Another Rogue Trader

In the tradition of Jerome Kerviel, Nick Leeson, and Yasuo Hamanaka, here comes the latest rogue trader to force us to contemplate what the heck the "risk managers" at large banks actually do for a living: world, meet Kweku Adoboli. Mr Adoboli, meet world.  Oh, you two are already acquainted?

Let me backtrack and explain those other names, then. Nick Leeson was the Singapore-based derivatives broker whose trading losses of $1.4 billion caused the demise of a centuries-old bank, Barings, in 1995.  Leeson is my personal favorite member of the group, for reasons I won't try to explain.

Hamanaka was a Japanese copper trader who at one time controlled 5% of the world's copper supply. In June 1996, though, Sumitomo Corporation had to admit to a loss of $1.8 billion on Hamanaka's trades. He was sentenced to eight years in prison, served seven.

Jerome Kerviel, the biggest loser of the bunch, in the employ of giant French bank Société Générale, lost 4.9 billion euros, or roughly $7 billion in what Americans call money, in January 2008.  It was an early sign that this was going to be a very rough year.

Now we come back to Kweku Adoboli. He lost the equivalent of $2.3 billion dollars working for UBS in their London office.  But he makes an odd addition to this already-odd-enough pantheon. First, he was an ETF specialist.  ETFs are boring.  They're supposed to be boring, that is their charm.

Second, he seems to be the first rogue trader of the "social media" era. He kept a Facebook page, and as things turned against him, at a moment when he must have understood his UBS superiors were closing in, he updated his FB status to read, "I need a miracle."

Third, his life story is, up until now, the stuff of inspirational movies.  To  read of his family and his life and only then to consider his crimes is like -- well, it's a little like watching :"The Miracle Worker" in a special edition with a new tacked-on ending where Anne Sullivan embezzles money from the Keller family.

Fourth, though, it's good to see that the London law firm of Kingsley Napley is still with us.  They represented Nick Leeson.  He went to the recognized experts in rogue trader defense for counsel.

Some wisdom from Singapore

US equities will rise again.

So says Josh, of "Josh Reviews Everything," while riffing and ripping on a Paul Farrell panic attack.

I won't seek to add anything more.

A timeline for the fall of Barings Bank

Feel free to correct me. It's a story with some moss on it, having passed from "journalism" to "recent history," but it intrigues me.

Feb. 25, 1967, Nick Leeson is born. His first home was in Orbital Crescent, North Watford, to the northwest of London, off M1.

1985-1989. During this period, Japan's "bond warrants" market accounted for most of the earnings of Barings Securities. Japanese companies had discovered they could get a substantial discount on the interest cost of bonds if they offered a sweetener, a "warrant" -- a long-duration stock option -- with the bond proper. Due to the relative lack of transparency the market for these warrants was inefficient and allowed an informed trader to make a steady income. This income fueled the ambitons and expansion of Barings in the far East.

1986. Trading began at SIMEX (Singapore International Monetary Exchange) on futures contracts written on Japan's Nikkei 225 index.

1987. Ian Martin becomes the finance director of Barings Securities. Martin will create the Business Development Group (BDG), a corporate trouble-shooting outfit.

1988. Nikkei futures contracts begin to trade on the Osaka stock exchange. Over the following years, there will be small discrepancies between their value in Osaka and the value of the same contracts in Singapore on the SIMEX, creating opportunties for arbitrage.

July 1989. Leeson joins the settlements department (the back office) of Barings. In London.

1990. Leeson, now part of Martin's BDG, is sent to Jakarta, Indonesia, because their back-office has become a tangle of never-completed settlements.

Sept. - Oct. 1991. Leeson, now credited with a success in Jakarta, is given another assignment back in London. Investigating an apparent fraud in derivatives dealing. This, too, enhances his standing in the firm.

Feb. 1992. Leeson applies for a City of London trading license. Some questions arise relative to a judgment against him in a county court, and the application never goes through.

March 1992 Leeson marries Lisa Sims, also a Barings employee. they honeymoon in Venice.

April 1992, Nick Leeson is posted to Singapore, to run the back office of the SIMEX operation there.

July 1992, a software technician establishes account 88888 for Barings at Simex, an "error account." Leeson soon excludes it from all reporting lines.

