GREG AGRAN: By the time we got to the end in, like, September, October, he really was throwing the kitchen sink at trying to keep the market elevated. So there were crazy swaptions on physical. Hey, I want to sell you this option on physical where I have 5 different options to deliver into. And he had sold so much crazy optionality that we just were, like, who is ever going to let us buy this option back?
It's a brutal day. LME market didn't open until 11:55 London time. Technically that's when the first floor happened. But you were basically--
TONY GREER: Started on the TOCOM.
GREG AGRAN: Yeah, you were active kind of from 8:00 in the morning. And then kind of all the real work would happen when that market was closed, because then New York, where a lot of the management-- hey, I need you to do this, talk to this client, do this.
We were working, like, long, long days. It was pretty common for us to be in the office, like, 7:30 in the morning till 9:00 or 10:00 at night, which by today's standards seems pretty crazy. But we are 25 and super. And it was busy and exciting. So we were happy to do it.
TONY GREER: I remember coming over there and figuring out that I was going to maybe go to the gym or something like that after the work. And after work was 8 o'clock. We go to the pub after work. There was no gym after that. So let's go to-- in 1995, Nick Leeson at Barings Bank loses $1 billion. And we're all sitting around the desk going, oh, my god.
GREG AGRAN: Which turned out to be a big boon for Goldman, because 1 early partner, another Harvard graduate friend of mine named Dave Heller, was on the other side of a lease and trade. That really credentialized Goldman in equity options.
TONY GREER: Right. So that's 1 side of that trade that you just went into. Then I want to go into September of 1996 when Sumitomo announced that they lost $1.8 billion
GREG AGRAN: Yeah, something nobody even really traded.
TONY GREER: From Copper trade, right? And so Sumitomo was then an investor in Goldman Sachs and 1 of our counterparties in the metals--
GREG AGRAN: It was I think at that time, I think it might have been the only private outside of the partners. And we're the only private investor.
TONY GREER: So what we learned was they had a rogue trader, Yasuo Hamanaka that was manipulating the copper markets. Then in September of 1996, they announced that the loss was more like $2.8 billion. So from there--
GREG AGRAN: I mean, I came to know they really didn't know how much they had lost.
TONY GREER: Right. That's what we figured. But till we get there at that point, Yasuo Hamanaka goes to jail for 8 years, and Greg Agran gets the unwind of his position. Right?
GREG AGRAN: I mean, with others. But--
TONY GREER: With others. But can you tell me a little bit about number 1, I'd love to hear what he was hiding from the markets, and how he is manipulating. And what was it like to unwind a rogue trader that had to be somewhat hairy?
GREG AGRAN: Well, first, the start of the story is such a great start, which is how I even came to know that we were going to be involved. We were not a marquee LME house, then. We were probably like a something like a B or maybe, at best, a B-plus player. But there were lots of-- you gotta remember, the LME, even in 1996, still had over 100 years of history. And there were houses that existed for most of those. So we were a relative newcomer.
But definitely Gary, Jim Reilly, the other leadership and commodity-- they saw this, and they knew about this senior relationship at the Sumi level from the ownership stake in Goldman. And they saw as, hey, maybe this is an opportunity to credentialize yourselves. But they had to also be thinking, can we actually do this or not, right?
And so they decided, well, the first thing to do would be to meet with them and get a sense of what they have and see if we can do it or not. And so this is, I think, the greatest part of the story, which is, it was a weekend. And Gary calls me on a Sunday early in the morning, like 7:00 or 8:00 in the morning.
Hey, come to this suite in the Park Lane Hotel. I'm like, well, why are you in the Park Lane Hotel? You own a beautiful house on Holland Park. Just get here. Now, as you all remember, you know J. Aaron back then. There was a prank every now and then.
So my first thought is, I wonder what kind of prank they're going to pull on me when I get there. I'm going to be the stupid guy that shows up at 8:00 in the morning. But whatever. I'm going to have to go. So I throw jeans, baseball cap, sweats on. And I show up.
And at this point, even when I knock on the suite door, I'm mostly prepared for a prank, not for a real opportunity. And Gary opens the door. And he's in a suit and tie. And I'm like, I'm underdressed. And then I kind of peek around the corner. And I see a bunch of Japanese guys on the couch with John Thain who's the CFO of Goldman at that point. And then I'm like, definitely underdressed.
And he's like, come in. You have God. And so we wind up having a fairly short meeting while I was there. They had been there a long time pretty much all night, I think. There were a few senior people from Sumi. There was a guy from MITI, the Japanese trade ministry.
