THE BEST WAY TO UNDERSTAND THE GLOBAL FINANCIAL SYSTEM 175
$1 trillion of swaps that we had with the rest of Wall Street.
Russia was just a slice of that.
At this point, it was August of 1998, and there were a lot
of Russian derivatives because a lot of people wanted to buy
Russian securities. It wasn’t easy to buy them directly and so
Credit Suisse and others in particular started creating basket
derivatives where the return would be indexed to the perfor-
mance of certain Russian securities.
But of course when that’s done, the leverage increases
because there’s a certain amount of those securities but if I
start writing derivatives, I can write five, six or ten times the
amount of securities in derivative from and let everybody
make the same bet. So, when Russia went down in August of
1998 that was a shock.
They not only defaulted on their external debts — it’s one
thing when you default on your external dollar denominated
debt, which they did — but they actually defaulted on their
internal ruble denominated debt. In theory, there’s no reason
to do that because they could have printed rubles. Yet, they let
their currency crash.
The recent collapse of the Russian ruble was the worst
since that time in 1998 when it collapsed even more rap-
idly than it has recently. Then, that started a global financial
panic. Everybody wanted his or her money back. People had
to sell good securities to raise cash to meet margin calls on
bad securities.
Then, all of a sudden, the good securities weren’t so good
anymore because everybody was dumping them, trying to
raise cash.
I saw another example of this dynamic in the early stages
of the 2007–2008 panic.
I was in Japan in September 2007, right after the mort-
gage crisis started. It was a full year before Lehman Brothers.
Remember, Lehman Brothers and AIG didn’t happen until