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A Wall Street Crash Course: How To Sell $1 For $100

Tyler Durden's picture




 

Submitted by Daniel Drew via Dark-Bid.com,

The Wolf of Wall Street

On Wall Street, a vital skill is the ability to sell something that you know is completely worthless. Goldman Sachs did it when it sold ABACUS 2007-AC1 to investors while hedge fund manager John Paulson was betting against it. Paulson paid Goldman $15 million to peddle this junk, which was a collateralized debt obligation that would make money when millions of people lost their homes. The SEC charged Goldman with fraud, and they eventually settled for $550 million. If you're an enterprising Wall Streeter who wants to make a name for himself without breaking the rules, you can operate a tantalizing scheme that investors can't resist. It's called Shubik's Dollar Auction.

The Dollar Auction was created in 1971 by Martin Shubik, a professor at Yale. Shubik was friends with the late game theorist John Nash, and in their spare time, they amused themselves by creating parlor games that were nothing less than diabolical. Wall Streeters are usually familiar with traditional risky games like No Limit Texas Hold'em and Liar's Poker. However, the Dollar Auction trumps all of those games by taking loss aversion to the next level.

The Dollar Auction works like any other auction except for one key rule: the second-highest bidder has to pay his bid in full and gets nothing in return. Experienced traders will immediately foresee how this will play out. Gather a large group of people in a room and start the bidding. Initially excited by the prospect of getting a dollar for pennies, people will start bidding. Even at 50 cents, they are still getting a bargain. No one worries about being the second-highest bidder because there are so many other people in the room.

As the bidding gets closer to $1, bids will start dying out. Eventually, someone will bid $1. At that point, there will be no new bidders, but someone is still stuck at 99 cents. That person is facing a guaranteed loss of 99 cents. If they bid $1.01 and win, they can get the dollar and only take a 1 cent loss. So they figure a 1 cent potential loss is better than a 99 cent guaranteed loss. However, the other remaining bidder is thinking the same thing. These two bidders will run up the price as high as necessary until one of them eventually decides he can't take it any longer. There is no limit to how high the insanity can go. Meanwhile, the auctioneer keeps both bids and only gives up one dollar. The Dollar Auction is the perfect metaphor for Wall Street. Both involve setting the clients against each other and taking fees for yourself.

The Dollar Auction mindset can also be seen in the post-crash bizarro bond markets. As a response to what seems like unlimited quantitative easing, bond investors have bid up the price of bonds to the point where they are actually locking in a loss on their investment right from the beginning. As Zero Hedge reported earlier this year, 16% of global government bonds have a negative yield; that's $3.6 trillion.

Negative Yields

The logic behind this behavior is that yields will become even more negative or deflation will occur. Bond investors are scrambling to avoid becoming the second-highest bidder in the global bond market frenzy. However, with QE failing in Sweden, and with the CDS market collapsing, this will not end well.

When Shubik created the Dollar Auction over 40 years ago, I doubt he could have imagined that the madness of his diabolical parlor game would be playing out in the global bond markets.

 

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Mon, 06/29/2015 - 18:07 | 6251529 Ignatius
Ignatius's picture

Fascinating, but really, I just needed my tires rotated.

Mon, 06/29/2015 - 18:08 | 6251536 whotookmyalias
whotookmyalias's picture

I will gladly pay you $1 next Tuesday for your $100 today.

Mon, 06/29/2015 - 18:18 | 6251575 Max Steel
Max Steel's picture

ha ! nice .

Mon, 06/29/2015 - 18:41 | 6251672 0b1knob
0b1knob's picture

A ridiculous game no person would willingly play with totally aribitrary rules proves ... what?

Mon, 06/29/2015 - 18:51 | 6251712 disabledvet
disabledvet's picture

Great News!

Senator McCain will gladly pay 13 billion dollars for out ten million dollar "aircraft carrier"!

WITH INTEREST!

Last one out is a rotten egg!

Mon, 06/29/2015 - 18:56 | 6251734 disabledvet
disabledvet's picture

"If you don't know who the sucker is at the table...

