Matt Levine Ripped My Face Off: CEF, FX, A

Summary

Money Stuff: The Podcast
Episode: Matt Levine Ripped My Face Off: CEF, FX, A
Release Date: August 1, 2025
Hosts: Matt Levine and Katie Greifeld

---

1. Introduction to Closed-End Funds and Private Company Exposure

In this episode, Matt Levine and Katie Greifeld delve into the evolving landscape of closed-end funds (CEFs), particularly those that provide exposure to private companies. Responding to listener feedback, they shift focus from traditional ETFs to more niche financial instruments that cater to retail investors seeking access to high-growth private firms like SpaceX and OpenAI.

Key Discussion Points:

• River North’s Paired Closed-End Funds: The hosts discuss River North's innovative approach with paired CEFs based on the "Prime Unicorn Index," which tracks major private companies. These funds offer both long and short exposures, allowing investors to bet on the performance of private firms without directly purchasing their shares.

  Matt Levine [03:11]:
  “We've talked a lot about people who are trying to jam private stuff into retail investors. The people doing most of the jamming are the people doing private credit funds.”

• Mechanics of the Funds: The paired CEFs utilize cash-settled swaps on the index, enabling investors to gain or negate exposure to the combined performance of private and public companies within the index. This structure aims to balance out investment risks while providing novel products to the market.

  Matt Levine [04:22]:
  “They are writing cash settled swaps on that index. The index measures, let's say, the value of these private stocks and public stocks.”

2. Trading Mechanics, Risks, and Potential Strategies

Levine and Greifeld explore the intricacies of how these funds operate, emphasizing the potential for trading at discounts or premiums and the implications for investors.

Key Discussion Points:

• Discounts and Premiums: The conversation covers historical instances where similar funds traded at significant premiums, questioning whether River North’s funds will follow suit or manage to maintain stability through their swap-based structure.

  Katie Greifeld [06:30]:
  “We often talk about how they trade at discounts. Does that matter at all here, that these are going to launch and then probably trade at a discount?”

• Volatility Drag Comparison: The hosts compare these paired CEFs to inverse ETFs, discussing how the lack of daily rebalancing in the CEFs might mitigate typical volatility drag seen in inverse ETFs.

  Matt Levine [08:47]:
  “With this thing, it's just swaps, it's a little easier. They're not leveraged and you are not giving them down from today. You're giving them the total return over the period.”

• Speculative Investment Strategies: Levine shares anecdotes about potential trading strategies involving both long and short funds to capture discounts, though he humorously warns against personally engaging in such trades.

  Matt Levine [07:53]:
  “My first PA trade in 20 years, we'll be buying both of them.”

3. UBS’s Complex Derivative Products and Client Losses

A significant portion of the episode is dedicated to dissecting UBS's sale of intricate foreign exchange (FX) derivative products, specifically Range Target Profit Forwards (RTPFs). These products were marketed to wealthy individual clients but resulted in substantial losses when unexpected market movements occurred.

Key Discussion Points:

• Structure of RTPFs: Matt explains how these derivatives were designed to offer advantageous exchange rates most of the time, but with the potential for severe losses during rare adverse events.

  Matt Levine [16:09]:
  “The thing they were doing is basically like we will sell you dollars at like 3/10 of a cent below the forward price. So you're getting a bargain. But if the actual price... goes below that target price, we will sell it to you at that target price.”

• Client Misunderstanding and Losses: The hosts highlight instances where clients, possibly lacking sophisticated understanding of the products, faced significant losses when the dollar plunged unexpectedly on Liberation Day tariffs.

  Katie Greifeld [18:48]:
  “Well, the FTA gave some great examples of the harm that was wrought by some of these trades really kind of blowing up.”

• Regulatory and Ethical Concerns: Levine criticizes UBS for selling complex derivatives without ensuring that clients fully comprehend the risks, leading to regulatory interventions and goodwill payments to affected clients.

  Matt Levine [17:02]:
  “It's this great tension in investment banking where obviously you want the client who, when you come to them with some crazy derivative, they're like, okay, sure, sounds good.”

4. Insurance Industry Challenges and Rating Agencies

Transitioning from derivatives to the insurance sector, Levine and Greifeld examine the systemic issues within insurance companies operating in hurricane-prone regions, particularly focusing on the role of rating agencies.

Key Discussion Points:

• Market Failure in Hurricane Zones: The difficulty and high cost of obtaining insurance for homes in hurricane zones have led to the emergence of "never pay" policies, which offer limited coverage and often fail during major disasters.

