled back its prime-brokerage business and replaced some executives involved in the affair. As for Hwang, Okuda hasn't met with him since 2019, according to one of the people, who weren't authorized to speak publicly about the Archegos matter.
Meetings between clients and senior executives are "normal business practice," said Reynolds, the Nomura spokesperson. The bank has "cooperated fully" with investigations carried out by multiple regulators and law-enforcement authorities and to date, "none of these agencies have found that such relationships improperly influenced Nomura's decision-making" or given notice "of any intention to sanction the firm or its personnel," she said.
Hwang, 59, was arrested in April 2022 for fraud, with the U.S. accusing him of lying to banks including Nomura about Archegos' holdings to illegally obtain "billions of dollars of credit." He pleaded not guilty and goes to trial in February, facing up to 380 years in prison.
All the executives named in this article either declined to comment or didn't respond to messages. Hwang also declined to comment. In court, his lawyers contended his trades were lawfully executed and that various investment banks "played a pivotal role" in the implosion of his firm.
The partnership extolled by Hwang merited high-level attention, given that the bank expected Archegos to generate $54 million of fees for the year through March 2021. This was more than any other client, as Hwang's increased borrowing gave him tens of billions of dollars of market exposure, the documents show.
Ultimately, Archegos tapped Nomura for more financing than industry giants Elliott Investment Management LP, Schonfeld Strategic Advisors and D.E. Shaw & Co. combined, using the loans to amass some $34 billion of trades across a concentrated number of stocks. Spokespeople for the hedge funds declined to comment.
The Archegos windfall would be a boost for Nomura and Okuda, 59, the CEO since early 2020. Nomura had taken over the European and Asian operations of Lehman Brothers Holdings during the 2008 financial crisis, but it remained a minor force in the cutthroat world of elite prime brokerages.
Steven Ashley, Nomura's veteran head of global investment banking, rarely expressed an interest in the unit and was more focused on bigger businesses, some of the people said. This bit-player status made Nomura's prime brokerage prone to being too deferential to a large client, they said.
Tiger Cub
Hwang's ascension to the top of Nomura's client list dates from the 2000s when he was a "Tiger Cub," a hedge fund manager who had worked under industry titan Julian Robertson at his Tiger Management LLC firm. Hwang left to set up his own Asia-focused fund, Tiger Asia Management LLC, and became a loyal client of Lehman's prime brokerage. Many bankers from the defunct Wall Street firm, including those who dealt with Hwang, moved to Nomura after the takeover and the relationship continued, Bloomberg has previously reported.
The bank and Archegos had a natural affinity, according to one of the people who worked closely with Hwang in the 2010s. Nomura, emboldened by the Lehman deal, wanted to deal with the most aggressive investors, while Hwang was well-versed in Asian markets and understood Japanese culture, the person said.
The warm relations continued after what could have been a career-ending moment in 2012 when the U.S. charged Tiger Asia with fraud for allegedly using non-public information for its trades. He entered a guilty plea on behalf of his New York-based firm and settled similar allegations by the Securities and Exchange Commission for $44 million. A Hong Kong tribunal banned him and the fund from trading there for four years.
When it was over, Nomura bankers still considered Hwang — a devout Christian who prayed with his employees every Friday morning — to be a humble, thoughtful and sincere operator, one former employee said. He also generated a lot of fees, another person said. When he shuttered Tiger Asia and formed Archegos as a family office that would manage his own fortune, the bank began lending to the new fund.
Sliding Scale
Prime brokers lend to hedge funds in return for fees and other forms of trading revenue. They typically demand collateral, or margin, that they can seize and sell if a fund's holdings lose value. The more collateral a prime broker holds, the smaller its losses will be if a client implodes. This is a vital calculation that should make the business a safe one, no matter a client's size, industry veterans said.
"Your first and best line of defense is the collateral you're holding," said Martin Malloy, the former global head of Barclays Plc's prime brokerage who's now a finance professor at Wake Forest University. "Just because you're a Tier-1 client doesn't mean you get a pass on my margin rules."
Nomura's prime brokerage used a sliding scale of 1 to 5 for collateral, assigning the riskiest clients 5 ratings and charging them the most, the documents show. Around December 2020, the bank moved Archegos from 2 to 1 and reduced the collateral it required from 14.2% of the value of its trades to 12.7%.
