AUCKLAND CASTLE AND THE US BANKING COLLAPSE
The Throne Room at Auckland Castle - Andrewrabbott - CC BY-SA 4.0
What does a 900-year-old English Castle have to do with the demise of Silicon Valley Bank and the recent fears of a US Banking Collapse? The answer lies in the VIX, the so-called Volatility Index, a measure of fear in the Equity markets.
The VIX saw runups in price during the 2008 Financial Crisis and the COVID-19 Pandemic. Both coincided with massive drops in the stock market. However, while the stock market tanked in 2008, the VIX skyrocketed to 95 from a low of 10, while in 2020, it spiked to 85 from a base of 12.
Traders in futures or options can earn overnight fortunes if they can correctly time the rise of an index like the VIX, and one man has done so with uncanny precision. In 2018, the VIX spiked from 10 to 50, and the mystery man had invested some $5 million which he turned into $200 million. Bloomberg reported on the story in a 2018 article where the mystery trader was named “50 Cent” due to his propensity to purchase 50 cent call options on the VIX.
Reuters reported in January 2020 that VIX option trades resembling 50 Cent again surfaced with large blocks of calls purchased between 57.5 and 59 cents each. The mystery trader’s estimated paper profit as of January 28 was $21 million when the calls traded at $1.15 each. On that date, the VIX was up slightly at around 18 to 19.
However just two months later, in March 2020, the VIX soared to over 85, which would have priced the calls at some 65 dollars each for a projected profit of hundreds of millions.
Financial Times reporters investigated and identified earlier trades as originating from the Ruffers LLP firm. The $20 billion London-based investment fund was founded by Johnathon Ruffer, who has been described as an investor, art collector, philanthropist and devout Christian. He is renowned for gifting over 150 million pounds to the restoration of Bishop Auckland, a historic town in Northern England containing Auckland Castle dating back to the 12th century.
After serving as chairman of the Good Shepherd Mission in Bethnal Green from 1998 to 2008, Ruffers took on the Auckland project in 2012, beginning with a 1-million-pound donation to the Durham Foundation, where the town is located. In 2013 he donated another 13 million to preserve Auckland Castle, the former palace of the Bishop of Durham. He contributed another 18 million to restore the Bishop’s palace and construct a museum highlighting the history of British Christianity. Ruffers completed the restoration project in 2019 after adding visitor restaurants and creating Kynren, an adjacent night show that tells the story of England’s history.
All told, Ruffers estimates he spent 50,000 pounds a day on the restoration of the castle and town over a span of 10 years. At roughly 18 million pounds per year, that works out to about 180 million which is covered by one good VIX trade.
But last month, on February 16, 2023, 50 Cent once again made headlines. Seeking Alpha, an investment forum, wrote, “a transaction was registered Tuesday, February 14, that linked to an account that paid 50 cents each for 100,000 VIX call options valued at US $5 million.” On the date of purchase, the VIX was trading at around 18 to 19.
However, just a few weeks later now in March, with the collapse of two banks, Silicon Valley Bank and Silvergate Capital, the VIX jumped to 28 before retreating to 24. So, the question is this - will 50 Cent again time the market perfectly? Will Ruffers be correct in calling another stock market debacle? And will this one involve further bank runs and collapses? Over the weekend, Signature Bank became the third casualty. And on Monday, the VIX climbed to a high of 30.8.