Former Goldman Trader Blows Up Morgan Stanley Rates Desk With Breakevens Bet Gone Horribly Wrong

Tyler Durden's picture

About a year ago, Goldman Sachs experienced an unprecedented P&L wipe out after in Q2 it bet on a decline in volatility, only to be caught offguard by the first Greek bailout which in turn cost the firm's prop desk hundreds of millions in losses. Now, about a year later, it is again the same sellside hubris and pretty much the same players that make a repeat appearance, after Bloomberg just disclosed that a very wrong way bet on 5 and 30 year TIPS breakevens has cost the interest-rates trading group "at least tens of millions of dollars." And while Jim Caron's traditionally wrong rates call has up to now only cost his clients money, this time it is his own trading desk that may be left collecting the shrapnel. But topping off the irony is that it is once again an ex-Goldmanite who is responsible for the actual trade. Per Bloomberg, "The interest-rate group is run by Glenn Hadden, who Morgan Stanley hired from New York-based Goldman Sachs in January." News of the loss made their way through the trading community earlier and was manifested in the weakness of the "hedge fund" banks: the Goldmans, the JPMs and, of course, the Morgan Stanleys of the world. As a result, MS is now forced to unwind the trade at a major loss (at least for the current quarter, we have to ask John Paulson if the trade is profitable on a cost basis), which will likely have substantial repercussions for the short and long breakeven curve for days, if not weeks.

What exactly did Morgan Stanley do wrong? Well, nothing much, until recently, at which point... everything. The firm had bet that the spread between the 5 year and 30 year inflation breakeven (matched maturity TIPS less Treasury) would tighten in hopes that near term (5 year) inflationary expectations would rise as 30 year inflation would drop. In other words, in the chart below, MS was hoping the line would keep dropping ever lower. Whether this is based only on technicals (it certainly seemed to be working for a while), or on fundamentals (enter Jim Caron) is not clear. And irrelevant. The chart below shows just what happened over the past 6 months. The trade worked, worked, worked, Hadden had already spent the bonus money in his head on that 4th Southampton cottage, when suddenly... poof. Everything imploded, following last week's insane market action courtesy of the IEA.

As Bloomberg explains: "Declining crude oil prices disproportionately hurt the value of TIPS maturing within five years because they have fewer remaining interest payments that can benefit from a rebound in prices. The five-year breakeven rate dropped to 1.88 percent yesterday from 2.04 percent at the end of May, indicating underperformance by five-year TIPS relative to nominals."

This unprecedented divergence can be seen on the standalone breakeven chart below (we have added the 29 Year Breakeven TIPS for a better correlation comparison):

And the blow by blow from Bloomberg:

The 30-year breakeven rate climbed to 2.57 percent yesterday from 2.42 percent at the end of May, indicating outperformance by  the 30-year TIPS relative to nominals. The June 23 auction was awarded to investors at a lower-than- expected yield last week, a sign demand outpaced dealers’ expectations. The TIPS drew a yield of 1.744 percent, 4.8 basis points lower than where they were trading at the auction deadline.

Well, there goes another quarter of Morgan Stanley interest rates profits. And judging by how horrendous Caron's other calls have been in 2009, 2010 and 2011, we would be shocked if this is the only latent time bomb at Morgan Stanley.

What is ironic is that everyone and their grandmother will now slowly bleed MS' team to death as it is forced to unwind the spread, only to immediately put the compression trade back on, at which point the 30Y - 5Y will resume its tightening bias.... Until some other trading desk blows up on the next black swan event.

And it was only yesterday that James Montier was saying that Black Swan insurance is overrated...

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Turd Ferguson's picture


fuck em

Ahmeexnal's picture

Moron Stanley gets burned again. But uncle telemprompter will make sure the taxpayers pick up the tab.

Rynak's picture

It's a sad state of economics, if the only thing necessary to fix things, is unregulated capitalism.

(I don't believe in unregulared capitalism, and in the longterm consider it critically flawed. Which is why i consider the state of things in realy bad shape, when even a fundamentally flawed economic model, would result in more efficient handling of things, than the current model..... in other words, intellectually, we've hit rock-bottom: Literarily everything performs better, than the current shit: it doesn't matter if you argue for communism as it's ideal is defined, it doesn't matter if you argue for capitalism as it's ideal is defined. It doesn't matter if you argue for socialism at it's ideally defined... all those models are better than what we have now)

Overpowered By Funk's picture

Unregulated capitalism does not exist. Where there are politicians there are regulations.

blunderdog's picture

How can it exist?  If you've got a government protecting property rights, you've got force (whether you consider it violent or coercive) regulating markets.

Eternal Student's picture

It exists right now in the bitcoin market. I'm not participating, myself. But it is absolutely fascinating to watch it develop. You've got everything repeating in the bitcoin markets, that we've been through with the standard exchanges. If you're familiar at all with economic or financial history, you'll recognize the past immediately.

It's very, very amusing to watch. And it's completely, totally unregulated at present. That's in the process of changing. But if you want to see pure, unregulated capitalism at work, check it out.

oogs66's picture

but its okay, really, they were just trying to do what goldman did, can you blame them?

monkeyshine's picture

Well thank goodness they are too big to fail.

TruthInSunshine's picture
06-28 15:39: Market talk that both JP Morgan (JPM) and Goldman Sachs (GS) suffered heavy commodity trading related losses in June


Is this some kind of ploy to lessen the anger had sheeple ever discovered GS & JPM literally create/control the commodity markets and can profit at will, perpetually, should they wish?

