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FamousandInfamousTrades Howtogetrichquick($$$)(ordietrying) Brainteaser Problem: MarketUpdate MarketWeekinReview • WeakChineseData– Exportsfell10%,Importsfell2% • ChinesePPIcameinpositive • DeathofThaiKing– effectonThaipoliticsandBaht • Yellenspokeandmarketsmovedagain,Decemberratehikeat66% • Poundvolatilityconcerning,inflationexpectationsskyrocketing,gilts • Strongearningsfromfinancialssofar • Goldman/Libyacaseruledinfavorofscrewingoverclientsandgetting awaywithit WhatisaBubble? TulipMania DotComBoom GeorgeSorosvs.TheBankofEngland TheManwhoBroketheBank EuropeanExchangeRateMechanism • FixedExchangeRateofGBPtoGermanMark • FirstAttemptatUnifyingEurope • BritishInflationWayinExcessofGermans SorosNoticesDeflationaryPressuresCounteractingBOE • SellsShort10BGBPwhenthecurrencywasatthelowerendof therangetocounteractBOEratehikesandmarketpurchases • Made1BbasicallyovernightwhentheBOEremovedEngland fromtheERM GeorgeSorosvs.Asia BreakingSomeMoreBanks • AsianFinancialCrisis– Shorted THBandMYRintothecrashto forceliftsonthepeg • HotMoneyoutflowsdrivenby short-sellersforcedAsian FinancialCrisis • SorosbannedfromMalaysia, publicenemy#1 TheRiseandFallofLong-TermCapitalManagement • JohnMeriweather – Hotshotbondtraderfromthe1980soutofSalomon Brothers,wherehewasvice-chairoffixedincometrading • Startedhisownfund(LTCM)aftertheSalomonBrothersfixedincomedivision scandal– BoardincludedRobertMertonandMyronScholes…soundfamiliar? • Oneman’s(Soros’)treasureisanotherman’strash?– AsianFinancialCrisis setoffarippleeffectofdeleveraging/fearfromglobalinvestors • LTCMreturned$2Bofcapitalwithoutreducinganypositionsizes,thusincreasing totalleveragesignificantly • PositioningwasshortTreasuryBonds..Whichiswhatpeoplestarted buyingwhenRussiadefaultedin1998 • Fundwasdown$2B,competitorsexitsfromtheirstrategiesdestroyedvalueeven more,andby2000,thefundhadlost$4Bandwounddown • Meriweather triedhedgefundworkagain,andagain…andthen2008 happened JohnPaulson How togetanAuditoriumNamedAfterYou ShortingtheEconomyandHousing • SyntheticallyShortedsubprimemortgagesusingcreditdefault swaps • Beganshortingtheinstitutionsthatbackedthoseassets(i.e.Bear Stearns) Returns • Made15billionforhisfundin1year • Pocketed4billionofthat NickLeeson andBaringsBank HowtoBringDownUK’sOldestMerchantBankOvernight UnauthorizedTradinginSingaporeFuturesMarket • SenttoSingaporetotradefutureforBaringsin1992 • Madeunauthorizedriskytradesandatfirst,madegreatreturns • Whenhebeganlosingmoney,hehidhislossesinanerror account Downfall • Jan16,1995,placedahighlyleveredshortstraddlepositionin theSingaporeandTokyomarket,bettingitwouldn’tmove • TheKobeEarthquakehitthenextday,sendingAsianmarkets crashingdown • Lossesreached£827million(US$1.4billion),twicethebank's availabletradingcapital • Leftanotereading“I’mSorry”andfled • FoundandarrestedinGermanylaterthatyear TheLondonWhale Don’tbedumb,anddon’ttake bigriskspt.2 • BrunoIskil takingbigshortpositionsin CDXIGforafundamentalviewon creditspreads • Somesmartfundsnoticedthehuge indexmoves…tookoppositepositions • Initiallossesturnedintoa$2Bgainfor theoppositeside..Anda$2Blossfor JPMorgan • WinnersincludedSabaCapital, Hutchin Hill,BlueMountain,and…JP Morgan BillBrowder InvestinginRussia BackgroundBeforeHermitageCapital • WenttoStanfordBusinessSchool,hadnoideawhathewantedto doafter.BerlinWallfellafterhegraduatedandcamefromfamilyof Communists,sowantedtobea“capitalistinEasternEurope”. • WorkingforBCGinLondon,firstprojectwasworkingwithbus factoryinUkranian border • Talkstointerpreteroneday,andfindsoutgovernmentisprivatizing businessesthathadmarketcapitalizationsequaltohalfofthe previousyear’searnings. • Had$4,000insavingsandmakesfirstinvestment.Makes10xin twelvemonths. BillBrowder InvestinginRussiacont. SalomonBrothers • FiguredoutRussiawasagreatinvestment.Onadvisoryproject withfishingcompany.Fishingfleet– 2Bworthofships(1Bat marketvalue)- 51%offleetbeingsoldfor2.5m. • Justthetipoftheiceberg.Entirecountryisbeinggivenawayfor free.BestwaytodoitisthroughVoucherofPrivatizationProgram, giventoeveryRussianover18.Givesaccessto30%ofallshare capitalofRussiancompanies. • Voucherscost$20x150mpopulation=$3bofproperty.Ifthisis 30%ofallcapitalinRussia,thentheentiremarketcapofRussia, thecountry,was$10bin1993. • Hesaysfuckinvestmentbankingadvisorywork,justinvestas principalsintheseprivatizations– quitstostartHermitageCapital. BillBrowder InvestinginRussiacont. HermitageCapital • Startswith$100m.Firstmonthup40%,secondmonthup35%,first yearup175%,secondyearup228%. • By1997,had1bAUM.Up800%intwoyears.ThenAsianmarkets hadtroubleandin1998,Russiadefaulted.Lost900m. • Evenworse,oligarchsofRussiastartedmisbehavingafterWall StreetstoppedinvestinginRussia.Startedassetstripping,transfer pricing,dilutions,embezzlements,andbasicallyanythingand everythingtostealmoney. • Goestowaragainststealing. BillBrowder InvestinginRussiacont. Gazprom • Gazpromtradingat99.7%discounttoExxon,perbarrelof hydrocarbonreserve.Marketconcludedthateverythingwasstolen fromthecompany. • Researchteamtoperform“stealinganalysis”.FiguredoutRussia keepseverybitofinformationinsomeministry.Findsoutabout Gazprom. • AnoilcompanythesizeofExxononlyrepresented9.65%of Gazprom’sreserves.Morethan90%wasstilltherewhenthe marketwaspricingitasif99.7%wasn’t. • Made100xonGazprom(30%ofportfolio):that100mà 4.5b BillBrowder ThingsgetreallybadinRussia BrowdergetsRaided • 25officersfromMoscowInteriorMinistryraidshisofficeonJune4,2007. • Raidedhiscompanytogetcertificatestamps,seals,andarticlesofassociationofhisfund.Threemonthslater,police transferredhiscompanytoVictorMarkelov,someRussianconvictedofmurderandreleasedfromjailayearearlier. • Browderhires7lawyersinresponse,includingSergeiMagnitsky.Sergeidigsdeeperandfindsthatdocumentsseized wereusedtofraudulentlycreatebillionsofdollarsoffakecontractsthatcompanyowedtothreenewlyformedshell companies. • Shellcompaniessued.Theguyswhostolehiscompanyhiredlawyerstopleadguilty– courtawardedabilliondollars ofjudgementstothreeholdingscompanies. • Filedcriminalcomplaints,Browder+6lawyersgotoLondontofigurestuffout,Sergeideclinesanddidn’twantto leave. • SergeiMagnitsky innocentlyarrested,tortured,kepthimsleepdeprived.Theywantedhimtotestifyagainst Browder. • “Withdrawyourtestimony,signthefollowingconfessionsayingthatyoucommittedanumberoftaxcrimes,thatBill Browdercommittedthesetaxcrimes,andthatyouguysstole$230millionfromRussia”. • SergeidiesfrompancreatitisbecauseRussiafailstotreathiminjail. Whataboutyouguys? AnyFunStories?MomentsofGlory?MomentsofNotGlory? PitchoftheWeek:Macro LongTreasuries ShortTreasuries