Late 1992, Leeson takes an exam and becomes entitled to take trade on the SIMEX floor. This means he was hereafter both making and settling trades -- a fateful set-up.

March 1993, Barings senior management is restructured. Longtime head Christopher Heath is out. Peter Norris is in as CEO.

October 1994, Mary Walz, head of Equity Derivatives, starts asking questions about Leeson and the improbable size of the profits he's reporting. This is also the month in which Leeson bares his buttocks in public, is arrested, then bailed out by Barings brass. The incident is hushed up.

December 1994, Walz was right. The profits were fictitious. In reality, by the end of the year his losses exceeded 208 million pounds.

January 16, 1995. Leeson, who has decided that he needs a big score to get out of the hole, places a huge "short" bet on volatility, in both Singapore and Japan. In other words, he bet that there'd be no immediate sudden shift in the value of Nukkei stocks.

January 17, 1995, an eathquake strikes Japan, 7.2 on the Richter scale, with devastating consequences for people, property ... and exchange-traded stock prices. Leeson's accounts head into a final downward spiral.

February 23, 1995. Nick disappears. It was his habit to work on the trading floor until 2:30 PM, then to attend to the office work. This day, he walked off the trading floor at the usual time, talked shop over drinks with colleagues (to whom he seemed his usual self) for an hour, then met up with Lisa and left Singapore.

Barings execs in both Japan and London had become increasingly insistent he "clear up" some problems they saw at last in the numbers, and this was his answer.

Feb. 25-26, the weekend of Leeson's 28th birthday. Barings officials break into a locked desk drawer and discover the remnants of some rather sloppy cut-and-paste jobs Leeson had used to fake crucial documents.

The rest is end game.

Father & Son: Singaporean plaintiffs

Lee Kuan Yew is widely admired in Singapore as an elder statesman and founder, with the formal title Minister Mentor.

His son, Lee Hsien Loong, is the current prime minister.

Two years ago, the Lees as plaintiffs successfully sued Chee Soo Juan and Chee Siok Chin for defamation. The Chees are brother and sister, and members of the Singapore Democratic Party. The lawsuit concerned an article in the party newsletter that was interpreted by the court to imply corruption on the part of the government.

In Singapore, alas, it seems that it's rather easy for government officials to win such defamation suits. The real action occurs in the damages hearing, which is underway now. Why now, two years later? I don't know, I'm just trying to work my way through this myself.

Anyway, Chee Siok Chin, the sisterly Chee, is representing herself at the hearing, and had the chance to confront her accuser, cross-examining the prime minister. You can find a partial transcript via this wonderful thing we call blogspot.

It begins with Chee telling the prime minister that his lawyers has been making him "look bad" by objecting to every question. Then she goes on to ask such straightforward questions as "how many libel suits have you brought in the last four years" to which the lawyer in question objects. Proving her point.

I enjoyed reading it: and I'll be keeping an eye on the situation, trying to understand it better.

Thinking about Thaksin

Thaksin Shinawatra returned to his homeland, Thailand, on February 28.

He has been in exile for a year and a half, when Thaksin -- the prime minister then -- was deposed by a military coup.

The junta stepped aside peacefully last year, arranging for elections, and a new incarnation of Thaksin's political party won those elections, as the leader of a six-party coalitions.

Six-party coalitions can be fragile things, so although the new prime minister (Samak Sundaravej) is an associate of Thaksin's, it's a bit much to speak of Thaksin, as some have, as the "kingmaker" in this situation.

Indeed, Thaksin is under something of a cloud himself. He has returned not in triumph but to face criminal charges arising out of his time in office.

One charge involves a 2003 land deal. While Thaksin was PM, his wife bought a plot in Bangkok from the central bank's distressed-asset fund. The accusation is that this was something more than just a sharp bit of dealing by a woman who just happened to be married to the prime minister, but that it was an inside fix.

The other charge relates to the events that set off the military coup. In 2006, the Shinawatras sold their interest in a computer company, Shin Corp. (they owned 49.5% of its equity) to Temasek Holdings, the sovereign wealth fund of the government of Singapore, for about US$1.9 billion. They paid no capital gains tax on this sale. It appears that under Thai law they were exempt from the tax, although the legality of it may only make it more scandalous than otherwise.

Also, Thailand's SEC found that the couple's son, Panthongtae Shinawatra, violated some of its disclosure rules in connection with the Shin Corp. transaction.

