Goldman's Libya Salesman Was a Little Too Good
bloomberg.com
bloomberg.com
Any party that's suing a bank will act the part of the unsophisticated victim, even if they knew exactly what they were getting into.
If a salesman offers you a bet that Citi shares will go up, and you take the bet, and Citi shares go up, and you don't get any money, and you ask him what happened, and he shrugs and says "derivatives are complicated, man" -- you should probably sue him. But if a salesman offers you a bet that Citi shares will go up, and you take the bet, and Citi shares lose 96 percent of their value, it looks a little funny to go to court and say "well we didn't understand the structural nuances of the bet." The nuances are not your problem.
Like paying prostitutes by example. Ah you meant illegal maybe.
There's plenty of problems in finance, but you won't be helping fix any of them by identifying even normal transactions as somehow fraudulent.
* The client came up with the trade idea (the spark seems to have come from Qaddafi himself.)
* It was basically just a call option, not some complicated thing with many bells and whistles
* The clients aren't even claiming they were duped in any way
The problem is not that Kabbaj was lying. It's that he was too charming.
Elsewhere, this sort of thing would be called corruption, specifically bribery of a public employee.
That doesn't mean that internships-for-deals or prostitutes-for-deals is an appropriate thing for a bank employee to be offering.
[1]the picture is somewhat complicated by the legitimate beneficiaries - the Libyan people - having had very little say in who ran their sovereign wealth fund, and the Libyan regime having radically changed since 2007 [2]not only was it less damaging than the equivalent long position in stock would have been with the benefit of hindsight, but other articles suggest the Libyans preferred the derivative option because they were less likely to be subject to asset freezes/seizures if the US government took a more anti-Gaddafi stance in future...
Whether it would have been illegal in 2008 I'm not sure
http://www.transparency.org.uk/our-work/business-integrity/b...
This obviously does not apply to this specific case, but I just wanted to point out that it may not be always so simple.
(edit: correct wording)
That really does sound like a big freaking problem!
What the hell happened!? Volatility went through the roof that option should have been a gold mine! What was the underlying asset for the put option, the shares or another forward that would pay out the difference??
If shares, did the short selling restrictions the SEC put in place adversely affect the viability of that option? Was the SEC colluding with Goldman to wipe out Libya's bet? Even unwittingly?
If not shares, did something happen to OTC options in the forward market that is not common news??
This lawsuit could have many legs. Not in compensation but information, and if the bank doesnt want that information out there then compensation.
They essentially bought a call option. Remember, (bought forward + put option) = call option [1]
They weren't 'hedging' anything, they just wanted to gamble that the stocks would go up. Obviously, that didn't happen. Because all they bought were options, they lost a lot less money than if they had simply bought the same notional amount in actual bank stock.
> Volatility went through the roof that option should have been a gold mine!
Options increase in value when volatility increases only if the stock price doesn't change. If you hold a call and the underlier tanks, it generally doesn't matter than the volatility shot up (unless the option is super long-dated). Try it yourself: http://www.option-price.com/
[1] https://en.wikipedia.org/wiki/Put%E2%80%93call_parity#Implic...
Part of the problem is that some financial products can expose you to greater financial loss than your initial investment, and it's these that need to be carefully regulated and only sold to those who know what they're doing.
Unfortunately they're very profitable most of the time, so everyone wants to get in on it. Imagine going around making a bet for $1 that makes you $1.10 every time except for the one-in-a-million possibility of owing $10m.
If the underlying never goes above $115 in those 3 months you make money. If it discovers the cure for cancer and gets a hostile takeover offer sending the price to $5000 well then you're out $4885.
An experienced options trader will limit their potential loss in this situation by say buying a call at $150 for $1.
There are lots of examples like this. Warren Buffett once likened this to picking up pennies in front of a bulldozer.
Options which can go a long way out-of-the-money. Short selling when vulnerable to short squeeze. Most kinds of heavily leveraged investment. Some kinds of trading that depend on volatility and liquidity. Anything with lots of unexamined counterparty risk.
One case study is LTCM: http://www.prmia.org/sites/default/files/references/Long_Ter...
.. which is an interesting read because it's kind of a TBTF "near miss", that could have blown up the system through defaults but didn't.
https://en.wikipedia.org/wiki/Martingale_(betting_system)
FYI, bonds are the one of most common examples of such a asymmetric bet.
If you buy a nice, safe, investment-grade bond that pays you ~2% more than Treasuries, it's because the market prices in a 2% chance every year that the company goes bankrupt.
So in return for 2% excess yield, you get a 2% chance to lose your entire principal. This is a lot like selling a call option -- if you get paid $2 on a $100 stock for selling a call, but if it goes badly against you, it's very possible to lose $100.
In fact, you can view 'buying a bond' as essentially buying the assets of a company, and then selling back a call option to the equity holder [1].