Mon, 06/29/2015 - 21:26 | 6252181 JohnG
JohnG's picture

 

 

"As the bidding gets closer to $1, bids will start dying out. Eventually, someone will bid $1. At that point, there will be no new bidders, but someone is still stuck at 99 cents. That person is facing a guaranteed loss of 99 cents."

WTF??

#mathmatters

Mon, 06/29/2015 - 21:58 | 6252289 0b1knob
0b1knob's picture

Every description of the game I have seen is hypothetical.   Has anybody every tried to get people to play it for real?  I doubt they would get any takers.

 

Mon, 06/29/2015 - 18:58 | 6251740 indygo55
indygo55's picture

Ya know that's a pretty good story. Short, dibolical and entertaining. Plus it ends in a observation that we all can go forward a little better off.

 

Mon, 06/29/2015 - 18:08 | 6251534 knukles
knukles's picture

The other one that's really enjoyed by the Bookies is called "Skullfuck the Muppets"

Mon, 06/29/2015 - 18:19 | 6251567 jimfcarroll
jimfcarroll's picture

> Goldman Sachs did it when it sold ABACUS 2007-AC1 to
> investors while hedge fund manager John Paulson was
> betting against it. Paulson paid Goldman $15 million to
> peddle this junk, which was a collateralized debt
> obligation that would make money when millions of people
> lost their homes.

That's BS. Paulson (John, not Hank) was told he was crazy for going short in that environment. Goldman was sure he would loose. He had to convince them.

The problem was, when Goldman lost, Paulson (Hank, not John) bent the rules as Treasury secretary to see his buddies at Goldman were taken care of. He (Hank, not John) needs to be brought up on charges.

John (not Hank) made the bet everyone here is trying to figure out how to make when this current fiasco unwinds.

Tue, 06/30/2015 - 00:19 | 6252827 JoJoJo
JoJoJo's picture

A better story woud be on Hank Paulson ( boy, those sons of Paul must have banking in their genes). Paulson left Goldman with 38 million to become Treasury Secretary - in order to save  Goldman.

Tue, 06/30/2015 - 19:05 | 6256031 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

It was 38MM in annual salary that he left, but took an estimated 700MM in equity with him tax free.

http://www.forbes.com/2006/06/01/paulson-tax-loophole-cx_jh_0602paultax....

Mon, 06/29/2015 - 18:22 | 6251592 Dr. Engali
Dr. Engali's picture

As if the republic isn't a big enough joke now the Supreme Court says you don't need an I.D to vote:

http://www3.atr.rollcall.com/supreme-court-victory-for-voting-rights-adv...

Mon, 06/29/2015 - 18:24 | 6251600 jimfcarroll
jimfcarroll's picture

Wew! Now I can "vote early, vote often." I was worried for a minute.

Mon, 06/29/2015 - 18:39 | 6251661 knukles
knukles's picture

-

Yesserie Bob! 
The Supreme Court is giving away the integrity of the Nation.  Morals and ethics be damned, the Law Be Damned, we shall interpret as we see fit.  As the times change so shall the Laws.
Tell me Judge, what is the Law today? 

This is the same thing that was done in German Courts when Hitler came to power. 
The old laws were never replaced with new ones, the Bundestag has been torched. 
The Courts interpreted the Laws on The Books differently to suit the "morals, ethics and morays" of the time.

That was not the intent of the country, our founders. 
What a week for the Progressives; now they own the Supremes.

However, they will rue the day this all happened when at some future date (I know not when just that it will) their very mortal enemies take over and they are crushed under the non-new-interpretations-of-the-non laws, beaten into economic and social submission, rights curtailed and private property absorbed for other purposes. 
To any "Conservative" or even 'Moderate", this is lawlessness.

Mon, 06/29/2015 - 18:44 | 6251685 Dr. Engali
Dr. Engali's picture

It s been a sad fucking few years. I don't even recognize the country I grew up in. Anybody in a position of power will sell their soul for a handful of fiat. At least Judas held out for real money before his betrayal. Fuck this place.