Such points are mere technicalities, though, compared to the issue of who bought the company the family was selling. One of their political opponents said that Thaksin was worse than Saddam Hussein for not protecting the Thai economy from foreigners: "Dictator Saddam, though a brutal tyrant, still fought the superpower for the Iraqi motherland," whereas Thaksin was selling out his motherland to Singapore.

Although there were lots of other reasons various factions were unhappy with Thaksin, as there always are, it was the Shin sale that sent people into the streets. Mass anti-Thaksin demonstrations, answered by mass pro-Thaksin demonstrations, created the climate of disorder that, in turn, created at least a plausible pretext for the coup that autumn.

Now he's home, and this Wednesday, March 12, 2008, Thaksin will appear in court to answer charges related to the 2003 land deal.

Conclusions? I have none to offer, except that all states are failed states. Pragmatism should dictate that we find ways to order our affairs without reliance upon hierarchy, sovereignty, and superstition. Anarcho-capitalism. Catch the fever.

Plot Summary

I discussed the book, Ugly Americans, in Monday's entry. Today I thought I'd offer a plot summary. In coming days I hope to make inquiries into the history behind it, how true a story it is/isn't.

We're told that in 1992, twenty Ivy League football players visited Japan, to play an exhibition game against Japanese college kids. Of course, American football isn't big in Japan, and the Ivy team (which would have been mincemeat before, say, the Boilermakers or the Sooners on even a bad year for either of the latter) handily defeated the Japanese who lent themselves to the show.

On this trip, Princeton's contribution to that all-star-Ivy team, John Malcolm, encountered a Princeton alum, Dean Carney. (I'll use their names as given in the book here. For their likely real names, see Monday's post.) Carney was a big-wheel at Kidder Peabody's Tokyo office, and he suggested Malcolm contact him about a job if no pro football career panned out.

None did, so Malcolm did, in 1993. Malcolm became one of KP's two Osaka-based traders. This lasted until April 1994, when KP discovered a $350 million "accounting glitch," and assigned responsibility for the glitch to one of its managing directors, Joseph Jett. KP (and its corporate parent, General Electric) made sweeping cutbacks in their trading operations as a result. Both Carney and Malcolm -- neither of whom had anything to do with Jett's accounting trickery -- were out of jobs, and they went their separate ways.

Malcolm took a position with a venerable English bank, Barings. He was again to work out of Osaka, but this time his orders were coming from Singapore, where Barings' star trader, Nick Leeson, held court.

Leeson, though, was making huge unauthorized trades during this period, and he was losing ... big. In January 1995 he made an enormous bet on a rise in the key Japanese stock exchange index, known as the Nikkei ... large enough so that if he won, he would recover all his losses. But of course he didn't win. That huge bet went against him, due to the Kobe earthquake January 17, and its devastating effects on Japan's economy.

After a brief period as a fugitive, Leeson was captured and did prison time. That didn't save Barings, which went into receivership. For the second time in eight months, a superiors malfeasance had cost Malcolm a job.

He called Carney for help. Carney, meanwhile, had founded a hedge fund, and Malcolm was soon trading for it. Mostly index arbitrage. What does that mean? In brief, there were by the 1990s funds in existence tracking most of the world's major stock market indexes. The idea is that someone might want to bet on the direction of, say, the Dow Jones, without having to invest in each of its component stocks. The managers of the index fund, by pooling a lot of investors' money, can of course more easily invest (according to their weight) in each of the components, and all the investors have to watch is the average itself. An "arb play" in this context means that a trader buys the components while selling the index-tracker fund, or vice versa, in order to take advantage of inefficiencies in the tracking process.

Anyway, Carney hired Malcolm again to come to Tokyo and arb the Nikkei and its components.

In 1994, the Hong Kong government created a tracker fund for the Hang Seng -- its equivalent of the Dow Jones or the Nikkei. [BLOGGER CORRECTION. The Mezrich account makes these dates seem plausible by a gross foreshortening of the events. The tracker fund actually came about as a result of actions taken by the government during the currency crisis of 1998.] In 1995, after Malcolm was settled into his Tokyo job, a company named Pacific Century Cyberworks (PCC) merged with Hong Kong Telecom, and under the terms of the tracker funds' charter, its managers had to buy $225 million worth of PCC stock. [AGAIN. MY MISTAKE, though with authorial encouragement. Mezrich is referring here to events of the year 2000].