And so Gary kind of-- they're talking. Gary has me off to a side. He brings me this phone book-sized pile of papers. And he says, hey, I need you to take a look at this and give me an idea of what the mark to market is.
And yeah, I'm looking through it. And I'm just like, I mean, this is it. There's not a single summary. There's nothing like-- this is just literally what we would know as a flat report. Like, it's a list of position by position of everything they have in their book. And they're the largest base metal traders in the world.
So I'm like, oh, OK. I'll take this back to the office. Let me call a few guys. We'll try to get it into our system. In a couple of days, maybe I'll give you an idea. He's like, no, this can't leave the room. I'm like, well, Gary, I don't have a computer or anything.
He just hands me an HP 12C. And then he whispers in my ear. And he says, just get me to the nearest billion. And so at that point, like, as you said, right, this is Nick Leeson lost a billion. Now, their lost so much money-- they just need to know within a billion--
TONY GREER: Within a billion.
GREG AGRAN: --how much they've lost. So I'm like, OK, I mean, I don't want to set your hopes too high. It's a monstrous effort. So I'm there most of the day at around 4 or 5 o'clock. He's like, what do you think? So now we're, like, 6, 8 hours. And I'm, like, it's billions.
I don't know if it's 2, if it's 5. The thing that scares me is I found 1 position, just 1 line that was down 600 mil. So I said, I just don't know. Was that an outlier? Maybe there's an up 600 somewhere. But it's hard to know, like, how many of those torpedoes could be in the book. But I'm kind of 2 bit at 5 right now.
So we basically worked through the evening by about sort of 11:00-- 10:00, 11:00. It was late that night. I kind of had it in a 2 to 3 area. And Gary said, I think that's good enough. Why don't you go home, and I'll call you. I basically barely got into my house.
And he's back on the phone. He said OK, who we going to need to deal with this? OK, we're going to need all the back office guys, right? Richie Schwartz, Robert Call.
TONY GREER: Matt Fried.
GREG AGRAN: Yeah. I got to have all our guys, because mostly what we need is we need the input and clerical, because it's going to be just such a monumental effort to manually put this in. They didn't have it on a disk or anything. Like, we were going to have to type in the position, have many people double-check it.
So there was a massive effort. They didn't give us the job right away because they were debating over fees. But we signed a nondisclosure. And they said, OK, look, why don't you get started. It turns out they were competing us against somebody else, which I didn't know or really care at the time.
But over the course of about a week, we wound up getting the mandate. So that required, especially by those standards-- we were really concerned-- hey, like, maybe we should try to have some compliance, like, in terms of, should we really basically be unwinding the biggest book ever in the history of base metals markets just on the trading desk while everybody else is sitting there?
Or should we try to have some semblance of separation for this. And Gary and everybody agreed that we had to figure something out. So we wound up having like a 3-prong system where Gary went and essentially worked for Sumitomo. So he cordoned off like a section that you needed a special ID card to get into.
And he went into there. And we never saw him again for like, 3 months because it took a long time for us to unwind. And he was, like, their advisor. And then he would give us orders. And we couldn't ask him, hey, what's coming next? Or how much do you have left? We had some sense, cause I had seen the whole book. And we were trying to keep track through the process of what we'd done.
But frankly, like, he did a pretty good job, as he should have, because, really, he was working for them at that point of shielding their intention. And sometimes he'd come out in a day and be like, hey, today, we want to buy. And I be, like, well, I know these guys are still long, like 40,000 lots. But OK--
TONY GREER: Yeah. Whatever you sell me. Yeah.
GREG AGRAN: Yeah. And then me and Chris Carrera kind of split up the execution part which was a big, big job when he was focused on the spot. And I was focused on everything else. And everything in Sumi's book--
TONY GREER: When you say everything else, so we're talking about forwards--
BOTH: Physical options.
GREG AGRAN: Yeah.
TONY GREER: So this is not just everything else. That's a small line item. Everything else is the other end of the iceberg.
GREG AGRAN: I mean, outside of the fact that the spot position was huge and was obviously kind of simple, because it's just like he was long, everything in future and spot form.
TONY GREER: And hiding the weight somewhere.
GREG AGRAN: Yeah, well, I don't know how much I'd say hiding, cause there wasn't great reporting back then. It was very easy to just basically have inventory that didn't make the official report. So I don't think he actually had to go to great lengths to conceal the size of his position.
TONY GREER: I see.
