One good point this article makes is that despite popular opinion, just because someone is suing a bank doesn't mean that the bank actually did anything wrong.
Any party that's suing a bank will act the part of the unsophisticated victim, even if they knew exactly what they were getting into.
If a salesman offers you a bet that Citi shares will go up, and you take the bet, and Citi shares go up, and you don't get any money, and you ask him what happened, and he shrugs and says "derivatives are complicated, man" -- you should probably sue him. But if a salesman offers you a bet that Citi shares will go up, and you take the bet, and Citi shares lose 96 percent of their value, it looks a little funny to go to court and say "well we didn't understand the structural nuances of the bet." The nuances are not your problem.
However, please remember it may be (of course) a little bit more complex than this: in certain markets trading certain types of investment vehicles with non-qualified investors is forbidden, since they simply would not be able to understand how it works.
This led to hundreds of lawsuits in a number of countries after 2008, when some banks just had low/mid-class people signing a piece of paper saying they were expert investors without actually informing them of the risks involved in those transactions.
This obviously does not apply to this specific case, but I just wanted to point out that it may not be always so simple.
Part of the problem is that some financial products can expose you to greater financial loss than your initial investment, and it's these that need to be carefully regulated and only sold to those who know what they're doing.
Unfortunately they're very profitable most of the time, so everyone wants to get in on it. Imagine going around making a bet for $1 that makes you $1.10 every time except for the one-in-a-million possibility of owing $10m.
Writing a call option. Say the underlying security is trading at $100. You write a call option with a strike of $110, 3 month expiration and sell it for $10.
If the underlying never goes above $115 in those 3 months you make money. If it discovers the cure for cancer and gets a hostile takeover offer sending the price to $5000 well then you're out $4885.
An experienced options trader will limit their potential loss in this situation by say buying a call at $150 for $1.
There are lots of examples like this. Warren Buffett once likened this to picking up pennies in front of a bulldozer.
FYI, bonds are the one of most common examples of such a asymmetric bet.
If you buy a nice, safe, investment-grade bond that pays you ~2% more than Treasuries, it's because the market prices in a 2% chance every year that the company goes bankrupt.
So in return for 2% excess yield, you get a 2% chance to lose your entire principal. This is a lot like selling a call option -- if you get paid $2 on a $100 stock for selling a call, but if it goes badly against you, it's very possible to lose $100.
In fact, you can view 'buying a bond' as essentially buying the assets of a company, and then selling back a call option to the equity holder [1].
The difference is that people at least generally understand that with a bond, your entire principal is at stake, and bonds are hard to lever up compared to selling a call -- but the actual economic risk profile is quite similar.
Things which can lose you more than your investment:
Options which can go a long way out-of-the-money. Short selling when vulnerable to short squeeze. Most kinds of heavily leveraged investment. Some kinds of trading that depend on volatility and liquidity. Anything with lots of unexamined counterparty risk.
I take issue with that, the article alluded to the reason but never mentioned it: why did the put option fail to hedge the forward?
That really does sound like a big freaking problem!
What the hell happened!? Volatility went through the roof that option should have been a gold mine! What was the underlying asset for the put option, the shares or another forward that would pay out the difference??
If shares, did the short selling restrictions the SEC put in place adversely affect the viability of that option? Was the SEC colluding with Goldman to wipe out Libya's bet? Even unwittingly?
If not shares, did something happen to OTC options in the forward market that is not common news??
This lawsuit could have many legs. Not in compensation but information, and if the bank doesnt want that information out there then compensation.
> why did the put option fail to hedge the forward?
They essentially bought a call option. Remember, (bought forward + put option) = call option [1]
They weren't 'hedging' anything, they just wanted to gamble that the stocks would go up. Obviously, that didn't happen. Because all they bought were options, they lost a lot less money than if they had simply bought the same notional amount in actual bank stock.
> Volatility went through the roof that option should have been a gold mine!
Options increase in value when volatility increases only if the stock price doesn't change. If you hold a call and the underlier tanks, it generally doesn't matter than the volatility shot up (unless the option is super long-dated). Try it yourself: http://www.option-price.com/
Everything I've read suggests the trade was very directional. They wanted to make money when citi went up. Maybe they had some puts, or not enough, but the story's two years old now and I haven't heard anyone suggest that LIA had a bunch of 'dud' puts.
If you tell the salesman "I want to by Citi shares" and he tells you, "Don't be schmuck -- only retail buys shares. You need to buy this impressively named derivative instead. With the instruments available to you simply buying shares would leave you irresponsibly underleveraged.", then the bank deserves a lawsuit. They may not deserve to lose the suit, but it was trouble they brought themselves.
I was in total disagreement with you until I read your last sentence. I would say put frivolous law suits and self interested salesmanship at the same level.
Goldman didn't help them make that happen. They sold them highly leveraged bets that the bank stocks would go up, not bank stocks. The two are very different things.
