Jim’s Mailbox

Posted at 1:05 PM (CST) by & filed under Jim's Mailbox.

Jim/Bill,

You gentlemen have always made a point of educating your readers to the point that “gold has no counterparty risk”. This may well become the mantra for many in the ensuing months.

The Softbank issue has the distinct aroma of 2008.

I wonder how many banks, funds, etc. are exposed?

Should they require bailouts, or heaven forbid go belly up, the ramifications could be global. Not unlike the MBS and CDS debacle of 2008.

Here we go again!

Just a thought.

CIGA Wolfgang Rech

Exactly correct Wolfgang!

Bill

“Your Money Is Gone. All Gone”: How SoftBank’s Call Spread Strategy Led To Catastrophic Results – A Thread
September 12, 2020

In the aftermath of reports both here and elsewhere which identified SoftBank as the “hedge fund” responsible for much of the August gamma meltup via the use of aggressive call spreads, the stock of the Japanese financial conglomerate tumbled as much as 17%, an unacceptable outcome to CEO Masa Son who delights in parading with his surging stock (to the point where we dutifully advises investors that SoftBank’s buyback program is the second largest only after Apple).

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The result was a half-hearted leak through Bloomberg that the bank is “reconsidering” the use of its notorious market-moving costless collar derivative strategy, the creation of the Akshay Naheta, a SoftBank senior vice president in Abu Dhabi who previously was also the brain behind a similar costless collar “investment” in the now confirmed Wirecard fraud, and who honed his derivative strategies at his hedge fund, Knight Assets, where he generated a staggering 112.5% annually and before that at Deutsche Bank where he was Head of Principal Strategies. As a result, we dubbed Akshay the “gamma whale.”

That said, it wasn’t clear just “what changes might be made” to the SoftBank group responsible for public equity investment. All we know is that Masa Son was on it in hopes of easing investor fears that SoftBank was transitioning to a full-blown hedge fund dabbling in highly risky derivative strategies.

But were these strategies really risky? Curiously, much of the media’s softball coverage of SoftBank’s strategy focused on the fact that “costless” call spreads, due to their zero invested capital, are effectively free trades and guaranteed to make money if the underlying stock goes up, while hedged in case of downside.

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