GREG AGRAN: Now, I think the market had a sense because he always bought. And it never showed up in the inventory report. So people would say, well, he'd say, I'm selling it to consumers. But at some point, people felt like, hey, we should be able to find this somewhere. And you couldn't. And so I think the market had a pretty good sense by the summer of '96 that something was amiss.
And, yeah, so the everything else was, he had thrown the-- by the time we got to the end in, like, September, October, he really was throwing the kitchen sink at trying to keep the market elevated. So there were crazy swaptions on physical. And hey, I want to sell you this option on physical where I have 5 different options to deliver into.
And he had sold so much crazy optionality that we just were like, who is ever going to let us buy this option back? This option could be worth 10 times what he sold it for, because he wasn't trying to be price-sensitive. He was just trying to profit--
TONY GREER: --affect the--
GREG AGRAN: --at the end, especially.
TONY GREER: Right.
GREG AGRAN: So yeah. The complexity of the book turned out to be pretty significant. And in actuality, we neutralized the spot and the effective delta on everything. We're very quickly, like, inside of a month. Partially the market was set up for it. There were a lot of speculators, a few hedge funds, and a few LME houses that I wouldn't say at the other side but we're well-prepared.
What really took a long time more than 6 more months was to get at all options. And in some cases, we just couldn't find guys who wanted to sell us back the most esoteric stuff that he had sold. And they still obviously dictated whether the price was fair. So they'd come back and say, hey, but he sold this option for $16 a ton. And you're telling us it's worth $225 ton.
We're like, yeah, that's the best price we can find. And we don't want to sell it to you. So what do you want to do? And so they held out for a long time-- months and months and months. And then I think there was a little bit of institutional fatigue. Like, the senior management at Sumi wanted to separate.
By this point, Hamanaka had kind of already been prosecuted. And it was well-flushed out like the extent of the deception that had happened. And Sumitomo senior management wanted to separate themselves and kind of start with a clean slate, so to speak. So they kind of went to Gary and said, We want to be done.
At this point, we were probably only doing, like, 1 or 2 transactions a week where we could find a price that they thought was acceptable. And there were probably 100s of really esoteric options still left. And we were OK. By this point, we were kind of moved on to other business for the most part.
And every couple of days, somebody would call us and be like, hey, is that option-- yeah, yeah. What do you want to do? OK. Yeah, I'm too 18 instead of-- OK, we'll go back to them. We'll let you know.
TONY GREER: So it's a long arduous process
GREG AGRAN: Yeah, it was long, arduous process. And eventually, they came to us about 6 months after the beginning and just said, we want to be done. And that was it. We made him a price and then that was the end. And me, I'll finish up the story.
Another very memorable and quite emotional-- the gentleman at Sumi that had run the process was this guy named Bob Takai who I still talk to today. Japanese have a lot of honor about their work. And I think they felt like this episode had brought a lot of dishonor on Sumitomo. And they were anxious to clear their name, so to speak.
And so we did what we thought was a good job. And Bob invited us over to Tokyo-- myself, Gary, Chris, a few other guys. He hosted us in his house for dinner. So you go in. And you take your shoes off. That's all very formal. And Bob has his family come out-- his kids. And they're all very deferential.
And his wife thanks us for bringing honor to the family. And oh, we can't thank you enough there. This could've brought such shame on us. It's been such a great experience to work with you and our families, and we want to thank you. And I was on the verge of tears, because it was so heartfelt and so personal. You can never even--
TONY GREER: Was Gary Cohen crying?
GREG AGRAN: No, he wasn't crying.
TONY GREER: Right, right, exactly. Man, that's amazing. I mean, what an amazing piece of your trading history to have under your belt. And what's cool is that you were still just getting started at Goldman Sachs through all of that and making--
GREG AGRAN: Yeah. I was in my fifth year only still. I was 26, 27 years old. And the whole world at that point seemed like you could do anything, because the firm had so much confidence in young people to be capable of incredible amounts of responsibility. It's amazing.
ALEX ROSENBERG: Let's play a game. I'm going to read out 3 sentences. You have to guess what they have in common. All right? Here we go. Sentence number 1. This has literally changed my life. I'm currently up enough on this trade to pay off my house. Here's sentence number 2. This call has been absolutely spot on. It has made a big difference to my year and portfolio returns. I'm likely up 30% by the end of the year.
And sentence number 3. It's effectively a macro-mentoring program from 2 of the best. Give up? Each sentence comes from 1 of our many subscribers to Macro Insiders. That's the actionable macro-mentoring service from Raoul Pal and Julian Brigden. To play along yourself. Check out Macro Insiders today to see what kind of membership works for you.