PIMCO Schools Morgan Stanley
Rumor has it that PIMCO is considering a name change to PIMpCO after the bitchslapping they doled out to Morgan Stanley last month.
Morgan Stanley's Edward Glenn Hadden is limping away from the inflation-based street fight with the pension giant, and it got ugly. Pay attention, kids. This is what happens when two market behemoths lock horns on opposite sides of a trade.
PIMCO expected higher long-term inflation, so they began buying TIPS - Treasury securities which increase in value as inflation increases. Hadden and Morgan Stanley took the opposite view and began shorting TIPS, and recommending clients do the same. Whenever a Morgan Stanley client called in to buy TIPS, Hadden took the other side of the trade and made it clear he would continue to do so until the trade paid off.
It worked in the early stages of the trade, but Hadden pressed the position too long. It is being reported that he made it clear to fellow TIPS participants that it was senseless to go long TIPS because Morgan Stanley was going to keep shorting them and they'd never go anywhere. But PIMCO called his bluff.
these bonds, these traders say. Morgan Stanley also recommended clients bet against 30-year TIPS, arguing it was the best move for those wishing to wager against bonds, according to a hedge-fund manager who received the pitch.At first, the Morgan Stanley trade worked. Mr. Hadden made it clear to investors that Morgan Stanley was going to stick with its positions, and even add to them, traders say. When investors asked to buy 30-year TIPS, Morgan Stanley offered to sell investors even more ofSome say Morgan Stanley's tactics were aimed at making it clear to traders that it was folly to buy 30-year TIPS because the firm was going to keep selling them. It was the equivalent of telling rivals around a poker table they should fold because you're holding a great hand.
When PIMCO caught wind that MS was aggressively short TIPS, PIMCO went into a buying frenzy on the open market. Hadden took the bait and increased his short position a like amount. Eventually Hadden got squeezed by the increased demand for TIPS, he needed to cover the short, and everyone else in the TIPS market knew it too. The blood was in the water and the feeding frenzy was about to begin.
Everyone knew he'd have to buy a huge lot of TIPS at the June 23 auction, so other traders bid them way up - making it even costlier to cover the short. PIMCO joined the party and managed to scoop up a couple billion dollars worth of TIPS at the auction, adding to Hadden's misery. Several market participants even sent congratulatory emails to PIMCO.
At the end of the day, PIMCO made about $50 million in profit, and Morgan Stanley's loss is estimated in the tens of millions. Ouch. Looks like Hadden, recently poached from Goldman Sachs, has some 'splaining to do.
The lesson here is this: if you're going to try to bully a guy out of the pot, you'd better make sure he doesn't have a bigger stack (and a better hand) than you.
Nice. Stories like that are always fun to read--love the whole chess-match atmosphere some of these guys work with.
Nice way to descibe this.
Was this the same time as this? http://www.wallstreetoasis.com/blog/negative-yielding-tips-and-the-beau…
[quote=bortz911]Was this the same time as this? http://www.wallstreetoasis.com/blog/negative-yielding-tips-and-the-beau…]
No, this just happened two weeks ago.
Thanks Eddie. Good stuff
Great post.
I like how trading is likened to poker. It really discourages me from ever actually picking stocks or following a gut feeling. Id rather just save until I make the minimum capital requirements to invest in a hedge fund.
http://rlv.zcache.com/lucy_you_got_some_splaining_to_do_card-p137548860…
When other traders bid something up because they know another buyer HAS TO aquire something, what's the term for it? I'm curious if there's a specific terminology for this. It seems like it's almost the opposite of cornering a market - what is this called?
It's a squeeze
Really enjoyed this one Ed. I'd love to see some other articles just like it. Play by play updates on the battles of the street. If you can get some dramatic music going and maybe feature a hot girl as the article image you'd be one step away from a michael bay film.
wow Eddie. this was beautifully written. no homo.
thanks.
How does this make sense? if you expect deflation (like Morgan Stanley did), rates should stay low and bonds should rally. How is shorting TIPs because you expect deflation a wager AGAINST bonds???
What do you think the letters in TIPS stand for? What happens to the prices of TIPS if inflation expectations subside?
I know what TIPS are. My question was, if you expect deflation, shouldn't you be long bonds instead of betting against them?
I always find it hilarious when a firm makes a "high profile hire", gives the guy a huge garaunteed contract, and then he proceeds to blow up and ruin everyone else's year on the desk. So the only guy who gets paid is the guy who lost everyone else's bonus. As you can imagine this makes for great morale and a very copacetic work environment. Not surprisingly given the nature of wall st, it happens all the time.
That's exactly what I thought when I read it. This guy waltzes in off the street and wants to make a name for himself, and ends up screwing his entire desk for the year. How pissed would you be if you were actually sitting on a decent P/L for the year and now it doesn't matter?
Here's how it happens everytime...
salesman calls and says "Hey we just hired XYZ from, this guy is going to take alot of risk, he's going to make great markets...he will bring real 'credibility to the franchise'! He is on garden leave but when he starts I want o get him on the phone with you, blah blah blah...yes I know he has worked for three different firms in the last six years and its unclear whether he even has a positive career PnL but he brings credibility damnit! I am excited!"
6 Months later salesman calls again "hey want to get a beer tonight?"
that night: "this fukking asshole lost his fukking shirt or more accurately my fukking shirt b/c he is on a huge fukking garauntee! I want to kill this fukking idiot! And he makes shitt markets for my clients who all hate me now anyway because he talked them into this stupid trade! Are you guys hiring?"
yes he is still there...they made a good amount of the losses back.
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