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Matt Levine

What Was Goldman Sachs Doing With Libya's Options Bets?

If you lose a lot of money to someone, one good thing to do is to go back to him and ask to do another deal where you can make your money back, nothing can possibly go wrong there.

If you more or less believe in the fundamental efficiency -- that is, randomness -- of markets, a lot of things get a lot easier. For instance you take losses more philosophically. If you lose money on an investment, that is not a sign that you should double down to make it back, nor is it a sign that you should stop investing altogether. It is a sign that a weighted random number generator has produced some random numbers and now one of those numbers lives in your bank account. Later more numbers will be produced, but you cannot make them bigger numbers just by wishing for it to be so, or by yelling about it, or by filling your days with stress and lawsuits.

I don't really know what's going on in this lawsuit that the Libyan Investment Authority filed against Goldman Sachs, and there is obviously a lot going on. One thing that is going on is that, depending on exactly which reports you read, the fund "lost about $1.75 billion betting on structured products in 2007 and 2008, about $900 million of which was with Goldman Sachs," or else "lost 98% of a $1.3 billion bet on currency movements and other complex trades done with Goldman in 2008." Apparently that $1.3 billion bet consisted of premium for "options on a basket of currencies and on six stocks: Citigroup Inc., Italian bank UniCredit SpA, Spanish bank Banco Santander, German insurance giant Allianz, French energy company Électricité de France and Italian energy company Eni SpA." And it lost 98 percent of its value by early 2010.