  Matt Levine [27:31]:
  “It seems like people want the never pay policy.”

• Role of Rating Agencies: They discuss Demotech, a smaller rating agency that has been granting high ratings to many insurance companies that subsequently face insolvency, raising concerns about the reliability of such ratings.

  Matt Levine [28:22]:
  “There's a ratings agency, it's like a mom and pop operation called demotech that rates a lot of smaller, less well-capitalized insurance companies.”

• State Guarantee Funds: The conversation touches on how states step in to cover claims when insurers fail, highlighting the short-term benefits versus long-term systemic risks.

  Matt Levine [29:22]:
  “If you're a homeowner, you can buy the bad insurance policy figuring either it'll pay out, or if it doesn't pay out, someone else will step in to pay it out.”

5. Conclusion and Upcoming Topics

As the episode wraps up, Levine and Greifeld humorously reflect on their discussions, hinting at future topics and encouraging listener engagement through a forthcoming mailbag episode.

Notable Quotes:

• Matt Levine [20:43]:
  “I really didn't. I was also very ineffectual, so it was fine.”

• Katie Greifeld [30:17]:
  “Well, the FTA gave some great examples of the harm that was wrought by some of these trades really kind of blowing up.”

• Matt Levine [31:34]:
  “Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.”

---

Key Takeaways

• Innovative Investment Products: The emergence of closed-end funds targeting private company exposure represents a novel but complex avenue for retail investors, blending traditional fund mechanisms with derivative-based strategies.

• Risks of Complex Derivatives: UBS’s RTPFs serve as a cautionary tale about the dangers of selling sophisticated financial products to clients who may not fully understand the associated risks, emphasizing the need for transparency and proper regulation.

• Insurance Sector Vulnerabilities: The challenges within the insurance industry, exacerbated by unreliable rating agencies and the reliance on state guarantees, highlight systemic risks that could have broader financial implications during large-scale disasters.

• Regulatory Oversight Importance: Across financial products and services, the episode underscores the crucial role of robust regulatory frameworks to protect investors and maintain market integrity.

---

This episode of Money Stuff: The Podcast offers an insightful exploration into the complexities of modern financial instruments and the inherent risks they pose to both investors and the broader financial system. Whether discussing the innovative pairing of closed-end funds or the pitfalls of complex derivative products, Levine and Greifeld provide a nuanced analysis, enriched with real-world examples and expert commentary.

Transcript

[Unknown Speaker 1]

My finance guys like you know we talk every day about stocks.

[Matt Levine]

We should just shut up and bought bitcoin.

[Unknown Speaker 1]

Just shut up and bought bitcoin.

[Matt Levine]

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[Unknown Speaker 1]

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[Matt Levine]

Not investment advice. Crypto trading involves risk of loss and.

[Unknown Speaker 1]

Is offered to US customers through PayWord Interactive Inc.

[Matt Levine]

Terms and conditions apply.

[Unknown Speaker 1]

Did you know using your browser in incognito mode doesn't actually protect your privacy? Take back your privacy with IPVanish VPN. Just one tap and all your data, passwords, communications, browsing history and more will be instantly protected. Ipvanish makes you virtually Invisible Online. Use IPVanish on all your devices anytime you go online, at home, and especially on public Wi Fi. Get IPVanish now for 70% off a yearly plan with this exclusive offer at IPVanish.com Audio Bloomberg Daybreak is your best.

[Karen Moscow]

Way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

What's special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead, you get the latest stories with context.

[Karen Moscow]

And that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world, with reporting backed by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify or anywhere you listen.

[Matt Levine]

Bloomberg Audio Studios Podcasts Radio News Katie it is ominous out there.

[Katie Greifeld]

The skies are darkening as we speak.

[Matt Levine]

It's Thursday at 2 o' clock and change and Will I get home?

[Katie Greifeld]

Will you get home?

[Matt Levine]

Will you get home?

[Katie Greifeld]

Gosh, I hope so.

[Matt Levine]

NJV has to cross one or more.

[Katie Greifeld]

Rivers to that's true. There are bodies of water to Ford.

[Matt Levine]

Hello and welcome to the Money Stuff Podcast. Your weekly podcast where we talk about stuff related to Money. I'm Matt Levine and I write the Money Stuff column for Bloomberg Opinion.

