By Elizabeth Dilts Marshall and Noor Zainab Hussain
(Reuters) -Morgan Stanley lost nearly $1 billion from the collapse of family office Archegos Capital Management, the bank said on Friday, muddying its 150% jump in first-quarter profit that was powered by a boom in trading and deal-making.
Morgan Stanley (NYSE:MS) was one of several banks that had exposure to Archegos, which defaulted on margin calls late last month and triggered a fire sale of stocks across Wall Street.
Morgan Stanley lost $644 million by selling stocks it held related to Archegos' positions, and another $267 million trying to "derisk" them, Morgan Stanley Chief Executive James Gorman said on a call with analysts.
"I regard that decision as necessary and money well spent," he said.
The bank did not disclose losses right away because they were not deemed material in the context of its overall results, he added.
Morgan Stanley is not alone in nursing losses as a prime broker for Archegos. Switzerland's Credit Suisse (SIX:CSGN) Group AG and Japan's Nomura Holdings (NYSE:NMR) Inc bore the brunt, having lost $4.7 billion and $2 billion, respectively.
Goldman Sachs Group Inc (NYSE:GS), Deutsche Bank (DE:DBKGn) and Wells Fargo (NYSE:WFC) & Co also handled Archegos positions but exited them without losses, Reuters and other media outlets have reported.
Morgan Stanley did not realize that Archegos had similar, concentrated positions at several banks across Wall Street, Chief Financial Officer Jonathan Pruzan told Reuters. As such, the collateral requirements it imposed were only reflecting Archegos's particular risks at Morgan Stanley, not the risks across the fund's broader portfolio.
Morgan Stanley has reviewed its prime brokerage business for similar problems but not found any, Pruzan said. The bank is looking more broadly at its method for stress testing, and will recalibrate positions with clients as necessary.
"We are never happy when we take a loss," he said. "But the event is over...and we will learn from the experience."
The Archegos saga is likely to have regulatory repercussions, however, with a slew of U.S. watchdogs as well as the Senate Banking Committee all probing the incident to better understand why some banks were so exposed to a single client.
Gorman appeared exasperated at times during the call as he faced repeated questions from analysts about Archegos, distracting from the bank's otherwise stellar performance.
Morgan Stanley's shares were down 1%.
"It's not a financial event in the grand scheme of things, but it will likely raise concerns," Oppenheimer analyst Chris Kotowski wrote in a note to clients.
Although Morgan Stanley's Archegos loss dominated the discussion on Friday, its first-quarter profit comfortably beat expectations. Its report wrapped up a robust quarter for the biggest U.S. banks, which benefited from reserve releases and record capital markets activity.
A spike in trading, partly driven by a Reddit-fueled trading frenzy in "meme" stocks like GameStop Corp (NYSE:GME), drove a 66% jump in revenue at Morgan Stanley's institutional securities business.
Unlike rivals JPMorgan Chase & Co (NYSE:JPM) and Bank of America (NYSE:BAC), Morgan Stanley and Goldman Sachs lack big consumer lending units, which has limited their exposure to loan problems during the pandemic and allowed them to focus on investment banking and trading.
Morgan Stanley's profit rose to $3.98 billion, or $2.19 per share, in the quarter ended March 31, from $1.59 billion, or $1.01 per share, a year ago.
Analysts were looking for a profit of $1.70 per share, according to IBES data from Refinitiv.
Net revenue jumped 61% to $15.72 billion.
Like bigger rival Goldman Sachs, Morgan Stanley benefited from an unprecedented boom in dealmaking through special purpose acquisition companies (SPACs).
Global investment banking fees hit an all-time record of $39.4 billion during the March quarter, according to data from Refinitiv.
Morgan Stanley also generated handsome fees from a spate of mergers and by underwriting numerous high-profile IPOs of companies including Affirm Holdings and AppLovin Corp.
Its investment banking revenue more than doubled to $2.6 billion.