An unaccountable liquidating desk accelerated losses that hit all consensus traders

Evidence

Though Kaplanis, promoted to head of global arbitrage for Salomon, advised against it, the decision was taken to liquidate the U.S. arbitrage desk’s portfolio as quickly as possible, and responsibility for the liquidation was passed to Salomon’s U.S. customer desk. Since the latter was “not accountable for the losses generated as a result of the liquidation, the speed of the latter was faster than would otherwise have been the case.” This caused losses not just to Travelers/Citicorp but also to all of those who had similar positions: “Not only did we lose money as the positions went against us as we were selling them, but all the other funds that also had these consensus trades also started losing money.” (Kaplanis interview) If the liquidation of Salomon’s arbitrage positions was a background factor in the problems of the summer of 1998, the immediate cause of the 1998 crisis was, as noted above, Russia’s August 17 default on its ruble-denominated debt. — Donald MacKenzie, An Engine, Not a Camera, 1034

Categorization

• SEED: Angle: how missing accountability for the agent executing a liquidation creates a counter-party externality — a neat case for a piece on how institutional design (not just models) shapes market contagion.
• XREF: connects to: Value-at-risk limits force position liquidation once breached — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1048; Arbitrage strategies became consensus trades as hedge funds imitated LTCM — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1029; Compressed decision time makes financial markets prone to cascading collapse — David Harvey, The Condition of Postmodernity: An…, 1938 (+3 more)

Broader Connections

• Value-at-risk limits force position liquidation once breached #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1048
• A small trigger can unravel large systems of overlapping arbitrage positions through forced selling #corroborates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 156
• Arbitrage strategies became consensus trades as hedge funds imitated LTCM #expands (0.78) — Donald MacKenzie, An Engine, Not a Camera, 1029
• Compressed decision time makes financial markets prone to cascading collapse #corroborates (0.75) — David Harvey, The Condition of Postmodernity, 1938