I can see the slogan now:

Obama/Biden 2012:  Just Remember that Goldman Sachs & JP Morgan lost money in June of 2011, and that was at a time when we were bringing in that Hope & Change, bitchez!

RockyRacoon's picture

The Turd speaks -- eloquently.

Cognitive Dissonance's picture

Still time to salvage your end-of-year bonuses boys. Put your back into those oars and ROW!

Turd Ferguson's picture

Hi, CD. Long time no talk. How ya been?

ThroxxOfVron's picture

Where You been, Turd?

Have You seen My buddy Kanellos around here anywhere?

Gold fur, smoke and fire; -You can't miss him.

Diablo's picture

first howie hubler, now this. 

MS are a bunch of incompetent fools. does anyone there know how to do anything right????

f#ck em, close that sh#t-shop down.


quantum dines's picture

Some one tell me how gambling money on the spread between 5 year inflation expectations and 30 year is adding value at all. What the fuck are these rates even based on? Some government manipulated CPI number? These squids need to find some actual value to add to society instead of plundering it with their pointless interest rate bets and other arcane financial bets.

XRAYD's picture

One can't just sit there. One has to DO something. All the time. How else can one get justified getting paid?

Mercury's picture

Well, at least some of the time, one man's speculation is counterparty to another man's insurance.

What are you doing about your inflation expectations?

quantum dines's picture

Dumping fiat and hoarding bullion and food and guns and bullets. The latter two will come in handy gunning down snake investment bankers when TSHTF

monkeyshine's picture

I figure I don't need the bullion, just the guns and bullets. By the time we will actually need to have the PM there will be too few people that have them to make any real market for them, and the people who have the stuff I would want would just as easily - if not more easily - hand it over facing the wrong end of the barrel than a fist full of coins. 

Jack Napier's picture

Anybody who has metal has lead to go with it. Those who spill blood will have theirs spilled.

island's picture

+ 1,000,000.

This is a core issue.  A phantom financial economy has replaced a real economy. 

Re-Discovery's picture


(once again, Goldman offloads its liability on unsuspecting counterparty.)

Cthonic's picture

Or perhaps something a little more devious, like active infiltration and financial sabotage?

slewie the pi-rat's picture

is that a double-reverse repo chart?

with a half twist?

Mercury's picture

So what's gonna happen with TIPS if this CPI re-calc talk gains traction?

soopy's picture

Is that really called the MSBLOW U index??

Seasmoke's picture

this is going to make it that much harder to have a perfect trading quarter

vegas's picture

Gee, what they should have done is swap the trade for some greek 50 year zero coupom bonds - then flipped them to the ECB collateral facility - and then reported everything as a profit for bonus purposes. WTF. What's wrong with these people?

cosmictrainwreck's picture

you really do work on the Street, don't you?

IQ 145's picture

 fascinating post. the professionals at these trading desks are naive. The post-modern, or post regulation, world of creative financing is fragile and unstable. Another snapshot of the workings of a machine of futility, fueled by greed and human folly; I'll certainly buy more popcorn and stay tuned to Zero Hedge. I wonder what the big bazoomba will be; and when ? 

FischerBlack's picture

MS isn't on the short list of prop desks that get the memos ahead of time, I guess. Must not have paid their tribute.

Coldfire's picture

Whether or not Moron Stanley's interest rate rectum gazing adds value or not, as long as I don't have to pay for it, I couldn't care less (except for the entertainment value).

Bansters-in-my- feces's picture

These guys/gals are fucking PARASITES.

They produce nothing.

And are fucking scum.

When are these people going to get a real fucking job.???

You know...Build something ,Bake something ,grow something....even if it's fucking dope....GET A FUCKING REAL JOB......

RobotTrader's picture

Sorry, but in today's "gadget" world, flipping electronic digits could easily morph into a national pastime.  And manufacturing of OTC derivatives remains the biggest export industry for the U.S.

My prediction is that 60% of the working population in the U.S. will eventually be engaged in gaming stocks or bit-coins for a living.

RobotTrader's picture

Probably the reason why stocks crashed.

Because "wrong way" bets placed on bonds, ergo, the huge bond rally which spooked too many equity players into selling.

Now bonds are starting to crash and that will cause a mini-panic to buy stocks (note how so many high growth consumer name have gone totally vertical the last 5 trading days).

So while you guys are laughing your asses off at MS and GS at their misfortune, the unwinding of this "mistake" might actually cause many bear positions in stocks to get destroyed in a mini-meltup.

bakken's picture

Ahh, this was set up,  Hadden gets a promotion when he quietly returns to GS  stationed in Asia!  GS killed Lehman, and now, why not MS, bit by bloody bit.  You see, it is not the relatively small sum involved, what kills is the BAD PUBLICITY!

Death to all enemies of the GS empire!!!(Lloyd actually peed on the carpet in the Oval Office when he visited the Wiz)

swissinv's picture

probably MS is the only US bank having trading losses because John told Geithner to fuck off

PaperBear's picture

Transfer the wealth that Goldman Sachs had stolen, I like it.

PaperBear's picture

I am sure the Goldman Sachs have got many more time bombs and they are larger too.

Highrev's picture

Squid double agents.

So do you think someone will start to take notice? That is to say when they see Goldman Sachs on someone's resume . . .

Cthonic's picture

Aye, time honored tradition among investment banks.