[Katie Greifeld]

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

[Matt Levine]

I feel like we got feedback last week that people were like, please, more ETF stuff. Which is unusual for us.

[Katie Greifeld]

I feel like maybe the people who leave comments are actually just contrarians. Like we messaged.

[Matt Levine]

They know that the default view is no more ETFs, though.

[Katie Greifeld]

Yeah. And we messaged so heavily that people don't like this that they were compelled to write. Actually, we like this. And here are our thoughtful thoughts on them. But we're not talking about ETFs.

[Matt Levine]

No, no. We're talking about a cousin, which are really. I mean, ETF is a term of art, but is it a fund that trades on an exchange? Sure. But yeah, we talk a lot about. I write a lot about people who are trying to jam private stuff into retail investors. The people doing most of the jamming are the people doing private credit funds. But the thing that the retail investors want the Most is probably SpaceX and OpenAI.

[Katie Greifeld]

They're like, I don't want private bonds, just give me SpaceX.

[Matt Levine]

Yeah. Private credit is sold by financial advisors, but SpaceX is bought. And it's hard because you need to go find shares of that. And I think a lot of people have, in various ways, had the thought, what if we didn't find shares? Right. What if we just did naked derivatives on SpaceX or OpenAI stock or whatever. Right. And the idea is you find someone who wants to be short OpenAI, and they write a contract saying, I'll give you the returns on OpenAI, and then you package that into a box and you sell it to retail investors. And then the retail investors get long OpenAI, and whoever wants to be short gets short OpenAI.

[Katie Greifeld]

Yeah. You're just only exposed to the price action.

[Matt Levine]

Theoretically, there's a certain amount of counterparty risk.

[Katie Greifeld]

Sure. Right, right, right, right.

[Matt Levine]

I've written about. We've talked about people who do various tokenizations, various things. And I wrote this week about river north doing these paired closed end funds, which is really the way to do this. Ultimately, it's a paired closed end fund and it's on this index of. It's like the prime unicorn index, which is sort of an index of big private companies.

[Katie Greifeld]

Sort of. Sort of.

[Matt Levine]

There' companies in there, too. To keep it honest, two of its.

[Katie Greifeld]

Top 10 holdings are public companies.

[Matt Levine]

Maybe they don't update that frequently or something.

[Katie Greifeld]

This is as of July 16th.

[Matt Levine]

No, no, no.

[Katie Greifeld]

But like, oh, they don't rebalance.

[Matt Levine]

Yeah, yeah. You have some unicorns in your index that go public.

[Katie Greifeld]

Sure, sure.

[Matt Levine]

But, right, so it's got like SpaceX, it's got some anthropic, it's got some of the hits. And what they're doing is they are writing cash settled swaps on that index. The index measures, let's say, the value of these private stocks and public stocks. There's some questions about how you measure the value of private stocks for these companies. There's secondary trading, there's funding rounds all the time. It's fine, you can get a value. Then they have the index, so they have the price and they have just cash settled swaps on that index. And you can go long or short. There's a long fund that gives you exposure to this unicorn index and there's a short fund that gives you negative exposure to this unicorn index. The obvious trick is they completely offset. So net, nothing happens net. It's like if someone wants to go long and someone wants to go short, then we issue shares to each of them and poof, we have both a way to invest in private companies and a way to short private companies, which some people want, some people think it's a bubble, et cetera. And so you get two delightful products to sell to retail without doing any economic activity outside of it. You don't have to buy shares, you don't have to do anything. Just offset retail bets against each other.

[Katie Greifeld]

So typically when we talk about closed end funds on this podcast, we talk.

[Matt Levine]

We do, you know, not as much as the deals.

[Katie Greifeld]

We dabble. We often talk about how they trade at discounts. Does that matter at all here, that these are going to launch and then probably trade at a discount?

[Matt Levine]

I have no idea how they'll trade. In fact, there is history of unicorn y close end funds trading at huge premiums.

[Katie Greifeld]

Right, right. So they'll trade at some dislocation. Maybe it's not a discount.

[Matt Levine]

Right. If you look at the structure of this, there's some stuff that suggests it shouldn't be too dislocated. So one thing is they are termed cash settled swaps. So this settles in 2027. I think the termination date is not clear, but 2027 isn't the name. So this is a thing that you buy it and in two years you get a payoff. So only so much discount you should really demand because you'll hopefully get, you'll get your cash back in two years. And then the other thing that is interesting for discounts and Premiums is like there are these two offsetting funds, right? So like if they both traded at a discount, you could buy both of them. And then you have a really interesting instrument, right? If you buy the long fund and you buy the short fund both at a discount, then you basically have captured the discount, but you have two years of counterparty risk. Weirdness risk suaves risk, but fundamentally no market risk. I think probably this is not investment advice.

