“Our business looks very attractive next to their business, where they trade to make a couple of basis points,” Tisch noted. “The only trouble is, if you’re wrong on a government bond the spread may change by a half a point. If you’re wrong on risk arb, you can lose half your position.” In short, the reason that deal spreads were so much wider than bond spreads was that you could lose a lot more money on merger arbitrage. Tisch left feeling that Long-Term didn’t know what it was doing. It was both inexperienced and highly leveraged—a potentially explosive combination.
