What the TF? The Coolest Trade I ever Saw

On the coolest trade I ever witnessed, I was an unwitting participant. In the end, I don’t know if any of it is true, but this is the story I saw and was a part of, and the firm’s P&L seemed to back it up.

I only mention it now, because I can’t help but think Jamie Dimon is pulling something similar. With Sarbanes Oxley and everything else, I’m not sure he could be, but there is a nagging doubt in my mind about “piling on” being the right trade.

I also can’t help but remember back in 2008, where Citadel had a conference call. That was unusual enough. More unusual was how easy it was to get the number. Ken went on about the basis (long corporate bonds vs short CDS). I remember liking the basis at that time, even had on a tiny bit, but I wanted to buy because I figured it was at ridiculous levels, the funding the Fed was supplying would help the market, and by the time Ken was so openly talking about it, you had to know the unwind was almost over.

So, anyways the trade I remember as the coolest trade was way back in the early 2000’s. I was at DB at the time doing some HY CDS, Synthetic CLO’s, Total Return Swaps and a few other things that most people hate. But the big story at the time was talk that the government would stop issuing the long bond.

The bond was going up almost daily. There was talk about the scarcity and that it could go a lot higher in price. The rumor was that DB was short. It started as a small rumor, but got around. One morning, the long bond opened up more than a point. It kept grinding higher. It didn’t matter who you were at DB, you were being asked by the street, by clients, by competitors about the trade. Everyone thought DB was short and getting killed. The size was supposedly large (by the standards of the day which are a fraction of what they are now). I remember being nervous about my bonus. What the heck was going on?

Then it happened. Edson Mitchell or his assistant came out of “mahogany” row and called the head of rates (who oversaw treasuries) off the desk. Myself and countless others were immediately on the phone and Bloomberg messages telling people what just happened. Holy cr*p this must be bad. The head of rates was called off the desk. That NEVER happens. And it was not to celebrate. Wow. The long bond spiked further, I think at one point it was up over 3 points – a huge move. The rumors of losses were growing by the second. People were wondering if they should trade with DB. The “usual histrionics” that were blowing the situation way out of all proportion.

According to legend, and the P&L seems to have backed it up, the rates desk was actually LONG treasuries. That extra 2 point gap made 100’s of millions of dollars for the firm. Whether they had ever been short, I don’t know, but they had turned the position and were now massively long and profiting from the move. How they didn’t just take the money and be happy I will never know. But to go through the charade of calling the head of trading off the desk and causing an immediate spike that they sold into, has to be the single coolest trading thing I’ve ever seen.

Be careful betting against JPM and the trade they allegedly have on and allegedly still need to unwind and might allegedly lose a lot more money on. I’m not saying this is a head fake and I haven’t recommended closing the trades in TFMkts Best Ideas™ that benefit from the unwind, but I really don’t believe, that in spite of Sarbanes Oxley, we are getting the full story, and not possibly being played a bit.

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E-mail: tchir@tfmarketadvisors.com

Twitter: @TFMkts