I saw them trading on the information they possessed about LTCM’s portfolio. The information I had been provided made me an insider – it was obvious what trades should be done to generate immediate profits (“pay fixed in ten year swap spreads”) but I respected the rules and waited. The LTCM bank group was apparently sworn to secrecy. But the economic incentives were similar to a cartel – each member was incentivized to secretly cheat. As with Archegos, an orderly liquidation of positions looked to be the best option. The following morning, our head of credit summarized the exposures we and the other big counterparties had to LTCM. I received a phone call late one night from a colleague informing me that LTCM was collapsing due to many highly leveraged bets going awry simultaneously.
I was running interest rate derivatives for Chase Manhattan (later merged into JPMorgan).
Their abundance of PhDs and egos had created a colossus that generated tens of millions of dollars a month in profits for the banks trading with them. LTCM was our biggest counterparty, but then LTCM was everybody’s biggest counterparty. In 1998, when hedge fund Long Term Capital Management (LTCM) was blowing up, their biggest swap counterparties gathered to discuss an orderly liquidation. Pausing rarely cost the opportunity – markets moved their way more often than not.
ARCHEGOS LIQUIDATION FULL
Whenever I found Goldman on the other side of my trades, I often traded less than my full position while I figured out what could be driving their decision to go the other way. They rarely seemed to be forced participants – often they’d identified a mis-pricing or arbitrage opportunity. In the 1980s and 1990s when I was trading interest rate swaps at JPMorgan, if Goldman was your counterparty to a trade it was worth taking a second look. Goldman Sachs is full of street smart, talented people. Nomura and Credit Suisse, in a high stakes version of the Prisoner’s Dilemma, thought time was on their side. Goldman and Morgan Stanley, who had sensibly adopted the role of observers not participants, evidently relied on this subtle distinction to immediately sell the Archegos collateral they held once they understood the scale of the problem. Some Wall Street firms are sharper than others. It was a mismatch of men and boys – according to reports, Goldman warned that the market would quickly realize the scale of the problem, depressing the prices of what they were trying to sell and leading to a very disorderly liquidation. Imagine the discussion among Credit Suisse, Nomura, Morgan Stanley, Goldman Sachs, UBS and Wells Fargo as they considered an orderly liquidation of the hemorrhaging Archegos portfolio. That’s one of the conclusions from the Archegos blow-up that is estimated to have cost the firm’s lenders as much as $10BN.
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