Every once in awhile, there comes a trader, an employee, or a customer, who is just too smart for their own good. They game the financial system, and abuse the loopholes to the best of their abilities to make tons and tons of money for themselves, without anyone getting the better of them for quite some time. By the time they are eventually caught, or their frauds are found, the trades have usually burnt holes in the organisation which they work for, or on which they work. Usually, such trades are not caught till the time the going is smooth — when the markets are on upswing, and everyone is making money. However, once the tide turns, it emerges that someone has already cornered a major chunk of the bank’s rainy day savings. We bring to you a few such prominent cases from the recent memory across the world, where the greed of a few brought entire organisations to halt.
In Germany, during the year 1995, Jurgen Schneider took large amount of loans from more than fifty banks. He received the loans by submitting fake documents as well as fake construction contracts. He used these funds to build a real estate empire. When the fraud came to light, Schneider had accumulated a staggering 6 billion Deutsche Mark (German currency which was replaced by Euro in 1999) from the banks. Schneider applied for credits to finance his buildings and the banks gave him these loans because he made a promising impression about the payoffs from the rent.
Daiwa Bank from Japan was one of the top 20 banks in the world in terms of asset size in 1995. From 1984 to 1995, over a period of 11 years, Toshihide Iguchi, Executive Vice President of Daiwa’s New York branch, had caused losses of $1.1 billion by trading in US treasury bonds. He had traded away the bank’s money for over 11 years, while using his position as head of branch securities custody department. The internal controls of the bank were not equipped enough to catch the trader. The bank went insolvent and the senior executives were ordered to pay damages as they failed to supervise the staff appropriately.
Yasuo Hamanaka, who was famously known as ‘Mr Five Percent’, as he controlled the global copper trade by that percentage, was the chief trader of Sumitomo Corporation. Over a period of 10 years, he had accumulated losses of $1.8 billion through fraudulent copper transactions. Hamanaka used Sumitomo’s size and large cash reserves to both corner and squeeze the market via the London Metal Exchange (LME). The trader kept this price artificially high for nearly a decade leading up to 1995, thus getting premium profits on the sale of Sumitomo’s physical assets. The bank simply chose to ignore to supervise the trader despite being well aware of the fact that his actions would have global implications.
Morgan Grenfell Asset Management was the London based subsidiary of Deutsche Bank. The bank had to cough up nearly GBP 200 million in September 1996. It further paid GBP 380 million in damages to investors, after a ‘risky star’ named Peter Young exceeded his authorisation and bought unlisted or little known Scandinavian shares. He used to revalue these shares regularly citing his own values. These values were never scrutinised by the third parties or even the investors.
The case of Orange County Investment Pool is indeed very unique. Unlike the above cases the intention here was not to defraud. The treasurer, Robert Citron, had made huge amounts of profits by investing in repos while the interest rates remained stable or even declined. However, the rise in interest rates and the steep decline in bond prices not merely eroded the profits, but also dragged the bank to bankruptcy. In 1994, Orange County announced that its investment pool had lost $1.6 billion.
John Rusnak, a rogue trader from Allied Irish Bank, hid three years of losing trade on the yen/dollar exchange rate in the bank’s US subsidiary, Allfirst Financial. Initially, when the Asian markets were strong, Rusnak did not have any problem. However, the trades started going awry later on when the markets turned against him. Finally, he had accumulated losses to the tune $691 million, after selling over $300,000 in options. It was the trader’s ability to circumvent the regulatory system to conceal his losses that resulted in much more damage than it would have been possible.
In the year 1997, swaption trader Kyriacos Papouis from NatWest intentionally covered losses by overpricing option contracts. The damage was caused due to mispricing of interest-rate options traded by the then 30-year-old Kyriacos Papouis. At first the bank put these losses at £50m ($79.5m), but they grew to £85m as Papouis’s trading positions were untangled.
Sometimes, it takes more than the doing of one employee, and institutional conduct becomes the cause of the damage caused to itself. In 1994, Procter and Gamble Co sued Bankers Trust for $195 million, alleging that Banker’s Trust misled it with regard to the value and risks of its derivatives positions. Bankers Trust went in for an out of court agreement and settled the case in 1996, however the reputation damage brought it down to the knees. Later, it was bought out by Deutsche Bank.