Everybody knew it was going to have to do this, so a lot of traders tried to get a risk-free profit by front-running this deal, i.e. buying PCC stock ahead of the fund's expected purchases.

Malcolm, though, discovered that the tracker fund wasn't going to buy the PCC stock through the exchanges at all. It made a private off-exchange deal with PCC's founder Richard Li. This meant that, when the day of the expected fund purchases arrived and no purchases took place, there'd be a strong downward pressure on the stock price.

Accordingly, on Malcolm's suggestion, Carney's hedge fund took a "short" position on $100 million of PCC stock. When the big day arrived, and the tracking fund didn't make the expected purchases, the price dropped dramatically, and Malcolm covered the short position, winning his firm more than twenty million dollars.

This one deal made Malcolm a star, known to expat western traders throughout east Asia as their "hot young gunslinger."

The ending of the book turns on another, quite similar, but even larger deal involving the addition of several high-tech firms to the Nikkei index. This is the deal that justifies the book -- Malcolm made Carney's firm five hundred million dollars in cash out of the restructuring of the Nikkei.

Then Malcolm leaves Carney's employ and heads for semi-retirement in Bermuda, although we're told he still does some light trading.

That's not the whole of the story, of course. There are some characters -- including Ivy Leaguers, other than just Carney and Malcolm. In the days leading up to the Hang Seng trade, for example, we're introduced to "Vince Meyer" (another pseudonym, surely), described as "the top trader of one of the biggest American banks in Hong Kong" who gives Malcolm a crucial datum. Meyer is a Harvard grad.

There's also some raw sex, some hinted-at violence, one vividly described auto accident, and some romance to liven up the prose, for those who don't think that index arb traders sitting in front of computer screens throughout the working day is by itself a very exciting spectacle even if it is profitable.

Ugly Americans

I've been inspired (not for any very good reason) to look again at a book I first read three years ago, soon after its publication.

The book is "Ugly Americans," by Ben Mezrich, who is better known as the author of the beating-Las-Vegas tale, "Bringing Down the House," soon to be a Hollywood movie, http://cicilycorbett.blogspot.com/2007/04/luck-be-lady.html

The two Mezrich books bear some similarity, but in "Ugly Americans" the casinos that the protagonists want to beat consist of the east Asian stock markets and their indexes. The unwieldy subtitle describes the book as "the true story of the Ivy League Cowboys who raided the Asian markets for millions."

Mezrich writes in the "new journalism" borderline style of a Tom Wolfe or Truman Capote -- novelistic techniques abound, although we're assured that they apply, as that subtitle says, to a "true story."

The chief of the protagonists are two Princeton grads, known here as Dean Carney and John Malcolm. When we're first introduced to Carney, circa 1992, he's a Tokyo based senior trader for Kidder Peabody, "derivatives mostly," and we're told that he hired Malcolm for his KP's Osaka office. An author's note tells us the name "John Malcolm" is fictitious, and strongly implies the same for the name "Dean Carney." It also says that "job titles and positions at companies that were actually in existence at the time the events in the book took place ... should not be read to refer to any specific people who were actually employed by those companies at any time."

Aside from an obvious desire to keep libel lawyers at bay, I'm not sure what this means. That sounds sweeping enough to render the phrase "true story" rather pointless. How different is that language from, "The facts as stated here are not to be confused with the facts as they actually were at the places and times purportedly described"? And if it isn't different, why not just re-classify the book as ... fiction?

For such reasons as that I wasn't initially impressed by the book. But I've been giving it another go of late. Why? Because of the upcoming movie version of Mezrich's other book, because of a possible re-assignment to east Asia in connection with my own employment, and because ... I have a couple of real-life names to attach to Mezrich's characters.

The Boston Globe did a profile of Mezrich soon after the book appeared, and its reporter did some commendable spadework, discovering that the particulars in the book concerning Malcolm fit pretty closely those of Princeton grad and football player Michael Lerach.

That inspired me to do a little more googling, which led to the suspicion that dean Carney could be Richard Tavoso, also a Princeton alum, who managed Kidder Peabody's equity derivatives business in Tokyo, 1990-93.

With real names, and with some determination, one might piece together the truth behind the "true story" as Mezrich has sort-of-given it to us. I'll work on it a bit.