[Katie Greifeld]

I hope these launch.

[Matt Levine]

And if they do trade at a discount, my first PA trade in 20 years, we'll be buying both of them.

[Katie Greifeld]

And don't run yourself.

[Matt Levine]

I will definitely not do that. And it's not an investment advice. I might do that. I might do that. Just for giggles. I read last week about auction rate securities, which is like my only PA trade ever was when I was a banker and like the auction rate securities market got dislocated and so I bought one lot of auction rate securities.

[Katie Greifeld]

Yeah, you did.

[Matt Levine]

At like a 7% yield. I was like, ah, look at me living dangerously.

[Katie Greifeld]

God, that did work out for you though.

[Matt Levine]

Oh Yeah. I made 7% for like a week.

[Katie Greifeld]

All right, that's pretty good.

[Matt Levine]

You didn't lose money.

[Katie Greifeld]

Half a thought I had because I live in ETF land is, you know, we talk about inverse single stock ETFs and there's some element of volatility drag there. And if you hold these long term, then it could be painful. Is there any funkiness that could happen on the short side here?

[Matt Levine]

The inverse ETF problem, the volatility drag problem, comes from rebalancing. Yeah, the rebalancing exists because every day you are offering the ETF to people and you want to give them down from today. Right. And so you're rebalancing to get the right amount of exposure. With this thing, it's just swaps, it's a little easier. They're not leveraged and you are not giving them down from today. You're giving them the total return over the period. I don't think there's too much in the way of volatility drag. There's some possibility that something can get funky. If the index goes up a lot, there's a cap on returns. There's some possibility of weirdness where if you buy the thing in six months, you're not getting quite the negative one times exposure you wanted, which is the opposite of volatility. The volatility drag exists because every day you're getting exactly the same proposition, which is like negative one or two times or whatever. The ETFs, exposure. And here there's not that here, there's just like there's a term to swap and you can buy in at any time to the swap or even you can't buy in at any time because the closed end funds, so they don't have to eat continuous offering. But no, it's very simple. And you know, it's based on this index.

[Katie Greifeld]

Yeah.

[Matt Levine]

I think in large part because it's nice to have a third party calculated index for your cash settled swaps. So you can be like, oh, the thing settled at whatever the price of the index is today, like, and someone else is doing the index. But if this works, you could do it for single names, you could do it for OpenAI. You could have the inverse OpenAI fund and the. Yes, OpenAI fund. And you should offer that to people with no financials. I don't know, it seems like a stretch, but we're in a brave new world of like, it's not clear what securities regulations apply to anything anymore. And if you wanted to do a single stock closed end fund, that's just like betting on and against a private company, could you do that? I mean, two years ago I would have said no. Now I'm like, yeah, I don't know.

[Katie Greifeld]

Maybe these closed end funds do seem like a stepping stone to that reality, so.

[Matt Levine]

Oh yeah, yeah, they're very close to that reality.

[Katie Greifeld]

I mean, we talked about xyz, right? Or the Destiny Tech.

[Matt Levine]

Yeah, yeah, that's the closed end fund that has private companies and trades at a huge premium.

[Katie Greifeld]

And we talked about how like Stripe, for example, or some of these private companies would not love this. So I would imagine that they would also theoretically not love this either. Even though we're talking about swaps here.

[Matt Levine]

I mean, with Destiny, were they using forwards? They owned various cats and dogs. But one thing they owned was like forwards on stock, which is like those forwards are physically settled. Those forwards are basically someone who owns Stripe stock signs a contract saying, I will give Destiny my Stripe stock as soon as I'm allowed to. When Stripe goes public. The reason they do that rather than just selling the shares is because Stripe doesn't let them sell their shares. They have some transfer restrictions. Stripe and probably every private company that transfer restricts its shares probably says, you can't do a forward contract. Forwards are to Stripe no better than selling the shares. Right now it's not clear whether these forward contracts are valid. And if they're not valid, then bad things could happen. Like Stripe saying, no, we get that stock Instead of it going to Destiny when Stripe goes public and they settle the forward here, Stripe gets no say. The private companies get no say. They're not involved at all. There's no contract on their stock. Nobody has to own their stock at any point. It's just purely a cash settled side bet between two people that don't involve the private companies. So there's not a lot they can do.

