Of dollars into the biggest banks there were still

  • No School
  • AA 1
  • 172

This preview shows page 105 - 107 out of 172 pages.

of dollars into the biggest banks, there were still significant worries about the scope of toxic assets still lingering on each balance sheet. But Goldman was navigating through the crisis, thanks to brilliant risk management. Derivatives desks make the most money when the markets are volatile, and in 2008 and early 2009, Goldman’s Derivatives desks across the firm made a killing. And this windfall didn’t come from taking bullets for clients; rather, a large part of it came from collecting large fees for unwinding panicked clients’ failed trades. Once it seemed as though the last of the panicked trades had been unwound, Wall Street did what it does best: it saw a huge dislocation in the market and started figuring out how to act on it. Baron de Rothschild, the famous eighteenth-century British financier, captured what Goldman Sachs and other banks on Wall Street would soon start doing: “The time to buy is when there is blood in the streets.” To put it in layman’s language, Goldman Sachs was ready to wager a lot of its own money that the markets were going to calm down very quickly. In mid-2009 before it was obvious that the markets were going to start recovering, a number of the smartest traders at Goldman Sachs started noticing an anomaly in the derivatives markets: derivatives prices were implying that for the next ten years straight, we were going to continue to see the levels of unprecedented volatility that we had been seeing in the nine months since Lehman Brothers went bankrupt. Could this kind of turmoil and unpredictability continue for ten years, unabated? Surely things would calm down—maybe not immediately, but sometime soon. A ten-year period of constant turmoil had not occurred since the Great Depression. And by now the government had shown the will to step in and support the system
Image of page 105
through capital injections to banks and an $800 billion stimulus package to help the economy. No one thought the mistakes of a passive Herbert Hoover would be made all over again. So Goldman Sachs and other banks on Wall Street, plus a number of the Wise Clients, started implementing a bullish bet: that the markets would start rising, and that volatility would start falling. The way many investors put this trade on was through shorting a derivative called a ten year S&P 500 variance swap—an over the counter, opaque product with very little liquidity. Famously, another smart investor had thought of a similar idea. Warren Buffett, the Oracle, who had previously called derivatives “financial weapons of mass destruction,” also noticed this dislocation and made a similar bet (albeit using a different tactic). This trade made banks and clients all over Wall Street hundreds of millions of dollars from mid- 2009 until mid-2010 as the markets rallied and volatility compressed. In many ways, betting that the markets would calm down was a brilliant move. It was certainly a daring one. After Bear Stearns went bankrupt in early 2008, a lot of people had thought that the firm’s fall was just an anomaly and that the worst was over. A number of hedge funds went bust at the time by getting the timing of this
Image of page 106
Image of page 107

You've reached the end of your free preview.

Want to read all 172 pages?

  • Fall '19

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors