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07-13-2015, 04:50 PM
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Photo: Alan Bond
It was the year 1867, in the continental U.S. the Civil War had just finished two years earlier. This was the central event in America's domestic history and more than any other event, it united the country. Meanwhile, in the Russian Empire, fear was growing about war possibly breaking out in Britain. In order to arm themselves with some financial muscle they looked across the Bering Strait at a 1.5 million square kilometer piece of land that they just happened to own. On March the 30th of 1867, Alaska was sold to the United States by the Russian Federation for $7.2 million (http://economix.blogs.nytimes.com/2010/08/20/was-the-alaska-purchase-a-good-deal/). This is the equivalent of around $16.5 billion in today's dollars. Was this a smart purchase? The wide-spread thinking at the time was that it wasn't. Widely Alaska was seen as a big blot of frozen tundra, and other than the oil and wild animals it had, it was pretty useless. But when thinking that today the $7.2 million purchase is worth around $15 trillion, you would have to assume that it couldn't have been too bad. With 150 years of compound interest accounted for, the rate of return is about 9 percent, which has easily beaten the rate of inflation over the period.
The sale of the Carnegie Steel Company to J.P Morgans U.S. Steel Trust in 1901 for $480,000,000, was easily (at the time) the largest financial transaction ever made. J. P. Morgan had financed the purchase using incredibly creative financing (especially for the times). He would pay out Carnegie out in 5 percent 50 year gold bonds.Carnegie had built up (http://www.biography.com/people/andrew-carnegie-9238756#early-life) his company from scratch, after immigrating from Scotland as a small child. Starting off by working in the railroad industry, he would start investing his money in oil and steel, and left the railroads in 1865 to move full-time into working on his investments. Until the 1901 sale, his focus was primarily on building up his steel interests. His story is one of the greatest in American history, and is he certainly an immigrant who made good. Prior to the sale there were a couple of incidents which left a bit of a black mark on his resume though, most notably the Homestead strikes in 1892, which left many workers dead or wounded. So from a personal standpoint the sale was a good move, as it not only put those troubles in the past, but it also made him the wealthiest person in the world (at the time). From the U.S. Steel Trust's standpoint, it was a reasonable buy, and the (eventually) re-formed company produced 67 percent of all Americas steel in it's first year of operation. Various break-ups of the company mean that a ROI cannot be worked out properly (US Steel has a market cap of $2.7 billion today). Still, it has been one of the largest American companies for over a century, and the Trust's purchase in 1901 is the reason why.
The next grand transaction I would like to write about, is the purchase of Channel 9 (http://www.crikey.com.au/2006/10/27/packer-explodes-alan-bond-myth/) for $1.05 billion AUD by Alan Bond in 1987. This was clearly a great trade for one side, and a terrible trade for the other. More than any other deal they ever did, this was the one that made (Australian) Kerry Packer and the Packer family truly rich. At the time, during the 1980s, there were two clear media heavyweights in Australian television, Alan Bond and Kerry Packer. Rupert Murdoch would have been in the conversation as well, but by that stage he was focusing on building his empire in America. If I remember the story correctly, one day in '87, Packer walked into Bond's office and said to him that either one of them needed to buy the other one out. At the time Bond was in acquisition mode, and was racking up debt like there was no tomorrow. Packer had always fancied himself as a bit of a trader, and could foresee the forthcoming stock market crash. Going full-steam ahead as usual, Bond piled in. The result was that Bonds bad debts piled up, he lost his company, and actually would go to jail for a few years due to getting too creative on his financing. His bad debts had piled up and many ordinary folk who had trusted him were left out of pocket. Kerry Packer meanwhile, would walk back through the doors of Channel 9 in 1990, having repurchased the company for $250 million.