It depends on what you did by helping them. The article did not specifically underline the straightforward way of the deal. Or (God forbid) morality. For any measure of morality (well perhaps not a dictator one)
Yeah. I've no sympathy whatsoever for the Libyan officials[1]. They made a bad bet and lost money. It wasn't a bet that was purposely designed to lose, and was apparently actually less risky than the conventional stock purchase.[2] Their claim not to have known what they were doing makes them more culpable, not less, for anything that went wrong because they were supposed to be looking after a sovereign wealth fund FFS.
That doesn't mean that internships-for-deals or prostitutes-for-deals is an appropriate thing for a bank employee to be offering.
[1]the picture is somewhat complicated by the legitimate beneficiaries - the Libyan people - having had very little say in who ran their sovereign wealth fund, and the Libyan regime having radically changed since 2007
[2]not only was it less damaging than the equivalent long position in stock would have been with the benefit of hindsight, but other articles suggest the Libyans preferred the derivative option because they were less likely to be subject to asset freezes/seizures if the US government took a more anti-Gaddafi stance in future...
Matt Levine's column/newsletter is one of the things I look forward to each day. His vignettes into finance are consistently interesting, discussed both in depth and understandably to neophytes, and with a dry humor not matched by any other financial journalist. Him talking about DTC settlement is more interesting than anyone else I've seen talking about...pretty much anything in the news.
His calling is definitely writing. It would have been a shame if he stayed in banking and didn't end up at Bloomberg. I'm not sure how he ended up doing that because there's probably almost no chance he's making more money blogging than working at Goldman, but I'm glad he did.
Which actually brings up a good proactive defense for the salesman: Make sure you let you client know what they should be asking, not just what they ARE asking. Not that this an easy question to answer - you're asking someone else to point out your unknown unknowns, but in turn, they're blinded by familiarity (example: I actually do experience slight surprise when people haven't heard of Hacker News).
If it's legal out there, why not? Would it be corruption and bribery to treat them to dinner and drinks? Don't view the world only through your own lens. It didn't say where exactly they were treated to prostitutes. Hell, it could even be in Nevada.
As per my other comment, on the face of it, it does seem illegal under laws in the US and UK such as the FCPA. Maybe someone could clarify though.
To add some more, there is an affirmative defense to the FCPA that it is ok to give gifts/payments that are lawful according to the written law of the country [1]. Libya has some laws against corruption but they are rarely enforced and may not have been in place at the time [2].
Anyway, it seems strange to me that this article is about a new legal theory of "undue influence" and a salesman being uniquely "too good" when the concept of bribery has been around for thousands of years. Maybe the article could have said something like, "Libya screwed itself over by not having anti-corruption laws, and therefore it's trying a different legal approach."
I was going to quote the same line, but because my brain found it particularly hard to parse. I assumed the clause beginning 'with' should refer to the last item in the list.
> "To help plan the training sessions, one of Kabbaj’s colleagues e-mailed to ask about the level of the Libyans’ knowledge of derivatives. He responded: 'Baaaaaaaasic.'"
bizarre. you don't really expect to have to walk through finance 101 with a 67-billion-dollar SWF... you just have to believe the guys hired to manage that fund are qualified right? these are not your grandma's retirement savings.
and then they turn around and say they don't understand what they bought?
Shorting Kabbaj seems to imply that Goldman themselves thought there was something wrong with his work, perhaps even that it demonstrated "undue influence". IANAL, but one could certainly imagine an inference like that being drawn in court.
I was left wondering what happened to the Libyan officials in question? In those days it wasn't unusual for those who displeased Kaddafi to face a show trial and quick execution.
Later developments didn't bother with much show in trials.
It appears the mainly involved persons, Layas and Zarti, emigrated to live in Egypt and Vienna, respectively. I'd say that if Zarti applied for asylum in Austria, he'd be one of the applicants with best reasons to get one, by the terms of refugee treaties.
> But "duped" is not exactly the right word. Libya knew it was betting on bank stocks to go up, and those stocks went down. It's not claiming fraud. It's claiming "undue influence." The problem is not that Kabbaj was lying. It's that he was too charming. Libya isn't saying it was duped. It's saying it was seduced.
Interesting twist here. I guess it must be hard to discern for someone who has lived in this trade for so long, and used this mindset as the core of his trade for most of his career but there are simple things that technical people (or even just lawyers) will easily discern: omissions and hiding of a client's best interest.
If you know something is wrong in a company and you don't tell it to your employer, in many fields, that makes you at least negligent. If you know something is wrong and you don't tell it because it causes personal gain to you, it is actually illegal in most jobs and likely criminal.
If you are paid for giving advices in the interest of your consumer and you hid an honest assessment of risks because you profit in your client's risky behavior, yeah, that's fraud. A doctor prescribing an addictive medicine, an IT guy selling a faulty software because he got share in the selling company, etc...
I struggle with this. If you are buying billions of dollars of anything, it is incumbent on you to make sure you get a good deal. You can clearly afford good advisors, and you should not be treated like a consumer walking in off the street.