[Katie Greifeld]

Yeah, and that's sort of what I was getting.

[Matt Levine]

They could put out a statement being like, we're not involved and you shouldn't do it, but they can't stop it.

[Katie Greifeld]

It might be like an annoyance rather.

[Matt Levine]

Yeah, yeah. I mean, like not going to change their lives. It's tripe or whatever. But it's.

[Katie Greifeld]

I did like that. You make the point though, that if you're buying into this closed end fund, you're not funding a private company. You're not giving your money and putting it up. Yeah, exactly.

[Matt Levine]

Right.

[Katie Greifeld]

Yeah. That's truly the reality that we're stepping towards.

[Matt Levine]

I mean, it very much is. And people want to gamble on private companies.

[Katie Greifeld]

God bless him.

[Unknown Speaker 1]

My finance guys like, you know, we talk every day about stocks.

[Matt Levine]

We should just shut up and bought Bitcoin.

[Unknown Speaker 1]

Just shut up and bought Bitcoin.

[Matt Levine]

Forget everything else and bank. I have all my crypto on Kraken. Dave Portnoy trusts Kraken with his crypto. So do millions of clients around the world.

[Unknown Speaker 1]

Download the app today and get $10 in Bitcoin after your first trade of $10 or more. Just enter code IHEART10 under Add Invite.

[Matt Levine]

Code when you sign up. Not investment advice.

[Unknown Speaker 1]

Crypto trading involves risk of loss and is offered to US customers through PayWord Interactive Inc.

[Matt Levine]

Terms and conditions apply.

[Unknown Speaker 1]

Did you know using your browser in incognito mode doesn't actually protect your privacy? Take back your privacy with IPVanish VPN. Just one tap and all your data, passwords, communications, browsing history and more will be instantly protected. Ipvan you virtually Invisible Online. Use IPVanish on all your devices, anytime you go online, at home, and especially on public wi fi. Get IPVanish now for 70% off a yearly plan with this exclusive [e-mail] audio.

[Karen Moscow]

Bloomberg Daybreak is your best way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international Relations.

[Karen Moscow]

But special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead, you get the latest stories with context.

[Karen Moscow]

And that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world, with reporting backed by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify or anywhere you listen.

[Katie Greifeld]

You know who doesn't Want to gamble UVs clients on range target profit forwards.

[Matt Levine]

They don't now because they lost.

[Katie Greifeld]

That's true bigly. Apparently the FT has really owned this story.

[Matt Levine]

Yeah. So ubs, I don't know. I don't want to blame ubs. As a former derivative salesperson, I sympathize. Banks sell derivative products, right? Like you work in fx, right? And like the thing you do is like clients come to you and are like, I would like to change my is products for dollars. And you'll be like, okay. And they'll be like how much will that be? And you'll be like 0.0001 basis points or whatever, right? You charge them a teeny tiny amount of money and so you spend all day in the lab cooking up things that could be more expensive, right? You're like what if. And you try to give them a product that sounds cool. And there's only so many products that can sound cool. But what they were doing is. I don't know, it's got names. It's like Conditional Target Redemption Forward or Range Target Profit Forward. All these.

[Katie Greifeld]

Yes. Rtpfs.

[Matt Levine]

Yeah, whatever name. The thing they were doing is basically like we will sell you dollars. It seems to have been like European, Swiss, whatever. Clients buying dollars, right? So UBS is like we will sell you dollars at like 3/10 of a cent below the like forward price. So you're getting a bargain. But if the actual price in a month or whatever goes below that target price, we will sell it to you at that target price. So you'll get not a bargain. You'll get like a bad deal. You'll be buying above market and we'll sell you twice as much in that situation as in the good situation. So basically like we will sell you dollars at a better than market price most of the time. And then some of the time we'll Sell you many more dollars at a much worse on the market price.

[Katie Greifeld]

Right.

[Matt Levine]

So basically the clients get a good deal in like 80 or 90% of scenarios. So you have a good thing to sell them. You're like, oh, look, you're getting a good deal.

[Katie Greifeld]

I want to go scenarios.

[Matt Levine]

And then they get a terrible deal. They get like really hosed in like 10% of scenarios. And unfortunately the bad scenario came true and all the clients were like, we didn't know what we were signing up for. And UBS is sad and sorry and has made, apparently the FTA reported, made more than 100 goodwill payments.

