Setting LME customer margin levels and collecting the cash these days is a pretty routine activity. Put the numbers into the parameters and out comes the required demand; send out the call, receive the cash, if not, close out the positions. That’s how the regulatory authorities want it, and they’re right. Margin shouldn’t be a subject of constant negotiation.
But it’s not that long ago that it was.
I recall an Iranian customer calling me in the early nineties, owing us several million dollars in margin, and telling me that his brother had a tract of land in La Jolla, California, and would we please accept a lien on that – which, as a development site, was worth far more than the outstanding call, but he wouldn’t make a big fuss about that, of course – as security for the cash we were requesting. He was quite hurt, I think, when I – politely – pointed out that I was not a Californian real estate developer but an LME broker, and that the currency we worked in was cash, so could we have some please, and preferably today? The next phone call asked us to transfer a chunk of his position to a competitor. Had they accepted the land deal? Or had he simply been trying it on with us, all the while knowing he had space elsewhere? I never knew, but I suspect that it was the former, and that the competitor had lower standards than us.
One of my favourites happened at about the same time, just as the Berlin Wall came down and the Russian monolith started to fragment. A member of the Kalashnikov family – they of the ubiquitous AK-47 – put some money into a small trading house with whom we had had a long relationship. All went swimmingly well. Then we called half a million or so dollars of margin. “No problem,” said the team in their London office, “Mr Kalashnikov is taking care of this personally and is on his way to clear it up.” Now, you, reader, are expecting me to tell you that he marched in brandishing one of his family products; not so. He walked into the office clutching a bulging Gladstone bag. Opening it, he showed us the contents – a stack of dollar bills. “More than half a million,” he said, “to keep us clear in the future.” Well, in the eighties and early nineties, the rules about cash were very different from now; I was surprised, but took it and gave it to the finance department to deposit in our bank. Unbelievably, when we look at today’s issues with cash, that was all fine. If it happened now, I would have him back out in the street with his cash faster than a man brandishing an AK.
A few years later, there was another Russian. This one had a deal with a large aluminium smelter, and as long as that was what they traded, all was mainly controllable. Sadly, though, he also had a penchant for trading copper. That went well, while the Sumitomo-inspired price kept rising, but on that fateful morning when the realisation of what had been happening dawned on the market, he was still fairly heavily long. The market dropped, and dropped, and his position got steadily worse as he chased it down. Eventually, my boss, on the principle that a bad position was easier for us to deal with than a potential bankruptcy, decided our best bet was simply to take the position from him, and worry about getting out of it later. So then the discussion started about how he was going to pay us. Some months earlier, when the copper price was high and he’d been flush, he had been in New York, where he had met a (no doubt young and charming) Russian lady who owned an art gallery. She told him she could find him some delightful pieces which would add style and glamour to his home. So she persuaded him to buy a collection of cast silver Russian statuettes of acrobats – mostly performing highly unlikely feats of athleticism – a Salvador Dali and an el Greco. Well, he thought, pro tem, until he could realise some cash from physical metal sales, these works could be deposited with us as collateral. So, a couple of days later, the two paintings arrived, and leant against the wall behind our dealing positions. Added a bit of class, it seemed. The statuettes were still in New York, and one of the Russian’s employees was despatched to bring them back. Now, most of them were about a foot high, but two were larger – say three feet or so. The man bringing them back was quite short, and I couldn’t get out of my mind the picture of a row of BA seats, man in the middle, flanked on either side by a silver statuette, all with their seat belts tightly fastened. It still makes me chuckle, because I know what the particular pose the statuettes were in was, and it was a broadly a metaphor for the trading that had landed our man where he was. Eventually, we had one of the London auction houses value the stuff. The statuettes, they said, were worth melted down scrap value, the Dali was indeed a Dali, but a limited edition version of one of his works, and they were frankly unsure of the el Greco. We never recovered all the money in this case; I saw the “el Greco”, as I think we should refer to it, in the study of a holiday home a couple of years ago.
Then there were all the clever people who thought they could circumvent margin calls by selling options to cover the cash requirement. Well, they got disabused of that one pretty quickly. The most sensible approach I heard, from a trader who has subsequently become very, very wealthy, was: “Always pay the LME calls first; without the LME, the whole business is dead. We need the credit, so we have to play the game.” As I say, he’s the one who has become extremely wealthy, not the boys who tried to finesse paying margin.
One last story that amused me was an Indian (not Russian this time) customer who owed us a substantial margin call that he didn’t want to pay. So he invited me to lunch, somewhere very prestigious, to persuade me to give him more time. “I’ll send my car to pick you up,” he said, and, duly, a red Rolls Royce arrived outside the office. Driving from the City to Mayfair, I chatted to the driver and asked him what Mr X was like to work for. “Oh,” he said, “I don’t work for him. He just hires the car when he wants to impress somebody.” Did he think I was that easily suggestible? You may guess he got no extra time to pay.
Readers of this who are even older than me will no doubt have even more entertaining stories about this subject; for those raised in a more regulated age, you’re lucky. This stuff may be amusing to think back on, but in truth it consumed an awful lot of time and energy. Ask some of those who had to go and sit out in China trying to get their money.
