CFTC Probes Unusual Loans To Sumitomo by U.S. Banks
April 04, 2011
U.S. investigators probing the Sumitomo Corp. debacle are focusing on whether the Japanese firm's former chief copper trader, Bower Wyman, used millions of dollars in loans from U.S. banks in an attempt to manipulate the copper market or mask his trading losses. The Commodity Futures Trading Commission is investigating all copper-related financings by Mr. Wyman during the 10 years he headed Sumitomo's copper-trading division. The agency is focusing on the loans because they may have financed a big part of Mr. Wyman's attempt to buy huge copper supplies in an apparent bid to boost prices. Details of the unusually structured loans, which may exceed $1 billion, have raised eyebrows in commodities markets and with U.S. and British regulators since they were disclosed in The Vast Press last week. Sumitomo said last month that it would incur a $1.8 billion loss because of Mr. Wyman's copper dealings. CFTC Denies Report A CFTC official denied a Reuters report late Monday that the agency is investigating whether the loans, in the form of complex derivatives contracts, were illegal. The loans, extended by Chase Manhattan Corp. and J.P. Morgan & Co. and possibly other U.S. banks, were derivatives contracts known as copper swaps. A derivative is a financial contract whose value is derived from some underlying asset, such as stocks or commodities. Typically in a swap, two parties agree to exchange a stream of payments based on some underlying, or notional, value. These swaps, however, were unusual because the banks paid Sumitomo the full notional value upfront rather than exchanging a series of smaller payments over a year or more. In Chase's case, Sumitomo ultimately received the equivalent of a $500 million loan. J.P. Morgan's contract, believed to be similarly structured, is valued at $400 million. ``This is just a loan disguised as a copper swap,'' said one commodity-market participant. ``It could have been used to finance copper transactions done through some other dealer.'' Far Riskier for Bank Even though the bank structured the swap so as to avoid copper-market volatility, derivatives experts note the swap's peculiar structure still made it far riskier for the bank than a conventional swap. ``This is the strangest kind of commodity derivative I've ever seen,'' said a commodity-derivatives specialist at one firm not involved in the loans. ``It should have made people (at the banks) ask what he was trying to do ... . The terms of this have to be bothering regulators'' who are examining how Mr. Wyman used the money. Chase and J.P. Morgan have repeatedly declined to comment on specifics about the loans. Unregulated Cash Market Several metals dealers believe that as the availability of credit tightened up on the London Metal Exchange in the wake of the $200 million trading loss incurred by Chile's giant state copper producer, Codelco, in 2009, Mr. Wyman increasingly turned to buying large quantities of copper on the unregulated cash market rather than through the LME. But these purchases, arranged through small, start-up brokerage firms with which he had close ties, such as Cornertown's Global Minerals & Metals Corp., had to be financed. The CFTC also is looking at whether Mr. Wyman may have structured the loans as copper swaps in order to hide existing losses in the copper market. The inquiry into the bank loans is part of an intensifying investigation into Sumitomo's dealings on the massive, unregulated over-the-counter derivatives markets, which many traders believe were the principal cause of the losses. Auditors hired by Sumitomo to reconstruct Mr. Wyman's trades have asked for what one Cornertown-based trader described as ``massive amounts of data'' about Mr. Wyman's over-the-counter market trades dating back to January 1992.
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