## Wednesday, July 20, 2022

### "If FIFTY BANKERS ever arrive at your office all at once, (1) you have done something terrible but (2) it is absolutely their problem, not yours."

I might get into trouble for such a long quote, but I wanted to give you a sense of how sharp and funny Matt Levine's writing is (all the more remarkable given his output). Most of his work appear behind the Bloomberg paywall but for cheapskates like me, there's a free but highly influential newsletter (link at the bottom of the page).

If you sell nickel futures at a price of \$25,000 per ton, and then the price of nickel futures goes up to \$100,000 per ton, then in some simple arithmetic sense you have lost \$75,000 per ton. If you sold 100 tons of nickel futures, then you have lost more than \$7 million. But if you sold 150,000 tons of futures, the math changes a bit; it becomes non-linear and relativistic. If you sold 150,000 tons of nickel futures at \$25,000 per ton, and then the price goes up to \$100,000, your banks will call you up and say “uh you have lost \$11 billion, can you pay that please,” and you will say “I would prefer not to,” and an insane series of events will happen:

1. The nickel exchange will cancel a bunch of trades and declare that actually the market price of nickel is \$48,000 per ton, magically reversing most of your losses.
2. Then the exchange will call you and say “okay let’s close you out of that trade at \$48,000 per ton.”
3. Then you will say “no, this is still too much money for me to lose, I prefer not to.”
4. Then your banks will say “well okay how much are you willing to lose?”
5. You will say “I would close out this trade at \$30,000, that’s how much money I am willing to lose.”
6. Your banks will say “okay fine, we’ll wait for nickel prices to go back below \$30,000, meanwhile we’ll just lend you the money to stay in the position.”
7. They will.
8. Eventually nickel prices will go below \$30,000 and you will get out of the trade at a modest loss.
9. If prices never go below \$30,000 then I guess your banks are very sad, but honestly they’re pretty sad about all of this anyway.

I cannot stress enough that this is not how it works if you are a small customer. This is the white-glove treatment that only the biggest customers get. If you are big enough, you get to tell the exchange how much money you’re willing to lose, and the exchange and your banks will make sure you don’t lose more than that.

Here is a wild Bloomberg News story about Xiang Guangda, the Chinese metals tycoon who runs Tsingshan Holding Group Co., who is nicknamed “Big Shot,” and who blew up the London Metals Exchange in March. We talked about it at the time, but this story adds a lot more detail about what Xiang, his bankers and the LME were thinking and doing. It is not pretty! Xiang shorted something like 150,000 tons of nickel somewhere in the \$20,000s, and when nickel prices went up to \$100,000 he said “no thank you”:

After nickel started spiking on March 7, Tsingshan struggled to meet its margin calls. … The LME had eventually intervened to halt trading a couple of hours after nickel hit \$100,000. It also canceled billions of dollars of transactions, bringing the price back to \$48,078, where it closed the previous day, in what amounted to a lifeline for Xiang and Tsingshan.

And then the LME said “well, okay, \$48,000?” and Xiang again said “no thank you”:

To reopen the market, the LME proposed a solution: Xiang should strike a deal with holders of long positions to close out his trade. But a price of around \$50,000 would be more than twice the level at which he had entered his short position, and would mean accepting billions of dollars in losses. ...

Xiang told the assembled bankers he had no intention of closing the position anywhere near \$50,000. A few hours later he was delivering the same message to Matthew Chamberlain, chief executive of the LME. Tsingshan was a strong company, he said, and it had the support of the Chinese government. There would be no backing down.

And so his banks said “well okay what price would be acceptable” and he said “\$30,000” and they said “fine”:

On March 14, a week after the chaos that engulfed the nickel market, Tsingshan announced a deal with its banks under which they agreed not to pursue the company for the billions it owed for a period of time. In exchange, Xiang agreed a series of price levels at which he would reduce his nickel position once prices dropped below about \$30,000.

Eventually nickel got below \$30,000 and he got out of the position at about a \$1 billion loss. “The loss has been roughly offset by the profits of his nickel operations over the same period.”

The article also describes the scene at Xiang’s office on the evening of March 8:

Within hours, more than 50 bankers had arrived at his office wanting to hear how he planned to respond to the crisis. He told them simply: “I’m confident that we will overcome this.”

If FIFTY BANKERS ever arrive at your office all at once, (1) you have done something terrible but (2) it is absolutely their problem, not yours.

(And yes, it's a variation on an old joke, but it's a damned good version.)