Nomura calls in McKinsey to learn from Archegos failings

Tokyo-headquartered multibillion dollar holding firm Nomura has tapped McKinsey & Company to bolster its risk management framework – having lost nearly $3 billion to a recent collapse of family office Archegos.

Archegos was a family company in New York set up by billionaire South Korean investor Bill Hwang in 2012, which managed over $10 billion in personal assets. The firm was used to make several big-ticket investments – including in ViacomCBS, Vipshop and Farfetch, among others. 

High-risk investment strategies saw Archegos crash in March, with the Wall Street Journal reporting total losses of over $10 billion for global investment banks – including Nomura Holdings, Credit Suisse, Goldman Sachs, Morgan Stanley and several others.

Nomura disclosed a loss of $2.85 billion, and has brought in experts from McKinsey & Company to prevent similar failings in the future – per reports from Risk.net. 

The fall

Nomura’s current risk management framework failed to identify red flags around Archegos, which used special financial instruments – total credit swaps – to underwrite its investments with funds from a host of different lenders. Archegos could invest anonymously and gain returns, provided that it covered the difference if there was a dip in asset performance. 

When such a dip came early this year, lenders called on Archegos to cover the losses to stop them from selling the assets – also known as a margin call. Archegos failed to do so, resulting in heavy losses for already strained banks – which were forced to sell at much-reduced share prices. 

According to reports, the anonymity that came with total credit swaps allowed Archegos to hide its exposure from lenders – putting them at high risk. Nomura’s $2.85 billion hit was the second largest behind Credit Suisse, which lost nearly $5 billion according to Reuters.

Nomura has since sold off 99% of its Archegos investments according to CEO Kentaro Okuda, and is looking to shore up its risk management framework to detect such elusive threats. The company remains confident in its profitability in the near future – expecting nearly $3 billion in pre-tax income from the next financial year.