The final trade I would like to make reference to, is my personal favorite trade of all-time. This was the big short trade made by Michael Burry and John Paulson (http://www.amazon.com/Greatest-Trade-Ever-Behind-Scenes/dp/0385529945) (among others) in the mid-2000s on Credit Default Swap protection against the U.S. Mortgage market. In the early days of the trade, in 2005 when Burry was the first one who began buying up protection, there were a few oddball people out there who suspected that the boom in the U.S. Housing market was about to end. However, there were two distinct danger's waiting in the wing's for people ready to take the short trade. The first was to find what way was best to profit from the trade. Their were quite a few people at the time who made the wrong type of trade and got burnt, like shorting U.S. Mortgage CFDs (Contracts for difference). This type of derivative is where enter into a contract with a (provider) company that says you have X amount of units. Your profit or loss is determined by the time you open the trade to the time that you close the trade. A Credit Default Swap (CDS) on the other hand is where the seller of the swap guarantees the credit worthiness of a debt security (such as a mortgage), and the buyer receives credit protection. (http://www.investopedia.com/terms/c/creditdefaultswap.asp) This, it turned out, was the right way to short the housing bubble. But the problem with it was that it would be a loss-carry trade i.e. until the housing bubble 'popped' investors would (on paper) be losing money. This means that it was difficult to get investors to commit, something Paulson was such better at doing than Burry. Although Burry was totally correct about the trade, many of his investors pulled out just prior to when the bubble finally popped.
So that's it, those are (I believe) four of the greatest trades in world history. What one do I think is the best of the four? If I had to make a pick, I would go with my favorite, the Paulson and Burry housing bubble short. Why I believe it was is that it was incredibly innovative and forward-thinking. Michael Burry in particular, was a guy who came from basically nowhere. He did not have a finance background, instead studying to be a doctor. He was not from Wall Street, instead he lived on the West Coast. What I think is best though, is that no one in the finance game would accept him, but he accepted himself. He did things his own way, and he thought out of the box. The Paulson and Burry trade is the sort of trade that we should look to emulate. Be creative, don't abide by the status quo, and choose your own way. -- This feed and its contents are the property of The Huffington Post, and use is subject to our terms. (http://start.westnet.ca/newstempch.php?article=terms.html/) It may be used for personal consumption, but may not be distributed on a website.
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Photo: Alan Bond
It was the year 1867, in the continental U.S. the Civil War had just finished two years earlier. This was the central event in America's domestic history and more than any other event, it united the country. Meanwhile, in the Russian Empire, fear was growing about war possibly breaking out in Britain. In order to arm themselves with some financial muscle they looked across the Bering Strait at a 1.5 million square kilometer piece of land that they just happened to own. On March the 30th of 1867, Alaska was sold to the United States by the Russian Federation for $7.2 million (http://economix.blogs.nytimes.com/2010/08/20/was-the-alaska-purchase-a-good-deal/). This is the equivalent of around $16.5 billion in today's dollars. Was this a smart purchase? The wide-spread thinking at the time was that it wasn't. Widely Alaska was seen as a big blot of frozen tundra, and other than the oil and wild animals it had, it was pretty useless. But when thinking that today the $7.2 million purchase is worth around $15 trillion, you would have to assume that it couldn't have been too bad. With 150 years of compound interest accounted for, the rate of return is about 9 percent, which has easily beaten the rate of inflation over the period.
The sale of the Carnegie Steel Company to J.P Morgans U.S. Steel Trust in 1901 for $480,000,000, was easily (at the time) the largest financial transaction ever made. J. P. Morgan had financed the purchase using incredibly creative financing (especially for the times). He would pay out Carnegie out in 5 percent 50 year gold bonds.Carnegie had built up (http://www.biography.com/people/andrew-carnegie-9238756#early-life) his company from scratch, after immigrating from Scotland as a small child. Starting off by working in the railroad industry, he would start investing his money in oil and steel, and left the railroads in 1865 to move full-time into working on his investments. Until the 1901 sale, his focus was primarily on building up his steel interests. His story is one of the greatest in American history, and is he certainly an immigrant who made good. Prior to the sale there were a couple of incidents which left a bit of a black mark on his resume though, most notably the Homestead strikes in 1892, which left many workers dead or wounded. So from a personal standpoint the sale was a good move, as it not only put those troubles in the past, but it also made him the wealthiest person in the world (at the time). From the U.S. Steel Trust's standpoint, it was a reasonable buy, and the (eventually) re-formed company produced 67 percent of all Americas steel in it's first year of operation. Various break-ups of the company mean that a ROI cannot be worked out properly (US Steel has a market cap of $2.7 billion today). Still, it has been one of the largest American companies for over a century, and the Trust's purchase in 1901 is the reason why.