[Katie Greifeld]

Yeah.

[Matt Levine]

Which basically is like a refund of the money they lost or we're so.

[Katie Greifeld]

Sorry, please don't leave us. We won't do it again.

[Matt Levine]

It's not just the money. It's that the UBS banker has to go to the client and like the interview to client is like, he didn't even bring any materials. Like, it's like they just go and like, look you in the eye and are very sincerely sorry. And they're like, we're not even pitching a different derivative today. Today we're here to just talk about how sorry we are. It's a really, like, touching moment.

[Katie Greifeld]

Yeah.

[Matt Levine]

And they also have internal trainings where they're like, being told not to scam.

[Katie Greifeld]

Clients and also role playing, like how these meetings should go from now on when you're pitching.

[Matt Levine]

Right. It's this great tension in investment banking where obviously you want the client who, when you come to them with some crazy derivative, they're like, okay, sure, sounds good. And they don't bid it out to get the price down or model it up themselves. They're just like, sure, I trust you. But those people are really good clients and they make you a lot of money until something goes wrong and then it looks bad in court. The client who really trusted you, the client who was not sophisticated at modeling FX volatility, those are not the clients that you want to go to court with. So it's a delicate balancing act where two years ago, UVs was probably rewarding the people who brought in the clients in large size. And now it's like, no more of that.

[Katie Greifeld]

Well, the FTA gave some great examples of the harm that was wrought by some of these trades really kind of blowing up. One client lost more than 3 million Swiss franc, which equates to like $3.7 million. Another person said that they lost 15% of their assets. They also asked the bank to exit the investment a few days after Trump's Liberation Day. And apparently, according to FT reporting, UBS sold these products to customers with the equivalent of fewer than $800,000 or so. So I don't know, it's just a weird trade in general to put on. This sounds like something like, if you were a big business trying to hedge your currency exposure, maybe this would make sense. But selling it to even, like, very wealthy individuals is weird.

[Matt Levine]

Yeah.

[Katie Greifeld]

Like, the way that the FT describes it is that these products offer limited upside but expose clients to potentially unlimited losses.

[Matt Levine]

Yeah, that's everything. It's like accumulators. It's like everything. Right.

[Katie Greifeld]

It's like the trade is everything except buffer ETFs, baby.

[Matt Levine]

I know, but, like, for so many wealthy clients, the trade is like, you can get 2% more on your money by, like, taking some black hole of risk.

[Katie Greifeld]

Right.

[Matt Levine]

And then you have the meeting and they're like, what do you think the chances are of that black hole of risk happening? And the client's like, oh, it sounds good. And they buy it and they get 2% extra yield, and then the black hole happens and they're very sad. Here the black hole was Liberation Day tariffs and the dollar plunging.

[Katie Greifeld]

I will say you were talking about the sympathy that you feel towards these bankers who make these derivative products.

[Matt Levine]

I don't.

[Katie Greifeld]

No.

[Matt Levine]

I think that's cool and awesome, but I was one of them. I only sold the sophisticated clients.

[Katie Greifeld]

Right. For sure.

[Matt Levine]

None of them got their faces ripped off. I'm not even kidding. Really?

[Katie Greifeld]

No.

[Matt Levine]

Well, I'm kidding a little bit. Like, none of them got their faces too. Wow.

[Katie Greifeld]

Someone's going to write in and say Matt Levine ripped my face off.

[Matt Levine]

I really didn't. I was also very ineffectual, so it was fine.

[Katie Greifeld]

My first beat at Bloomberg was covering FX as a little baby journalist. And the period that I was covering fx, there was no volatility in currency markets. You had to beg people to read your stories and also, like, really scrape the bottom of the barrel to find stuff to write about. I joined Bloomberg in 2016 and stopped covering currencies in 2019. President Trump's first term actually gave us something to write about. But this trade probably wasn't as risky. It probably really was fine 90% of the time, because the type of volatility that we saw in the Swiss franc dollar exchange rate on Liberation Day, that wasn't happening for a long time. You saw it across asset classes.

[Matt Levine]

What does that tell you? If this trade had been perfectly explained, like, clients who were not professional FX traders but were smart and sophisticated financial people. This trade had been perfectly explained. The perfect explanation is in the ballpark of you will get some extra yield or profit or whatever most of the time. But if the dollar plunges, it does not usually plunge. Then you'll get your face ripped off. And some people would have been like, okay, I'll take that bet. And then the dollar plunged and then they got their faces ripped off. I've read about this before. There are clearly some customers who did not understand what they were getting into. And naughty of UBS to sell them something they didn't understand. But also probably some people were like, I will make the bet that the dollar will not be super volatile and the dollar is super volatile. But look, everyone else is getting a goodwill payment. I should get a goodwill payment too.

