Citibank's $900M Blunder
Whether this is a good strategy for Brigade Capital (cons: risking reputation with banks and the public, low chance of truly being able to keep the money, pros: increasing reputation in some circles with investors, and giving off an error of cut-throated-ness, 176.2 million dollars today) comes down to churn rate.<p>I used to trade equities (high frequency, etc.) and I&#x27;ll never forget the one trading &#x2F; programming infinite loop I had while doing some pairs trading (this was like maybe 2005). It was with Goldman. Accidentally, went long something like 10,000 shares of AMGN at the time. I remember it was an Amgen &#x2F; Biogen pairs trade. Clearly it was an &#x27;out trade&#x27; or mistake. I called Goldman&#x27;s desk immediately (the trading was of course all automated). Anyway, I talk to a Goldman trader. He looks up the order. Again, I&#x27;m long a lot more AMGN than I should&#x27;ve been and it&#x27;s very unusual. Back then you could call trading desks - not sure how automated it is now... If there was an accident involved, the fair thing to do is to &quot;bust the trades&quot; (originally based on trading floors, trading pits, etc.). And lots of trading firms had these relationships with brokers like Goldman back in the day. AMGN is trading up a bit from when these orders came in - so I&#x27;m actually making a little money off this mistake, but I just want to unwind &#x2F; exit this mistake. He agrees. I breath a sigh of relief.<p>I go back to trying to figure out what stupid infinite loop triggered this issue and make sure I&#x27;m completely out of everything (note, this was a huge learning lesson in my programming career in terms of always building in safety checks). 30 minutes go by and the trades aren&#x27;t busted. I call Goldman back and now am worried, as by this time Amgen stock has started to go down, so now these trades are really hurting more and more (20k, 30k, etc. in 2005 dollars for a young programmer&#x2F;trader). Now it&#x27;s in Goldman&#x27;s favor and I speak to another guy and they refuse to bust the trades.<p>Why do I mention this? Because again it&#x27;s all a matter of churn. They made implicitly the calculation of - is this going to jeopardize the trading activity our firm is giving Goldman and cause us to split up? If not, if the expected cost of churn is less than they can make via a short-term reward, they don&#x27;t care.<p>I now work for Amazon, and I recall Bezos saying he&#x27;d always be happy to make up a loss for a customer instead of losing them as a customer. While I think this is a good thing in the world, in a way it all comes down to churn (and LTV). And the true price of your reputation for future customers based on your reputation for treating customers.<p>Brigade Capital has to make that call. For me, Goldman as a company is doing fine (despite my never trusting them again after that) - so perhaps it was the right call for them to make (re: their culture -- certainly, an argument can be made that they&#x27;re not liable; however the other argument that they agreed verbally to the bust and then went back on their word...).<p>I&#x27;ve since left the trading industry, and strongly believe in long-term value &#x2F; valuing the relationship with the customer above all and, economically, the LTV of a customer. But I&#x27;m savvy enough to know that indeed an Amazon LTV is way way more than a single cost of an item. Now Amazon can&#x27;t refund every single order that is lapsed or it will really start to eat up LTV, but it makes a lot of economic sense to protect the customer relationship (it&#x27;s not just being nice).<p>But there&#x27;s always a tradeoff. Is 176.2 million worth it v. the reputation hit and increase in churn rate for existing customers + the lowered expectation of new customers? Perhaps for them it is. (Are they a 1B under management company? a 100B under management company? According to wikipedia it says 35B, so 176.2 is small relatively to them v. their reputation) In the long run, given the difficulty in overcoming the legal aspects around this issue (i.e., given their chances of not winning the lawsuit) and having their public perception be reduced for future business relationships (reputation once lost is very difficult to regain), I doubt it.<p>Richard Posner was&#x2F;is a big fan of the economic theory of law. In a way, there is a market value to kindness, which is an odd thing. But the good&#x2F;moral thing is usually the more valuable thing in the long run (since we all vote with our wallets for what we think is sustainable and good&#x2F;moral&#x2F;honest things are usually more sustainable for business).