In my post the Rise of Godzilla I explained how the UAE money markets work and the presence of a money center bank that I will call Godzilla. In my introduction I outlined a short squeeze that Godzilla had run against the whole UAE banking system, all fifty banks. In this article I will outline how a (then) midsize bank successfully fought off a bullying short squeeze by Godzilla.
A corporate client informed us that he was moving what was relatively a large deposit to Godzilla for business reasons. Our corporate team had a great relationship with this client and he informed us well over a month in advance of requesting the transfer. Normal operational procedure is to plan how to replace this deposit. This is two pronged, a short term bridge, usually provided by the treasury via the interbank money markets that is then replaced by longer term client deposits managed by the corporate division of the bank.
The flip side is that the bank receiving the new deposit needs to deploy the asset in a similar two pronged manner. First they place it in the interbank money market (Central Bank accounts do not pay interest) and then corporate/retail lend out the funds longer term.
As you can see there is a symmetry here: Godzilla needed to place funds in the money markets that exactly matched the funds we needed to borrow. The gentleman’s agreement in the market is that we would contact Godzilla’s treasury and agree in advance the placement of funds. Such agreements, once entered into, are binding.
My team reached out to Godzilla and were given the runaround. My chief dealer came to me worried, and explained to me the historical situation detailed in my post Rise of Godzilla. He wanted me, as a senior executive, to talk to Godzilla’s senior executives to resolve the situation. Instead I asked him how he would handle this if there was no political cover.
The chief dealer came up with an idea. He pointed out that there was no reason to submit to Godzilla and that we could easily cover our money market needs from the other 50 banks in the market and that our money market team had the skill to do this without moving the market against us (i.e. continually buying funds can raise interest rates). If we covered most of our position then we would be in the strong position of dictating to Godzilla our terms. I approved his idea. My chief dealer went into shock at having a manager listen to him and back his plan. Over the next couple of weeks he positioned us accordingly.
I will never forget the day that Godzilla got spanked. I was in a conference and I got a call from the chief dealer. Time had run out and Godzilla was trying to bully us by not placing the funds with us. They did not know that we didn’t need the funds. He asked me what to do. I told him I’d be there in 20 minutes and that I trusted him to do the right thing and gave him full authority and cover (remember this is a treasury, so the phone lines were recorded).
By the time I showed up it was all over. Godzilla couldn’t place the funds and was paying their client around 6% and receiving 0% from the idle funds in their CB account on a very large deposit. My chief dealer hadn’t completely covered our short position and took a piece of Godzilla’s surplus funds at well below market. Godzilla learnt to respect my team’s skills. My team respected me for my trust in them. And we made a lot of money. Happy days.
Teams backed by massive assets get lazy. They start making tactical errors. Those tactical errors are converted to strategic successes by astute competitors. The greater the assets supporting you the more vigilant you should be about the onset of arrogance.