4 ms·

One good point this article makes is that despite popular opinion, just because someone is suing a bank doesn't mean that the bank actually did anything wrong.

One good point this article makes is that despite popular opinion, just because someone is suing a bank doesn't mean that the bank actually did anything wrong. 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.

makapuf 10y ago
> doesn't mean that the bank actually did anything wrong. Like paying prostitutes by example. Ah you meant illegal maybe.
- smallnamespace 10y ago
  If a client comes to you and says "I want to buy some bank stocks", and you help them make that happen, what exactly did you do wrong? 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.
  - makapuf 10y ago
    It depends on what you did by helping them. The article did not specifically underline the straightforward way of the deal. Or (God forbid) morality. For any measure of morality (well perhaps not a dictator one)
    - smallnamespace 10y ago
      The article was pretty specific: * 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.
      - claudius 10y ago
        > 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.
        notahacker 10y ago
        Yeah. I've no sympathy whatsoever for the Libyan officials[1]. They made a bad bet and lost money. It wasn't a bet that was purposely designed to lose, and was apparently actually less risky than the conventional stock purchase.[2] Their claim not to have known what they were doing makes them more culpable, not less, for anything that went wrong because they were supposed to be looking after a sovereign wealth fund FFS. 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...
  - makomk 10y ago
    Goldman didn't help them make that happen. They sold them highly leveraged bets that the bank stocks would go up, not bank stocks. The two are very different things.
- youngtaff 10y ago
  I suspect this would be considered bribery in the UK now (following 2010 bribery act) Whether it would have been illegal in 2008 I'm not sure http://www.transparency.org.uk/our-work/business-integrity/bribery-act/ http://www.transparency.org.uk/our-work/business-integrity/b...
  - ddeck 10y ago
    IANAL, but I believe this would almost certainly have been illegal in 2008 under the US Foreign Corrupt Practices Act. https://en.wikipedia.org/wiki/Foreign_Corrupt_Practices_Act https://en.wikipedia.org/wiki/Foreign_Corrupt_Practices_Act
crivabene 10y ago
However, please remember it may be (of course) a little bit more complex than this: in certain markets trading certain types of investment vehicles with non-qualified investors is forbidden, since they simply would not be able to understand how it works. This led to hundreds of lawsuits in a number of countries after 2008, when some banks just had low/mid-class people signing a piece of paper saying they were expert investors without actually informing them of the risks involved in those transactions. 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)
cloudjacker 10y ago
I take issue with that, the article alluded to the reason but never mentioned it: why did the put option fail to hedge the forward? 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.
- smallnamespace 10y ago
  > why did the put option fail to hedge the forward? 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/ http://www.option-price.com/ [1] https://en.wikipedia.org/wiki/Put%E2%80%93call_parity#Implications https://en.wikipedia.org/wiki/Put%E2%80%93call_parity#Implic...
- tedunangst 10y ago
  Everything I've read suggests the trade was very directional. They wanted to make money when citi went up. Maybe they had some puts, or not enough, but the story's two years old now and I haven't heard anyone suggest that LIA had a bunch of 'dud' puts.
JackFr 10y ago
If you tell the salesman "I want to by Citi shares" and he tells you, "Don't be schmuck -- only retail buys shares. You need to buy this impressively named derivative instead. With the instruments available to you simply buying shares would leave you irresponsibly underleveraged.", then the bank deserves a lawsuit. They may not deserve to lose the suit, but it was trouble they brought themselves.
- jklein11 10y ago
  I was in total disagreement with you until I read your last sentence. I would say put frivolous law suits and self interested salesmanship at the same level.
pjc50 10y ago
I believe a number of US cities bought interest rate swaps and lost out, resulting in outrage and lawsuits: http://www.bloomberg.com/news/articles/2016-01-29/derivatives-mean-u-s-cities-get-no-free-pass-from-crisis-legacy http://www.bloomberg.com/news/articles/2016-01-29/derivative... 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.
- ahelwer 10y ago
  That's very interesting; basically a reverse lottery. What are examples of such a bet?
  - cletus 10y ago
    Writing a call option. Say the underlying security is trading at $100. You write a call option with a strike of $110, 3 month expiration and sell it for $10. 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.
  - pjc50 10y ago
    Things which can lose you more than your investment: 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_Term_Capital_Management_Shory_version_April_2009.pdf 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.

