Ultimate Carry Trades - AIG, MF Global, and LTRO

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors,


We know how AIG and MF ended, as of yet we don't know how LTRO will end.

AIG was the ultimate carry trade. They sold massive amounts of CDS for a very small spread. They had no funding cost, no collateral requirements(initially), and no mark to market risk for their own P&L.  The year before AIG blew up, management was spending all sorts of money buying back their "undervalued" shares. Actually they probably bought back a lot of shares in early 2008.  What could go wrong with the trade?  The only thing that could go bad was a downgrade to AIG at the same time as the assets they wrote CDS on went down, because then and only then would they have to post collateral.  Their CDS had massive negative mark to markets long before they were on the verge of collapse. It was the fact that a downgrade to their ratings could enable their CDS counterparties to call for collateral.  It was the threat of collateral calls that ended it for AIG.

LTRO has variation margin.

What happened at MF?  Massive positions in short dated bonds to earn the "carry". All was fine until the size concerned people. They had trouble financing the position. The position was so large the market pushed against them. With so much leverage they couldn't meet the margin calls and selling the bonds would wipe them out.

LTRO has variation margin and the banks have disproportionately large positions in the debt of their country.

Lots of "carry" trades have worked out well, but when they don't, the result is pretty ugly. Many argue that LTCM was also just a giant "carry" trade that unwound when vol and mark to market blew through their ability to post collateral.

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youngandhealthy's picture

Margins goes both ways. Sometimes up, sometimes down. And it is no surprise that it rose lately because ECB changed eligible collateral (accepts more volatile debt).

Will it be a problem? Dont think so. 

If it is a problem...then MFIs could move some Wonger from the overnight deposits. Right Tyler?   ;-)

GeneMarchbanks's picture

Nationalization of banks in Europe is the endgame. LTRO blowing up or otherwise.

Sudden Debt's picture

No, there is something else brewing.
The new QE's in Europe will also be used to form a new bank to lend out to corporations and not only to existing banks. There's not much known about that type of bank but in the end, it might well be the type of bank which will absorb all the other indepted banks at the ECB.

treemagnet's picture

As I've previously stated.....we're fine, really.  We've uncoupled from the badness and coupled to the goodness.  Its just not that difficult, see....go long, be happy!

Catflappo's picture

Whats slightly bizarre is that since LTRO 1, a lot of the collateral posted has probably rallied, not depreciated.   Which means that if some banks are already under water collateral wise, in ostensibly benign market conditions, then the ECB has got a massive potential problem on its hands.



jcaz's picture

Yep- that's why this was a no-win from the beginning.....  Either way they were screwed, they just bought some time and confusion....

The trend is your friend's picture

It always comes down to one word....HUBRIS

AbruptlyKawaii's picture

sapiens is a dead end, an evolutionary mistake, hubris implies some modicum of forethought, actual planning and intelligence, this is just blind stupidity, sort of like nuclear power, gee brain what are we gonna do with all that toxic waste? the same thing we do every  night pinky: try to take over the world!

SheepDog-One's picture

thats what Im thinkin, we're basically the dinosaurs, another species run its course, an experiment gone wrong although the design was pretty good on paper, can only really screw things up and do evil works.....now just waiting for the giant comet to mass extinction event us like the dinosaurs.

sangell's picture

Didn't the ECB just disallow GGB as collateral after the S&P downgrade. Of course the GGB collateral they held apparently will suffer no loss but doesn't this make ALL collateral the ECB accepts more likely to be downgraded and thus require more of that variation margin?

LongSoupLine's picture

Carry trades predicated on ponzi foundations never end well.

SheepDog-One's picture

Could a bunch of crazy wild west cowboy cattle rustlin trades go wrong? Yea, guess so.

LongSoupLine's picture

On a similar note, Abbey Joseph Cohen (read: contrarian indicator) on CNBS with Maria "nails on a chalkboard" Bartiromo saying "sideline money coming back in"


SheepDog-One's picture

OH right, the 'sidelined money' which didnt come back in at DOW 10,000 or 11,000 or 12,000 is finally back buying at 13,000....uh huh sure Maria!

mind_imminst's picture

If the often spoke-of but never invested sideline money is really coming in.....TIME TO SHORT THE MARKET....the dumb money is ready to be scalped again.

espirit's picture

Heh, heh.  Short paper, long Phyzz - Bitchez.

jcaz's picture

LOL- yeah, look at that monster volume on stocks lately, Abbey......  What a freaking tool......

TruthInSunshine's picture

Hedge Fund Hotel

by Abby Joseph Cohen

Ode to LTCM, Buffett, AIG, Madoff, Hank Paulson, Geithner, the Squid, JPM & cnBSc Money Honies

I remember you well in that Hedge Fund Hotel
Vick Niederhoffer was famous, LTCM was a legend.
They told the sheep that they were staffed with brilliant men
but in reality they cooked up flawed Al Gore-Rhythm.
And clearing the decks of the wealth of ones like us
who are oppressed by the pitchmen of sell-side,
the sheeple fixed themselves, bleating, "Well never mind,
we are wiped out now, but we have bread & circus."

I remember you well in the Hedge Fund Hotel,
you were talking such shit about QE,
Becky & Maria giving head to Buffett & Immelt on the unmade bed [and Carl Quintanilla blowing Sir Sanford],
while the limousines wait in the street.
Madoff & Dykstra were the reasons and that was New York,
they were running for the money and the flesh.
That was called love for the the victims of pikers like Crames & Blodget,
probably still is for the handful of them left.
Ah but you got away, didn't you NASDAQ,
you just turned your back on the crowded trade,
you got away, I never once heard you say,
this Winners of the New World bullshit is the top, bitchez.
Hank Paulson needs Goldman, Obama needs JPM
and all of that jiving around with AIG.

And then you got whacked, didn't you sheeple investors & taxpayers...


Nobody For President's picture

So I'm carrying all this stuff, and it is really starting to smell, where can I put it down?

chinaboy's picture

"Drinking poison to ease thirst" was an old Chinese phrase. Does it apply here?

Jefferson's picture

Between ECB subordination and variation margin you would have to be crazy to lend money to a European bank.

Rollerball's picture

Oh, to be a liquidity provider.  Where's the risk (vis-a-vis premium)?

Turn the lights off already, you in-bred douchbags.  

I couldn't be more bored.