When Genius Failed (Roger Lowenstein) #4

The first modern swap was engineered in 1981. IBM had bonds denominated in Swiss francs and German marks and wanted to convert this debt to dollars. David Swensen, a Yale PhD newly arrived at Salomon, suggested that perhaps some other borrow could be persuaded to issue debt that, aside from being denominated in dollars, was identical to IBM’s. One obvious choice was the World Bank, which had an appetite for holding debt in a variety of currencies. As an inducement to borrow, Salomon gave the bank a slightly lower-than-market interest rate. Then the two borrowers switched—IBM winding up with the dollar debt, the World Bank with the foreign stuff—and voila! the world of swaps was born.

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