makapuf 10y ago

> doesn't mean that the bank actually did anything wrong. Like paying prostitutes by example. Ah you meant illegal maybe.

smallnamespace 10y ago
If a client comes to you and says "I want to buy some bank stocks", and you help them make that happen, what exactly did you do wrong? 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.
- makapuf 10y ago
  It depends on what you did by helping them. The article did not specifically underline the straightforward way of the deal. Or (God forbid) morality. For any measure of morality (well perhaps not a dictator one)
  - smallnamespace 10y ago
    The article was pretty specific: * 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.
    - claudius 10y ago
      > 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.
      - notahacker 10y ago
        Yeah. I've no sympathy whatsoever for the Libyan officials[1]. They made a bad bet and lost money. It wasn't a bet that was purposely designed to lose, and was apparently actually less risky than the conventional stock purchase.[2] Their claim not to have known what they were doing makes them more culpable, not less, for anything that went wrong because they were supposed to be looking after a sovereign wealth fund FFS. 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...
- makomk 10y ago
  Goldman didn't help them make that happen. They sold them highly leveraged bets that the bank stocks would go up, not bank stocks. The two are very different things.
youngtaff 10y ago
I suspect this would be considered bribery in the UK now (following 2010 bribery act) Whether it would have been illegal in 2008 I'm not sure http://www.transparency.org.uk/our-work/business-integrity/bribery-act/ http://www.transparency.org.uk/our-work/business-integrity/b...
- ddeck 10y ago
  IANAL, but I believe this would almost certainly have been illegal in 2008 under the US Foreign Corrupt Practices Act. https://en.wikipedia.org/wiki/Foreign_Corrupt_Practices_Act https://en.wikipedia.org/wiki/Foreign_Corrupt_Practices_Act

crivabene 10y ago

However, please remember it may be (of course) a little bit more complex than this: in certain markets trading certain types of investment vehicles with non-qualified investors is forbidden, since they simply would not be able to understand how it works. This led to hundreds of lawsuits in a number of countries after 2008, when some banks just had low/mid-class people signing a piece of paper saying they were expert investors without actually informing them of the risks involved in those transactions. 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)

cloudjacker 10y ago

I take issue with that, the article alluded to the reason but never mentioned it: why did the put option fail to hedge the forward? 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.

smallnamespace 10y ago
> why did the put option fail to hedge the forward? 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/ http://www.option-price.com/ [1] https://en.wikipedia.org/wiki/Put%E2%80%93call_parity#Implications https://en.wikipedia.org/wiki/Put%E2%80%93call_parity#Implic...
tedunangst 10y ago
Everything I've read suggests the trade was very directional. They wanted to make money when citi went up. Maybe they had some puts, or not enough, but the story's two years old now and I haven't heard anyone suggest that LIA had a bunch of 'dud' puts.

JackFr 10y ago

If you tell the salesman "I want to by Citi shares" and he tells you, "Don't be schmuck -- only retail buys shares. You need to buy this impressively named derivative instead. With the instruments available to you simply buying shares would leave you irresponsibly underleveraged.", then the bank deserves a lawsuit. They may not deserve to lose the suit, but it was trouble they brought themselves.

jklein11 10y ago
I was in total disagreement with you until I read your last sentence. I would say put frivolous law suits and self interested salesmanship at the same level.

pjc50 10y ago

I believe a number of US cities bought interest rate swaps and lost out, resulting in outrage and lawsuits: http://www.bloomberg.com/news/articles/2016-01-29/derivatives-mean-u-s-cities-get-no-free-pass-from-crisis-legacy http://www.bloomberg.com/news/articles/2016-01-29/derivative... 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.

ahelwer 10y ago
That's very interesting; basically a reverse lottery. What are examples of such a bet?
- cletus 10y ago
  Writing a call option. Say the underlying security is trading at $100. You write a call option with a strike of $110, 3 month expiration and sell it for $10. 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.
- pjc50 10y ago
  Things which can lose you more than your investment: 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_Term_Capital_Management_Shory_version_April_2009.pdf 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.