Averaging Down

When the market started falling, he accumulated more Russian bonds, at an average of around $52. That was Carlos’ trait, average down. The problems, he deemed, had nothing to do with Russia, and it was not some New Jersey fund run by some mad scientist that was going to decide the fate of Russia. “Read my lips: It’s a li-qui-dation!” he yelled at those who questioned his buying.

By the end of June, his trading revenues for 1998 had dropped from up $60 million to up $20 million. That made him angry. But he calculated that should the market rise back to the pre–New Jersey sell-off, then he would be up $100 million. That was unavoidable, he asserted. These bonds, he said, would never, ever trade below $48. He was risking so little, to possibly make so much.

Then came July. The market dropped a bit more. The benchmark Russian bond was now at $43. His positions were underwater, but he increased his stakes. By now he was down $30 million for the year. His bosses were starting to become nervous, but he kept telling them that, after all, Russia would not go under. He repeated the cliché that it was too big to fail. He estimated that bailing them out would cost so little and would benefit the world economy so much that it did not make sense to liquidate his inventory now. “This is the time to buy, not to sell,” he said repeatedly. “These bonds are trading very close to their possible default value.” In other words, should Russia go into default, and run out of dollars to pay the interest on its debt, these bonds would hardly budge. Where did he get this idea? From discussions with other traders and emerging-market economists (or trader-economist hybrids). Carlos put about half his net worth, then $5 million, in the Russia Principal Bond. “I will retire on these profits,” he told the stockbroker who executed the trade.