Goldman’s risk controls worked well during Archegos fire sale, CEO Solomon says

Goldman Sachs CEO David Solomon said Tuesday that his bank’s risk management systems performed well after the forced unwind from a highly levered fund tanked several stocks in the U.S. and China and took a multi-billion dollar bite out of other banks.

Shares of Discovery and ViacomCBS fell dramatically in March after investment banks began shopping large blocks of the stocks at highly discounted prices after a client failed to meet margin requirements. That client was widely reported to be the family office Archegos Capital Holdings, a highly levered fund run by Bill Hwang.

The forced selling caused an estimated $4.7 billion loss at Credit Suisse, where two executives announced their resignations on Tuesday. Goldman, however, has not reported material losses from the trades.

“From my perspective, our risk controls worked well. We identified risk early on. We took prompt, corrective action to lower our risk according to the contract we had with the client,” Solomon said on CNBC’s “Squawk on the Street.” “And I can’t really speak to what other banks have done and how they’ve handled the situation, but I’m very pleased with how our team handled it.”

Hwang made his concentrated bets through equity swaps, where the investment banks he was working with officially owned the stocks, and used high leverage in his trading. When the stocks went down and he couldn’t meet his capital requirements, the banks were left holding large chunks of the stocks.

“I think this is a classic case of an investor with concentrated positions that have leverage against them. And when price moves against them, it’s important to take down risk … This is not the first time this has happened and it’s certainly not going to be the last,” Solomon said.

The Archegos blowup has renewed debate about the possible need for more scrutiny toward family offices and swap positions. Solomon said the discussion about transparency around more complex equity positions “deserves debate” but declined to say if it was appropriate to work with Bill Hwang at all, given his prior issues with insider trading.

“I don’t think going back and second-guessing decisions like that at this point is the answer to this,” he said.

Source: CNBC