[Katie Greifeld]

Yeah. I mean, you would think that they would happen potentially across asset classes. Every asset class had an outsized move on Liberation Day.

[Matt Levine]

Right. And there's something about FX where people, smaller customers get sold weirder stuff. There are definitely equity trades like this we talked about. Is it the accumulator? We've talked about structured note trades that kind of have this shape, right?

[Katie Greifeld]

Yeah.

[Matt Levine]

But I don't know. In fx, it does seem like people take more random gambles. And also people don't expect as much volatility. And then they get volatility. You're very sensitive.

[Katie Greifeld]

Such a strange market. It was a fun trip being there for like two and a half years.

[Matt Levine]

Right. If you're in the business of selling equities, there's a lot of like, you can do buffers and stuff, but there's a lot of just like, ooh, buy OpenAI. It's a good stock. Right. You're in the business of selling fx. You're kind of instantly going to weird derivatives.

[Katie Greifeld]

Yeah, yeah.

[Matt Levine]

And sometimes they block.

[Nathan Hager]

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[Unknown Speaker 1]

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[Katie Greifeld]

Terms and conditions apply.

[Unknown Speaker 1]

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[Karen Moscow]

Audio Bloomberg Daybreak is your best way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

What's special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead, you get the latest stories with context.

[Karen Moscow]

And that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world, with reporting backed by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify, or anywhere you listen.

[Katie Greifeld]

Which leads us to insurance.

[Matt Levine]

Insurance sometimes blows up too.

[Katie Greifeld]

Yeah, well, trying to get us to hurricanes somehow, but I can't quite make the metaphorical jump. So anyway, in 10 minutes I'm going.

[Matt Levine]

To make a literal jump into the hurricane here.

[Katie Greifeld]

Ho ho. It's raining in New York.

[Matt Levine]

It's raining in New York. And like they've already preemptively shut down all transit.

[Katie Greifeld]

Well, all the subways keep breaking, right?

[Matt Levine]

I have to take a subway and then a train. It's gonna be bad.

[Katie Greifeld]

My dad is picking me up today, so I'm happy.

[Matt Levine]

Okay, so Florida. Florida. So there are a lot of houses in hurricane zones. It's hard and expensive to buy insurance on your house if it's in a hurricane zone. People have jumped into the gap to meet that market failure. Conceptually, the way you do it is you start an insurance company and you don't have any money and you start selling insurance policies to raise money. And if you do this for 20 years without a hurricane, you'll have so much money that you can pay off any claims. If you do it for one year and then there's a hurricane, you will not have so much money that you can pay off any Claims. And so there's a risk in starting a new. I'm dramatically oversimplifying. And in fact, new insurance companies are supposed to be well capitalized, but conceptually, you start a new insurance company, you raise money by selling premiums, and then if there's no hurricanes, you're great. And if there's lots of hurricanes, you go to zero. And that's hard to do because insurance companies have to be rated. There's a couple of big ratings agencies. There have been a number of stories recently. There's one in the Wall street this week, and Bloomberg wrote about it last year. There's a ratings agency, it's like a mom and pop operation called demotech that rates a lot of smaller, less well capitalized insurance companies and gives a lot of them A ratings. And they have a higher incidence of their A rated companies becoming insolvent within a reasonable period of time.

[Katie Greifeld]

30 times more likely.

[Matt Levine]

30 times more likely than the other ratings agencies that use more traditional methods.

[Katie Greifeld]

Somewhat meaningful.

[Matt Levine]

And it's like, why does this exist? Well, well, people want to buy insurance. Someone sent me there's a Monty Python skit where a reverend comes into the insurance office and says, why aren't you paying my claim? And he's like, oh, you see, you bought the never pay policy, which never pays off. It's a great policy if you don't have a claim, but if you have a claim, it never pays. It seems like people want the never pay policy. Yeah, I've written a little bit about why it's an interesting systemic answer, which. The answer is that these insurance companies have enough money that if you burn your house down by accident, they'll pay your claim. They have that kind of money. What they don't have is the money to pay off everyone's claim if there's.

[Katie Greifeld]

A big hurricane, if a town is wiped out.

