Japanese trading giant Mitsubishi said last week it booked a US$320
million loss after an unnamed
rogue trader made unauthorized loss-making oil derivatives trades and
allegedly manipulated the risk management system to disguise his actions.
Last week’s viral story about the trading bust at a Mitsubishi subsidiary
joins two long lists in the financial and oil trading history: the gallery of
the rogue traders and the hall of infamous oil trades gone very, very wrong
that cost financial institutions millions and/or billions of U.S. dollars and
reputational damage.
The still unnamed trader at Mitsubishi’s subsidiary Petro-Diamond
Singapore (Pte) Ltd now joins the gallery of infamous rogue traders Nick
Leeson, Jerome Kerviel, and Bruno Iksil in the list of traders who have
incurred massive losses to the financial institutions they had worked for
because they had made unauthorized derivatives trades.
Without authorization, the trader at Petro-Diamond Singapore had taken
derivatives positions on oil since the beginning of the year. But after oil prices started to slide
at the beginning of the summer, he incurred hefty losses, costing the company
US$320 million in oil bets gone wrong.
The trader wasn’t the first ‘rogue one’, nor will he be the last.
One of the most striking events involving a rogue trader took place in
1995. Back then, Nick Leeson was found to have kept secret
files on rogue stock futures trades that cost Barings Bank the current
equivalent of US$1 billion (827 million British pounds). Leeson’s trades in
Singapore led to the
collapse of London’s oldest merchant bank and the banker to the Queen.
Leeson served time for his unauthorized trades. Related:
Lunar Elevator Could Trigger Moon Mining Race
Leeson may have single-handedly caused the collapse of the oldest merchant
bank in the City, but in early 2008, it was uncovered that Societe Generale’s
junior trader Jerome Kerviel lost six times more money than
Leeson for his then employer Societe Generale—US$7.2
billion. Kerviel had billions of U.S. dollars in stock index futures
positions—US$73 billion to be exact. The rogue trader also manipulated the
risk management system at the bank to show that he was taking lower-risk
arbitrage trades, when in fact he was making very risky bets. Kerviel had
made only half the arbitrage trade without offsetting long positions with
short ones, for example.
In terms of money lost, Kerviel is the number-one rogue trader in history,
so far.
Another high-profile trader is Bruno Iksil, also known as the
‘London Whale’, who incurred a US$6.2
billion loss at JP Morgan Chase in 2012 and triggered investigations
into the bank’s practices that cost JP Morgan US$1 billion in penalties.
Apart from these high-profile ‘rogue traders’ in the financial markets,
the oil derivatives market has also seen several massive trading busts over
the past few decades.
In 1994, German oil and metals conglomerate Metallgesellschaft
amassed a
loss of US$1.3 billion on trading oil futures, which brought the group on
the brink of collapse. Its largest creditor and shareholder Deutsche Bank
swooped in to save it.
In 2004, fuel trader China
Aviation Oil collapsed after booking US$550 million in oil derivatives
losses. In the biggest scandal in Singapore since Leeson’s Barings debacle,
executives were arrested and prosecuted for concealing the huge trading
losses in the disastrous oil trading strategy.
In 2006, the Singapore unit of Japanese trading giant Mitsui & Co lost
US$81
million on bad bets on naphtha and said a trader had falsified data to
cover up the losses. Mitsui then closed all the futures and derivatives
positions of the Singaporean unit across all petroleum markets. Related:
Why Is Iceland The Focus of Washington’s New Trade Strategy?
Noriyuki Yamazaki, the naphtha trader who was found guilty of the fraud,
had his prison
sentence later reduced by an appeals court in Singapore. Masatsugu
Takahashi, another Mitsui employee at the time of the naphtha trade, also saw
his jail term shortened to 18 months from three years.
Early this year, Sinopec—the biggest refiner in China and in Asia—said
that its trading unit Unipec booked a US$687
million loss on crude oil hedging in the fourth quarter of 2018.
“Because of wrong calls on the oil price moves, (the company) incurred
losses on the futures side of the hedging when oil prices fell,” Sinopec said
in January, adding that “Investigations have shown Unipec has applied some
inappropriate trading strategies in hedging crude oil business,” as carried
by Reuters.
A month before that, in December 2018, Sinopec said it had suspended
Unipec’s president Chen Bo and senior Communist Party representative at the
company, Zhan Qi, and was reviewing details of some crude oil deals that had
led to losses.
In the volatile and risky oil derivatives trade, the list of rogue traders
and wrong-way bets is only set to become longer.
By Tsvetana Paraskova for Oilprice.com
