The Red Roulette and the Rate Shock of 1994
Remember your job is to identify the book and post your answer. You can also simply share any thoughts in the comments.
Today’s Quote/Passage:
Imagine a casino full of gamblers betting on a roulette wheel. Spin after spin, the ball lands on a red-colored number. The gamblers bet on red numbers and win, doubling and feverishly redoubling their bets. As the cheers grow louder, they begin ignoring the fact that the wheel has just as many black numbers as red. They believe they have entered an incredible new world where the roulette ball only lands on red numbers. They bet everything on the next spin.
Substitute “low interest rates” for “red numbers” and you have a description of the early-1990s financial markets.
…On February 4, 1994, Alan Greenspan and the Federal Reserve raised overnight interest rates from 3 percent to 3.25 percent.
…But behind the scenes, it was pure panic.
…Most individual investors did not yet know of the swaps Bankers Trust had done with Gibson Greeting and Proctor & Gamble, or the complex financial strategies First Bost and Salomon Brothers had engineered.
…By early 1994, hundreds of money managers and treasurers-from..Orange County, California to..Piper Jaffray - had secretly bet hundreds of billions of dollars -..bets that interest rates would stay low..When the Fed raised rates on February 4, 1994, they lost.
We’ll wrap this series up today and be back next week with the usual take on whatever madness the Fed (or markets) deliver.
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