The next grand transaction I would like to write about, is the purchase of Channel 9 (http://www.crikey.com.au/2006/10/27/packer-explodes-alan-bond-myth/) for $1.05 billion AUD by Alan Bond in 1987. This was clearly a great trade for one side, and a terrible trade for the other. More than any other deal they ever did, this was the one that made (Australian) Kerry Packer and the Packer family truly rich. At the time, during the 1980s, there were two clear media heavyweights in Australian television, Alan Bond and Kerry Packer. Rupert Murdoch would have been in the conversation as well, but by that stage he was focusing on building his empire in America. If I remember the story correctly, one day in '87, Packer walked into Bond's office and said to him that either one of them needed to buy the other one out. At the time Bond was in acquisition mode, and was racking up debt like there was no tomorrow. Packer had always fancied himself as a bit of a trader, and could foresee the forthcoming stock market crash. Going full-steam ahead as usual, Bond piled in. The result was that Bonds bad debts piled up, he lost his company, and actually would go to jail for a few years due to getting too creative on his financing. His bad debts had piled up and many ordinary folk who had trusted him were left out of pocket. Kerry Packer meanwhile, would walk back through the doors of Channel 9 in 1990, having repurchased the company for $250 million.
The final trade I would like to make reference to, is my personal favorite trade of all-time. This was the big short trade made by Michael Burry and John Paulson (http://www.amazon.com/Greatest-Trade-Ever-Behind-Scenes/dp/0385529945) (among others) in the mid-2000s on Credit Default Swap protection against the U.S. Mortgage market. In the early days of the trade, in 2005 when Burry was the first one who began buying up protection, there were a few oddball people out there who suspected that the boom in the U.S. Housing market was about to end. However, there were two distinct danger's waiting in the wing's for people ready to take the short trade. The first was to find what way was best to profit from the trade. Their were quite a few people at the time who made the wrong type of trade and got burnt, like shorting U.S. Mortgage CFDs (Contracts for difference). This type of derivative is where enter into a contract with a (provider) company that says you have X amount of units. Your profit or loss is determined by the time you open the trade to the time that you close the trade. A Credit Default Swap (CDS) on the other hand is where the seller of the swap guarantees the credit worthiness of a debt security (such as a mortgage), and the buyer receives credit protection. (http://www.investopedia.com/terms/c/creditdefaultswap.asp) This, it turned out, was the right way to short the housing bubble. But the problem with it was that it would be a loss-carry trade i.e. until the housing bubble 'popped' investors would (on paper) be losing money. This means that it was difficult to get investors to commit, something Paulson was such better at doing than Burry. Although Burry was totally correct about the trade, many of his investors pulled out just prior to when the bubble finally popped.
So that's it, those are (I believe) four of the greatest trades in world history. What one do I think is the best of the four? If I had to make a pick, I would go with my favorite, the Paulson and Burry housing bubble short. Why I believe it was is that it was incredibly innovative and forward-thinking. Michael Burry in particular, was a guy who came from basically nowhere. He did not have a finance background, instead studying to be a doctor. He was not from Wall Street, instead he lived on the West Coast. What I think is best though, is that no one in the finance game would accept him, but he accepted himself. He did things his own way, and he thought out of the box. The Paulson and Burry trade is the sort of trade that we should look to emulate. Be creative, don't abide by the status quo, and choose your own way. -- This feed and its contents are the property of The Huffington Post, and use is subject to our terms. (http://start.westnet.ca/newstempch.php?article=terms.html/) It may be used for personal consumption, but may not be distributed on a website.
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