The Red Pack Pact — A tale of casual moral hazard.

London, UK — around 2014, I was having a warm, £5 lager with a then-customer who traded, amongst other things, interest rates futures (derivatives that allow the hedging and speculation of changes in global interest rates).

We were both having a grumble and a catch up as he mutters something strange “to be honest, it might be time to fire up the Red Pack Pact and bug out”.

I got the bit about “bugging out”, a common topic of conversation in a working environment of constant stress, low morale and unrewarding work, but I had to rewind the conversation for the bit about the Red Pack Pact

“You never heard of the Red Pack Pact?” he asked with a grin.

“Well I know what the Red Pack is but…” I said, trying to recover what was obviously an unforgivable lack of knowledge on my part.

He cuts me off, as these guys are prone to doing, “right so what you do, is get a mate working at another shop [bank] to go long [buy] Red Pack dollars in massive [a very large bet]” he pauses a second for effect “and you go short, matching his bet”.

The penny drops. If two traders bet against each other in the same contract — one wins and one loses.

“But one of you gets sacked right?” I said, pointing out the obvious.

He shrugs, “yeh maybe, but the other one has a record year, you just get them to share their bonus”

We joked about the ins and outs of it. What if your mate welched on the deal? What if the regulator saw the link between you and your confederate etc etc. I left with the impression that the idea was unrealistic — but only after he’d had a bloody good think about it.

He was joking of course, but it got me to thinking. Where else and in what other environment does an employer limit the consequences of huge failure to zero (no financial liability), and reward, often in very explicit terms, a % of any money you generate from the gambling of other peoples’ money?

Moral Hazard ;)