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Opinion
Matt Levine

Portuguese Railroad Company Was Really Into Snowballs

If you show an affinity for crazy derivatives trades, you will get shown a lot of crazy derivatives trades. You may be tempted to interpret this as a sign of your savvy. Don't.

One service that I like to provide is pointing my readers to ridiculous derivatives trades, and so a while back I pointed you to a ridiculous "snowball" swap that Portuguese state-backed railroad Metro do Porto did with Santander. Santander agreed to pay MdP a fixed rate, and in exchange MdP agreed to pay Santander a variable rate that started at zero, stayed at zero if Euribor stayed within certain bounds, and grew enormously and cumulatively if it went outside those bounds. It went outside those bounds. So the payments snowballed, MdP ended up paying Santander more than 40 percent a year, teeth were gnashed, etc.

Today I learned that this snowball was no aberration at Metro do Porto, which seems to have spent years accumulating an arsenal for the nerdiest and most expensive snowball fight imaginable. Here is an Independent article that sounds familiar: MdP entered into a snowball swap where it agreed to pay a bank some horrible accumulating goulash of interest rates, and that swap quickly and horribly went against it. But it's a different swap! This one was with Goldman and happened in early 2008, about a year after it entered into its snowball swap with Santander. And after the Goldman snowball went horribly awry, MdP decided to get out of it by entering into another swap with Nomura in 2009, in which Nomura agreed to pay MdP the goulash that it owed Goldman, in exchange for MdP paying Nomura a totally different goulash so outlandish that it reduced the Independent to incoherence.