The difference is that people at least generally understand that with a bond, your entire principal is at stake, and bonds are hard to lever up compared to selling a call -- but the actual economic risk profile is quite similar.
[1] https://books.google.com/books?id=0TTiiI6CGj4C&pg=PA25&lpg=P...
It's a bit hard to find from the website, so here's the RSS link for everything he writes: http://www.bloomberg.com/view/rss/contributors/matt-levine.r...
I think this is my favorite bit.
Which actually brings up a good proactive defense for the salesman: Make sure you let you client know what they should be asking, not just what they ARE asking. Not that this an easy question to answer - you're asking someone else to point out your unknown unknowns, but in turn, they're blinded by familiarity (example: I actually do experience slight surprise when people haven't heard of Hacker News).
Can anyone explain why the words corruption and bribery are missing from the article? Is it normal to treat government workers to prostitutes?
To add some more, there is an affirmative defense to the FCPA that it is ok to give gifts/payments that are lawful according to the written law of the country [1]. Libya has some laws against corruption but they are rarely enforced and may not have been in place at the time [2].
Anyway, it seems strange to me that this article is about a new legal theory of "undue influence" and a salesman being uniquely "too good" when the concept of bribery has been around for thousands of years. Maybe the article could have said something like, "Libya screwed itself over by not having anti-corruption laws, and therefore it's trying a different legal approach."
bizarre. you don't really expect to have to walk through finance 101 with a 67-billion-dollar SWF... you just have to believe the guys hired to manage that fund are qualified right? these are not your grandma's retirement savings.
and then they turn around and say they don't understand what they bought?
being a second cousin of a wife of the "beloved leader"'s chief of security is the best qualification, easily beats your Princeton's MBA in Finance.
> the bank was willing to guarantee him $9 million in pay. It was an astonishing sum, even at Goldman.
> Kabbaj never got his $9 million.
via https://www.bloomberg.com/features/2016-goldman-sachs-libya/
It appears the mainly involved persons, Layas and Zarti, emigrated to live in Egypt and Vienna, respectively. I'd say that if Zarti applied for asylum in Austria, he'd be one of the applicants with best reasons to get one, by the terms of refugee treaties.
http://www.telegraph.co.uk/finance/newsbysector/banksandfina...
Interesting twist here. I guess it must be hard to discern for someone who has lived in this trade for so long, and used this mindset as the core of his trade for most of his career but there are simple things that technical people (or even just lawyers) will easily discern: omissions and hiding of a client's best interest.
If you know something is wrong in a company and you don't tell it to your employer, in many fields, that makes you at least negligent. If you know something is wrong and you don't tell it because it causes personal gain to you, it is actually illegal in most jobs and likely criminal.
If you are paid for giving advices in the interest of your consumer and you hid an honest assessment of risks because you profit in your client's risky behavior, yeah, that's fraud. A doctor prescribing an addictive medicine, an IT guy selling a faulty software because he got share in the selling company, etc...
The fact that a while oil rich country had given the nephew of someone the right to buy billions of dollars is the fault of the fucked up dictatorship ruling the country
I can see why the new government wants to sue - but I suspect a new moral hazard should be introduced - when a dictatorship is buying, it should be automatically assumed that subsequent democratic governments can come and ask for the cash back no questions asked
That alone should stop most dictatorships doing anything. Interesting idea?
"""In some respects, the concept is analogous to the invalidity of contracts signed under coercion."""
(Thanks - V interesting)
There are any number of private security organizations; like any industry most (but not all) are professionals who know and operate within the relevant laws.
This is not how most of the world sees things.
In the eyes of those who were assured of sure things, the brutal dismemberment and evisceration of the scammers, their families, and their pets, is justified, reasonable, and pretty certain to happen at some point, to protect one's honor.
If one wishes to do business in other cultures one should understand those cultures.
The particular cultural value you're appealing to here is rule of law: https://en.wikipedia.org/wiki/Rule_of_law
It is a value I'm personally fond of. But it's not the only way to run a country. I'm going to go out on a limb an suggest that a guy who engineered a coup, declared himself "Brotherly Leader and Guide of the Revolution of Libya," and stayed in power 40 years was maybe not the biggest fan of the theory that "law should govern a nation, as opposed to being governed by arbitrary decisions of individual government officials".
> Not all cultures are the same
way to go west! something about lesser evil and whatnot
The Gadhaffi regime is to blame for all of these things; pinning them on 'Libyan culture' is not even wrong.
I'm not sure what else to say. Please consider editing this comment; I'm sure it was poorly worded as a response to the original poster, and you don't actually mean this.
It's very possible that the Libyans were informed that they are hedged against a crash, only to discover later that the PUT counterparty got liquidated.
Any one willing to investigate this particular point deeper?
The forward is identical to (long call, short put). You can see that would be bad if the stock goes down. So they bought puts to close out their short put position, leaving them with a long call which expired worthless.
"Did you know Goldman had an extraction team? In my time selling equity derivatives, it never came up."