Doesn’t this happen way too often? From Instutional Investors, “How To Lose a Billion Dollars Without Really Trying”, here:
”Banks were paying to get risk off their books to pass stress tests regulators imposed after the last financial crisis. But, the thinking went, the insurance would never actually pay out, because such a dramatic crash had never happened. But in trader-speak, these kinds of deals are called “selling the small puts,” and are often described as picking up pennies in front of a bulldozer. Malachite’s founders tried to challenge that mentality. According to someone familiar with their thinking, even post-demise, the pair saw their strategy as “much more like picking up $100 bills in front of a Tyco truck.”
Whatever the vehicle, it’s the getting-crushed part that matters, experts point out. Alberta’s public investment fund lost $2.1 billion trading vol through March, and swiftly killed its program. AIMCo has a reputation among Canadian pension peers for standoffishness. Among some Wall Street traders, its known for eating up their crash risk.”
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