The fact that a while oil rich country had given the nephew of someone the right to buy billions of dollars is the fault of the fucked up dictatorship ruling the country
I can see why the new government wants to sue - but I suspect a new moral hazard should be introduced - when a dictatorship is buying, it should be automatically assumed that subsequent democratic governments can come and ask for the cash back no questions asked
That alone should stop most dictatorships doing anything. Interesting idea?
So a bank has an extraction team. Looks like a cyberpunk novel. I suppose extraction team come from a "security/mercenary" company. I'm curious of the legal implication.
If you're large enough it makes sense to be vertically-integrated with services you need frequently. They have a lot of wealthy people who need to operate in insecure regions, it makes sense that they'd deal with kidnappings etc. relatively frequently (indeed I'd look askance at an employer that expected me to work in a dangerous region and didn't have a policy/plan for such occasions).
There are any number of private security organizations; like any industry most (but not all) are professionals who know and operate within the relevant laws.
Not all cultures are the same. The article assumes a universal culture and values of "buyer beware" in which personal assurances, friendship, and honor, all mean nothing at all whatsoever.
This is not how most of the world sees things.
In the eyes of those who were assured of sure things, the brutal dismemberment and evisceration of the scammers, their families, and their pets, is justified, reasonable, and pretty certain to happen at some point, to protect one's honor.
If one wishes to do business in other cultures one should understand those cultures.
Yes, the LIA should probably have tried to understand British and American culture better before dumping money into Citigroup via Goldman Sachs. But even if they had bothered—and that's a big ‘if’, since Qaddafi was not really known to play well with others—would that have changed anything? The market would've still crashed and the LIA would still be justifiably irate about losing a lot of money.
If the court case is in London, that suggests the business was being done in London (or at least the accounts were being kept there), so shouldn't the Libyans be the ones to understand the other culture?
It is a value I'm personally fond of. But it's not the only way to run a country. I'm going to go out on a limb an suggest that a guy who engineered a coup, declared himself "Brotherly Leader and Guide of the Revolution of Libya," and stayed in power 40 years was maybe not the biggest fan of the theory that "law should govern a nation, as opposed to being governed by arbitrary decisions of individual government officials".
In theory you'd assume the engaging party (either proactive sellers or proactive buyers) would adapt to the cultural practices of the ones they're reaching out to, but to some degree it probably doesn't align with human nature all of the time.
No. The one in question armed the IRA and friends, blew up an American civilian airliner over Scotland, and shot a British police officer who was protecting their embassy. Babes in the wood.
so west disposed of him only to create proper civil war in that country, with ISIS cells and in the end, kill at least tens of thousands indirectly, still counting.
way to go west! something about lesser evil and whatnot
When people begin by describing Westerners as too noble and too high-minded that they're taken advantage of by other cultures, your comment will be on fleek. Until then, the originating comment smacks of Enlightenment-era anti-Semtisim with the roles reversed.
Sorry, but this is so reductive that it descends into prejudice.
The Gadhaffi regime is to blame for all of these things; pinning them on 'Libyan culture' is not even wrong.
I'm not sure what else to say. Please consider editing this comment; I'm sure it was poorly worded as a response to the original poster, and you don't actually mean this.
I mean this. A facile defence of a whole nation on the basis that they aren't sufficiently savvy or worldly wise and the mean Westerners took advantage of their trusting nature is as offensive as - and shown to be as such by comparison with - an equally reductionist counter point. It's simply the grossly offensive "noble savage" idea rehashed.
I was checking out Matt Levine's articles here https://www.bloomberg.com/view/contributors/ARbTQlRLRjE/matt... and it's interesting how the title of 99% of his articles is "Something and Something Else", "Something, something else, and some other thing". Wonder if he's aware of it himself :-)
He has two series: one is Money Stuff, the daily (?) newsletter of finance news, that has such titles, and it is on purpuse for sure. The other is Wall Street (where this article is, the articles that have header images) that seem to have a pattern too, but less clear cut.
I think the author is hiding (intentionally or not) an important part: The PUT option. This is supposed to hedge against the risk of the stock going down.
It's very possible that the Libyans were informed that they are hedged against a crash, only to discover later that the PUT counterparty got liquidated.
Any one willing to investigate this particular point deeper?
They had a forward contract, which is not the right, but the obligation to buy citi shares at some price (though it was cash settled). If citi tanks, you can lose more than just the initial investment. The put was so that they only lost all their money, not more than all their money.
The forward is identical to (long call, short put). You can see that would be bad if the stock goes down. So they bought puts to close out their short put position, leaving them with a long call which expired worthless.
Any party that's suing a bank will act the part of the unsophisticated victim, even if they knew exactly what they were getting into.
If a salesman offers you a bet that Citi shares will go up, and you take the bet, and Citi shares go up, and you don't get any money, and you ask him what happened, and he shrugs and says "derivatives are complicated, man" -- you should probably sue him. But if a salesman offers you a bet that Citi shares will go up, and you take the bet, and Citi shares lose 96 percent of their value, it looks a little funny to go to court and say "well we didn't understand the structural nuances of the bet." The nuances are not your problem.