The decision occurred around the same time as a call that included Nomura's U.S. prime brokerage head, Joshua Kurek, and Hwang's head of trading, William Tomita. While Hwang didn't dial in himself, he was grateful for "Josh's help with margin and risk parameters" and "all of the work Josh has done over the past years in making sure both sides are comfortable from a risk/PB perspective," according to the documents. Archegos was borrowing from the bank because of its "comfort level" with Nomura's "senior level management," the documents show.
Top-ranked customers, the division's most creditworthy clients, were so trusted that they were sometimes allowed to pledge less collateral than the bank's risk models deemed most prudent. Prime brokerage employees referred to this gap as Margin Template Variance, or MTV, the documents show.
While MTVs were generally supposed to be reserved for the safest clients, risk officials at Nomura still recognized the dangers that they presented, the documents show. They were supposed to be reviewed every week, with amounts as small as $250,000 getting flagged to business heads depending on the customer.
Archegos' MTV was already running at about half a billion dollars in December 2020, the documents show. By mid-March 2021, as the fund borrowed more and more, it had surged to almost $2 billion.
Growing Hazard
That was more than double the total amount for a group of portfolios run by Elliott Investment Management, one of the world's biggest hedge funds. It was almost 10 times that of D.E. Shaw, another industry pioneer founded by David E. Shaw. No other clients had MTVs higher than tens of millions of dollars, the documents show.
Nomura officials at first didn't fully recognize the growing hazard. Archegos was barely mentioned at meetings in January or February to discuss risks across the U.S. global-markets division, the documents show. At a March meeting specifically about risks at the prime brokerage, employees stated that the collateral they were demanding from the fund exceeded any potential losses. The bank did raise Archegos' collateral requirement slightly, to 13.1%.
Bankers elsewhere were beginning to take a more stringent stance. Deutsche Bank officials had a meeting with Hwang in early 2021 and asked him how he intended to exit his increasingly large positions, one of the people said. After his vague response, they demanded more collateral, ultimately about 23% — much more than what Nomura was charging, the person said. Counterparts at Goldman Sachs took a similar approach, another person said. When the fund collapsed, both of those banks avoided substantial losses. The banks declined to comment.
Risk Management
Nomura gave Archegos those breaks despite the bank's spotty record on risk management.
Back in 2015, Nomura lost about $40 million — then its biggest-ever trading loss — when a series of bond trades with an obscure client went awry. Nomura's risk managers were dismayed by the blunder and eager to avoid a repeat, one of the people said. They worked to improve controls and were confident they had done so, the person said.
Internal auditors weren't as sanguine. They criticized gaps in risk management across Nomura's global-markets business in 2019 and 2020, tagging it as below-satisfactory with "room for improvement," the documents show.
The Bank of England's Prudential Regulation Authority raised more concerns in 2020 about Nomura's European government-bond desk, a key business renowned for outsize bets on sovereign debt. The team frequently breached its risk limits, yet risk managers only pushed back "once a trader has already accumulated a limit-breaching position," the bank's internal auditors wrote.
On Feb. 17, 2021, weeks before Archegos collapsed, the in-house watchdogs flagged a slew of issues at the prime brokerage. They warned that the PRA was concerned risk management "does not appear to have sufficient resources to be fully effective," and the bank's methods for calculating collateral and risk monitoring fell short.
"This could result in excessive risk exposure to clients, for example, due to insufficient or poor-quality collateral that is not appropriately managed," the auditors wrote, warning of potential losses and regulatory censure.
A spokesperson for the PRA declined to comment.
Archegos Collapses
The decades of "friendship" between Hwang and Nomura began to fall apart in the third week of March 2021 when ViacomCBS Inc., one of Archegos' biggest investments, announced a stock offering and its shares began to sink. U.S. prosecutors allege that Hwang then spent more than $2 billion trying to drive up the value of his portfolio, succeeding only in depleting the fund's cash.
While other bankers across Wall Street made margin calls and seized billions of dollars of stocks linked to Archegos, Nomura executives balked, the people said. On a call with Hwang and representatives of other banks on March 24, one prime-brokerage executive asked whether it would be possible to "unwind exposures in a pro-rata fashion that reduces exposures to counterparties equally?"
Other bankers on the call, who were rushing to offload shares, were surprised by Nomura's delayed reaction and likened the bank to "rabbits in the headlights," one of the people said. In the aftermath, multiple employees heard Ashley, the head of global investment banking, utter a colorful line of despair.
"How," Ashley said, "did no one notice this tall tree?"
