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# Drysdale Case

#### CK2015

##### New Member
Subscriber
I read the case many times, but still not able to understand, how did Drysdale managed to obtain $300 million of unsecured loan from Chase? How many parties are involved in the deal? Confusing phrases to me are 1) unsecured, but mentioning of collateral with out accrued interest 2) Loan from Chase to Drysdale, but it acted as an agent for its clients. Is it a syndicate loan? Can somebody help with this? Also I read that the whole$300 million dollars was wiped out and Chase had to absorb the entire loss due to legal terms stated in the agreement. What happened to the recovery from collateral?

#### CK2015

##### New Member
Subscriber
I just read it. Nowhere they mentioned the actual loss. All I see/hear is that Drysdale were able to obtain loan from Chase showing them the artibitrage opportunity with a flawed accursed interest calculations and then Bond prices went down and Chase had to bear it due to flaw in the contract.

Here is my understanding
1. I think mentioning of "unsecured loan" is incorrect
2. Chase didn't loose all of $300 It would be nice to know little bit more detail like, to how many investors did chase have to pay and how much losses did they actually incur. This is just to be aware and know the impact of this disaster.$300 million seems to be incorrect.

#### brian.field

##### Well-Known Member
Subscriber
I am sure you can search online to find more information. The point is, with respect to the FRM, that Chase's internal risk management framework failed.

#### CK2015

##### New Member
Subscriber
Ya..looked at NY times then edition and couple of other sites with no luck...the numbers are different to what's listed in the case ..for example a $30m number for capital vs$20m etc...I agree with you that from exam perspective, I'm good..but was just curious to what exactly happened...

#### Dr. Jayanthi Sankaran

##### Well-Known Member
Thank you folks for all these wonderful links - greatly appreciate it

#### Dr. Jayanthi Sankaran

##### Well-Known Member
Hi @CK2015,

In regard to your first question,

(1) How did Drysdale manage to obtain $300 million of unsecured loan from Chase? How many parties were involved in the deal? It appears to me that Drysdale borrowed Treasury securities from securities dealers (a syndicate possibly! - don't really know how many parties were involved). Chase was just an intermediary between these securities dealers and Drysdale (2) Confusing phrases to me are 1) unsecured, but mentioning of collateral with out accrued interest 2) Loan from Chase to Drysdale, but it acted as an agent for its clients. Is it a syndicate loan? Can somebody help with this? The trading strategy followed by David Heuwetter, the head trader at Drysdale Government Securities, involved selling short US Treasuries outright for the market price plus accrued interest in the Government securities market. At the same time, by borrowing US Treasuries at market price in order to cover his shorts in the repo market, he was making money via accrued interest on the short position with no cost. At that time, repo pricing was a little different - since Repo's were generally just overnight and settled for cash, including the accrued interest in the Repo price did not seem important. (3) Also I read that the whole$300 million dollars was wiped out and Chase had to absorb the entire loss due to legal terms stated in the agreement. What happened to the recovery from collateral?

Chase ended up liquidating Drysdale. Although Chase technically, acted as a clearing agent between the securities dealers and Drysdale, all the repo transactions were carried through them. That is why the counterparties to Drysdale felt that the onus was on Chase.

Citing Scott E.D. Skyrm: " Up until then, the government securities market had operated under the assumption that the buyer in a Repo trade was entitled to liquidate the trade in the event of a default by the seller. There was no law on books differentiating a Repo from a collateralized loan and there had never been a case in court to set a precedent. The market was unsure whether they could liquidate the Drysdale/Chase Repo trades.

If Repo was technically a “collateralized loan,” then securities held by a creditor would be part of the bankruptcy proceeding, meaning the securities could be tied up for months, or even years in bankruptcy courts. If however, a Repo was technically a sale and a repurchase transaction, then the securities could be immediately liquidated in the event of a default.

Following the collapse of Drysdale, the government securities market and Repo market were frozen."

I found this case to be very enlightening as far as the arbitrage trades go. Great learning on the US Treasury and repo markets.

Hope it helps!
Thanks!
Jayanthii

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#### Dr. Jayanthi Sankaran

##### Well-Known Member
Thanks for that vote of confidence Brian - much appreciate it!

Best
Jayanthi

#### Dr. Jayanthi Sankaran

##### Well-Known Member
Thanks Brian - you are indeed a true pal!

Best
Jayanthi

#### hulan1991

##### New Member
Hi, I have a question about the case study of Drysdale. I'm wondering if anyone can help. Thanks very much.

When I read the Drysdale case, I found it was hard to understand. So I grabbed more information about this case. I found that Drysdale borrowed billions of securities from Chase using reverse repo. The accrued interests were around 300 million. So does the textbook mean that, since the clean price of collateral worths 300 million less than the money lent, it corresponds to billions of secured debts plus 300 million unsecured debts?

#### Nicole Seaman

##### Chief Admin Officer
Staff member
Subscriber
Hi, I have a question about the case study of Drysdale. I'm wondering if anyone can help. Thanks very much.

When I read the Drysdale case, I found it was hard to understand. So I grabbed more information about this case. I found that Drysdale borrowed billions of securities from Chase using reverse repo. The accrued interests were around 300 million. So does the textbook mean that, since the clean price of collateral worths 300 million less than the money lent, it corresponds to billions of secured debts plus 300 million unsecured debts?
Hello @hulan1991

I moved your post here, where there is already a thread started regarding the Drysdale Case. There is a great deal of discussion in this thread, and if you use the search function in the forum (in the upper right corner), there are other threads that discuss this also.

Thank you,

Nicole

#### nikogeorgiev

##### Member
Ya..looked at NY times then edition and couple of other sites with no luck...the numbers are different to what's listed in the case ..for example a $30m number for capital vs$20m etc...I agree with you that from exam perspective, I'm good..but was just curious to what exactly happened...
well the NYTimes from back then stated that the capital was only £5.5m as opposed to \$20m in the case study. Irrelevant as this has no impact on the LO.