Back in 2011, Boaz Weinstein was riding the rollicking waves of the financial markets, looking for juicy credit default swap trades to sweep up in his net, when the captain of the S.S. Saba Capital noticed a counterparty acting strangely. It was a whale—not a majestic if troubled blue whale, but something more like a gray whale or Minke whale. It appeared to be gorging itself on MBIA CDS, while all of its fellow bank whales wouldn’t touch the stuff.
Weinstein didn’t understand it. But since he had only a flimsy fishing net at the time—and because, as he says, he loves puzzles and “the market to me is the ultimate puzzle”—he decided to study the great stricken beast, to try and understand its habits. And since we’re not actually talking about giant sea creatures but banks, he did this by giving them a call.
There was another incident that’s never been reported on, as far as I know. It was a year before the London Whale, and it was Morgan Stanley that took the hit…. I went to go see Morgan Stanley to warn them. The head of risk for the bank said: “I don’t get it. MBIA has wrapped [guaranteed] exposures for every bank on the Street. Are you telling me none of the other banks have bought MBIA protection? We’re the only ones?”…
From there, as a thank-you, they worked with me for weeks to help them unwind as much as they could. It was our most profitable investment in 2011—garnering more than $75 million for us that year.
Which was a great haul, but not as great as it could have been. However, this understanding of how banks think about and trade CDS would be priceless, as would the industrial-sized harpoon Weinstein bought as he continued to trawl the net open interest seas.
I was very primed to find the London Whale a year later. That being such a successful trade for us emboldened us to continue to look at the changes in NOI that added detail to our London Whale thesis.