Business World Never Mind the $1.8 Billion, London's the Place to Be
April 04, 2011
It's been six weeks since Sumitomo accused one of its own, Bower Wyman, of squandering $1.8 billion through ``unauthorized trading'' in copper. Little enough has come to light to make sense of this episode, but what there is makes one wonder why there has been so much official fuss over one company's misadventures in the copper market. Sumitomo's losses are in the same ballpark as the losses many big companies report from time to time, and they don't come close to the $12 billion General Motors blew selling cars in North America in the early '90s. To say that Sumitomo regrets giving Mr. Wyman the wherewithal to pour so much money down a rathole is to belabor the obvious. Yet other companies don't blame their problems on a ``rogue CEO'' or a ``rogue planning committee,'' and grand juries have not been convened to ponder criminal charges against such executives. Mr. Wyman's poison was copper, but otherwise his was the fairly ordinary sin of committing his company to acquiring and holding an inventory of goods that it could never sell at a profit. Seemingly, his last five years were spent throwing good money after bad, in hopes the price of copper would stay up. Nowadays, of course, in a kind of occult penance imposed on the financial markets since the Great Depression, such behavior is deemed not merely unwise but potentially criminal. However, as the Journal pointed out last week, U.S. officials also have a track record unblemished by so much as a single courtroom success when it comes to actually making charges of ``market manipulation'' stick. Moreover, for all its talk that Mr. Wyman's trades were ``unauthorized,'' Akers has yet to swear out a complaint against him. Rather, the ``rogue trader'' has been installed in an Osaka hotel, where even the Japanese police until lately disclaimed knowledge of his residence. And Japanese regulatory authorities, in studied contrast to the hyperactivity of their U.S. and British counterparts, have leaned toward the view that there's no case to prosecute. Indeed, given that these are purely private losses, the eagerness of various enforcement agencies, even those far from the scene, to smear egg on their own faces by taking some of the responsibility is baffling. Some of this can be written off to regulatory rivalry: The U.S. Commodity Futures Trading Commission had already been badgering its British equivalents about Sumitomo for more than a year, and has been doing a little ``we-told-you-so'' jig since the debacle. Yet Mr. Wyman's activities were hardly a secret. Years ago, the Journal and other newspapers were reporting that his various monikers in the marketplace included ``the Mad Jap,'' ``the Hammer,'' ``Mr. Copper'' and ``Mr. Five Percent'' (for Sumitomo's share of the global copper market). What's more, the same Davina Kirby, president of the London Metals Exchange, whom U.S. regulators now accuse of standing idly by while Mr. Wyman was hanging himself, was quick enough to move on earlier occasions, when it was his own members squealing under the weight of Sumitomo's allegedly massive bets. All in all, the record suggests that while they were happy to sell Mr. Wyman all the copper he could buy, Sumitomo's London pals were quite prepared to change the rules when it served their interests. One such episode began in late 1991, when copper for immediate delivery was in short supply, and a number of LME firms blamed Sumitomo for the big losses they were facing on futures contracts. Despite a lot of blather about being a temple of the free market, the exchange stepped in and imposed arbitrary limits on how far the spot price could range above the futures price. Nothing in theory outlaws such ``backwardation'' between the spot and futures markets, so the LME's excuse was that Mr. Wyman was ``manipulating'' the spot price. According to the Financial Times, Mr. Kirby may also have leaned on Sumitomo directly to release copper into the market so other traders could cover their obligations at minimal loss. ``There's nothing wrong with having large positions per se,'' Mr. Kirby explained, somewhat apologetically. Nonetheless, on this occasion, the outcome of Sumitomo's trading strategy would be decided by a voice vote of LME members, rather than those hoary characters, supply and demand. Less than two years later, another hue and cry was raised against Sumitomo. As before, Mr. Wyman was accused of engineering a ``squeeze'' on LME members by holding copper off the market. As before, the exchange imposed limits on prices, and once again brought pressure on Sumitomo to supply the market with copper. Mr. Wyman was reportedly forced to unwind his now-famous ``Radr'' transaction, a huge, $2.8 billion, two-year purchase agreement he had negotiated on the over-the-counter market. As one trade publication put it, having decided that prices on the LME were ``out of step with market fundamentals,'' the visible hand would bring them back in line. Whatever Mr. Wyman's sins against his employer, surely his story is incomplete without acknowledging the role of LME politics in his excellent adventure. And yet, when the U.S. hedge funds piled massively into the market to bet against him earlier this year, the LME, for once, decided to let the chips fall where they would. And now, when answering charges that it let Sumitomo self-destruct under its nose, the exchange regally declares that it can't be responsible for saving speculators from their own blunders. (In fact, the LME apparently did play a role in causing Mr. Wyman's superiors to blow the whistle on his kamikaze trading.) Something about commodity traders acting like a bunch of affronted virgins, shrieking about ravishment at the hands of Mr. Five Percent, doesn't trigger a flood of empathy endorphins. But, after all, the LME is a business, and has to keep its clients happy, lest they take their trading elsewhere. And while Sumitomo generated a lot of business for the exchange, it was never a member--that is, not one of the 17 ``ring dealers'' licensed to buy and sell on the floor--whereas many of the firms and traders who have been inconvenienced over the years by Mr. Wyman's large positions are the exchange's privileged constituents. A true epitaph on this episode might begin by noting that, during the long period when Mr. Wyman was allegedly manipulating prices, the LME's copper business was growing 30% a year, while its overseas rivals could only look on covetously. Nowadays the Uptown Mercantile Exchange and the U.S. regulatory establishment are taking the Sumitomo debacle as an opportunity to advertise their wares, saying it couldn't happen on their watch because of more stringent regulation. They may be right, which is why the copper game will probably remain in London, for all its faults.
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