By Nicholas Varchaver
April 9, 2017

Good Morning.

Have you heard about the oil traders who humbled Wall Street’s top investment banks and earned $9.1 billion for their clients over just the past two years? I certainly hadn’t. The identity of these hotshots might surprise you. They don’t work at some elite hedge fund. Nor are they a handful of brilliant near-sociopaths of the type you might find in a bestseller written by Michael Lewis. Instead, they are… employees of Mexico’s finance ministry. “Uncovering The Secret History Of Wall Street’s Largest Oil Trade,” in Bloomberg Markets, is one of the most unexpected financial tales in recent memory.

The article describes how Mexico, which for years relied on oil for nearly a third of its income—making it highly vulnerable to drastic falls in petroleum prices—set out to hedge its exposure at the dawn of the new century. To say the government succeeded would be a dramatic understatement. Among other things, the story includes a near moment-by-moment account of the maneuvering in 2008 just before the financial crisis. Mexico’s team saw what the bankers couldn’t see—that prices were about to plummet—and they prepared themselves by making what looked like a crazy bet. At a moment when oil was trading at nearly $150 per barrel, they locked in a series of options contracts allowing them to sell 330 million barrels at prices ranging from $67 to $87 a barrel. That seemed bonkers—until oil crashed into the 40s before stabilizing in the 50s in 2009. Result: Mexico cashed in $5 billion at the expense of Barclays, Goldman Sachs, Morgan Stanley and Deutsche Bank. As the article makes clear, that year was hardly unusual. Perhaps the biggest mystery here is why Wall Street’s finest minds don’t have the sense that casino operators have: Don’t keep playing with the guys that take your money every time. Then again, knowing Wall Street hubris, maybe that’s not such a shocker.

Mexico has tried to keep what it calls the “Hacienda Hedge” under wraps—who’d want to expose its compliant counterparties to the sort of publicity that makes them stop taking the bets?—but Bloomberg Markets has done superb work in uncovering it (and bolstering every assertion with copious documentary evidence).

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