Mon, 06/29/2015 - 19:44 | 6251883 EINSILVERGUY
EINSILVERGUY's picture

Reichstag not Bundestag

Mon, 06/29/2015 - 18:36 | 6251624 Jumbotron
Jumbotron's picture

Well of course not.  There are NO illegal aliens anymore.  Only "undocumented workers".  Meaning....you can't blame them for not having any documents.  Start calling them "illegal" then you run afoul of the Chamber of Commerce and Big Business and...well...you know.....can't have that.  That kills productivity and profits.

Besides.....we don't know any more if you are a man or a woman.  So thing's like Driver's Licenses for I.D. are moot now as well.  I mean...Mrs. Jenner....you don't exactly look like Mr. Jenner anymore.  That's ok.....go ahead and vote.  Just wait your turn.  There are 15 "undocumented" workers ahead of you.

America's dead anyway.....why care?  Let the masses have their bread and circuses every 2-4 years. 

George Carlin said it best......"Garbage in....Garbage out"

https://www.youtube.com/watch?v=qxsQ7jJJcEA

And all the while here is why you should vote.  Hell....this is why you should send your son's and daugher's to die in Middle Eastern hell holes to export "American Values".  Here's some "American Values" for you

https://www.youtube.com/watch?v=Hl972jf8cs4

Mon, 06/29/2015 - 18:59 | 6251746 indygo55
indygo55's picture

Well how the hell else do you expect all those illegals are gonna vote for moar free stuff???

 

Sarc off/

 

Mon, 06/29/2015 - 23:14 | 6252637 wareco
wareco's picture

Actually, the Supreme Court didn't say a damn thing, since it decided not to hear the case.  If you want to blame someone, blame the 10th Circuit Court of Appeals.

Tue, 06/30/2015 - 14:31 | 6255018 Jumbotron
Jumbotron's picture

"Actually, the Supreme Court didn't say a damn thing, since it decided not to hear the case.  If you want to blame someone, blame the 10th Circuit Court of Appeals."

Look, you fucking idiot.  By standing aside, the Supreme Court is COMPLETELY to blame.   Just like that little faggot in the White House and his Immigration cronies standing aside and letting hoards of illegal immigrants into this country.

Inaction is TREASON !!!

Tue, 06/30/2015 - 01:18 | 6252984 TheReplacement
TheReplacement's picture

I do believe the SCOTUS ruled that states may not require ID.  The limitations of that edict are open to interpretation.  For example, are YOU a state?  Why no, no you are not.  As such, that ruling does not apply to you. 

Ponder

Mon, 06/29/2015 - 18:27 | 6251607 WTFUD
WTFUD's picture

Casino's are shown to be model enterprises when compared against banks.

Mon, 06/29/2015 - 18:58 | 6251741 disabledvet
disabledvet's picture

I thought AIG was the resident Insane Asylum on the Street in 2008?

Mon, 06/29/2015 - 18:34 | 6251642 Sophist Economicus
Sophist Economicus's picture

Daniel, did you ever work in the Finance Indusrty or are you an Internet Expert.

This is an incredibly idiotic piece with absolutely no understanding of why government securities would be 'bid' even with slightly negative interest rates

Pathetic

Mon, 06/29/2015 - 18:41 | 6251670 I Write Code
I Write Code's picture

I bid five quatloos.

Mon, 06/29/2015 - 18:44 | 6251687 pragmatic hobo
pragmatic hobo's picture

as far as scams go ... nothing beats the scam to sell carbon credit to the public ...

Mon, 06/29/2015 - 18:51 | 6251715 Fun Facts
Fun Facts's picture

Goldman also offers a crash course in how to turn someone elses billion dollar sovereign wealth fund [khadaffi's] into your money.

[you just set up a mirror account and take the other side of every trade, close them out as losers on the sovereign side and winners on your side.]

Basic grand theft and crimes against humanity goldman style.

Tue, 06/30/2015 - 02:54 | 6253084 Finogen
Finogen's picture

Maybe people buy bonds with negative yields because they can still use them as collateral for buying other stuff (shortage of bonds due to Fed's buying), not because Wall St is playing "Shubik game" or smth.

Tue, 06/30/2015 - 04:35 | 6253146 honestann
honestann's picture

gold auction:  bid on my 1kg gold bar.

Bidding starts at $50,000.

Do NOT follow this link or you will be banned from the site!