[Matt Levine]

Yeah. And why would you want to buy insurance that protects against you accidentally burning your house down but not a hurricane? The answer is, I think, is that you probably correctly believe that there's some sort of bailout coming if your town gets wiped out.

[Katie Greifeld]

Yeah.

[Matt Levine]

And in insurance, this is really quite literal, where there's state guarantee funds that basically will step in to cover wiped out insurers. So if you're a homeowner, you can buy the bad insurance policy figuring either it'll pay out, or if it doesn't pay out, someone else will step in to pay it out. And then there's a question of why do states allow this? Because the states fund the guarantee funds and they're on the hook if this insurer doesn't pay out. I think the answer is that's a problem for another day. And right now it's nice to have insurance. So if you're a Florida politician and people can't get insurance to buy houses in Florida, that's really bad for you, right?

[Katie Greifeld]

Yeah.

[Matt Levine]

And if they can get insurance, that's good for you. And if the insurance doesn't pay out and the state government has to step in to guarantee the insurance, that's a problem for later. And so there's a certain amount of short sightedness where regulators, politicians are all happy to go with a system where the insurers are not necessarily all that well capitalized because that's a problem for someone else to figure out later on.

[Katie Greifeld]

Yeah, this is not the same thing, but it kind of reminded me of the conversation we were having about Egan Jones a couple months ago. That is the ratings agency that basically gives pretty high ratings to private credit investments and has a track record of a lot of those private credit investments not going so well, or you think about it, gave pretty good ratings to Chicken Soup for the Soul. It gave good ratings to Redbox, and those went belly up. But there is a space for these rating agencies.

[Matt Levine]

Yeah, it's a similar dynamic in that ratings are not really for the consumer of the ratings. You're not getting insurance from an A rated insurance company because you want insurance from an A rated insurance company. There's some sort of regulatory backdrop. And so if ratings are kind of generous, a lot of people are very happy to have generous ratings. And so there's a market niche for people who are willing to provide generous ratings.

[Katie Greifeld]

Yeah. And I mean, it's all just future problems to deal with.

[Matt Levine]

So yeah, everything is A rated now, hasn't defaulted yet. Who knows what'll happen?

[Katie Greifeld]

Hey, so this episode is coming out on August 1st, and in August, people, including Matt Levine take vacations. So we're going to do another mailbag episode. So make sure you send us your cool questions. Moneypodloombird.net and there's a pretty high likelihood that we'll answer some of them. Matt.

[Karen Moscow]

I know.

[Matt Levine]

We might do a mailbag episode.

[Katie Greifeld]

We might.

[Matt Levine]

There's a medium probability we'll answer if.

[Katie Greifeld]

Your questions are good enough.

[Matt Levine]

Won't go nuts.

[Katie Greifeld]

If your questions are good enough, we will do a mailbag. So it's up to you.

[Matt Levine]

That's not even, yeah, sure, it's up to you. It's all riding on you. And that was the money stuff. Podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Matt Levine]

You can find my work by subscribing to the Money stuff newsletter on Bloomberg.com.

[Katie Greifeld]

And you can find me on Bloomberg TV every day on Open Interest between 9 to 11am Eastern.

[Matt Levine]

We'd love to hear from you. You can send an email to moneypodloomburg.net.

[Katie Greifeld]

You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

[Matt Levine]

The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.

[Katie Greifeld]

Our theme music was composed by Blake Maples and Sage Bauman is Bloomberg's Head of Podcasts.

[Matt Levine]

Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff. From Bitcoin believers to cautious first timers.

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[Matt Levine]

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[Unknown Speaker 1]

Crypto trading involves risk of loss and.

[Matt Levine]

Is offered to US customers through PayWord Interactive, Inc. Terms and conditions apply.

[Unknown Speaker 1]

Did you know using your browser in incognito mode doesn't actually protect your privacy? Take back your privacy with IPVanish VPN. Just one tap and all your data, passwords, communications, browsing history and more will be instantly protected. IPVanish makes you virtually invisible online. Use IPVanish on all your devices, anytime you go online, at home, and especially on public Wi Fi. Get IPVanish now for 70% off a yearly plan with this exclusive offer at IPVanish.com Audio Bloomberg Daybreak is your best.

[Karen Moscow]

Way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

What's special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday news. Instead, you get the latest stories with.

[Karen Moscow]

Context, and that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world, with reporting backed by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify, or anywhere you listen to.