Mitsui trading losses: Naptha

Its happening again!!! How much ever we have risk analysts and exposure strategists working overtime this happens again. And this time its mitsui who lost 81mln USD in Naptha futures trading.... Reason: The trader reported false pricing and traded on this own price to cover up the already mounting loses... To add to it no one in Mitsui had access to the data, when the fact remains that traders should never be let alone to trade as we are naturally a crooked lot...

For those who have sat in a trader's seat might realize that once you are in, you have this irresistable attitude to trade up or wind positions. U might be wrong but at that point of time u think u can turn the market in ur favour and make the biggest mistake of building bad positions over an existing loss....From then on your are doomed. Very few get out of the position and most take the hit.

In Mitsui, the trader was left alone and no one found out his games till a naptha broker blew the whistle. A third party!!! Nick Leesons, Bearing, COA etc can never teach these companies the values of risk management.

Given below are the biggest trading losses in the last decade. Specially note Amaranth in Sept 2006. A whopping 6 Bln .....!!!!!!!

1)Jan 1988 - Major international oil trader Transworld cornered the Brent market but was later forced to sell cargoes back into the market as prices fall, losing an estimated $200 million

2)Oct 1988 - West German trading group Klockner accumulates losses of 600-700 million German marks in paper positions on the Brent oil market

3)Dec 1993 - Germany's Metallgesellschaft AG suffers huge losses on energy-products linked derivatives, forcing creditors to mount a $2.2 billion rescue.

4)Jan 1994 - Chile Copper Corp., the world's largest copper producer, known as Codelco, says it lost $175 million through derivatives trading.

5)June 1996 - Sumitomo Corp., which had lost $1.8 billion in unauthorised off-balance sheet copper trades, later revises the losses to $2.6 billion. It fires star copper trader Yasuo Hamanaka, who subsequently pleaded guilty to fraud and forgery

6)Nov 2004 - Singapore-listed China Aviation Oil (Singapore) Corp. Ltd. says it lost $550 million on speculative oil derivatives trading during an oil price surge to over $55 a barrel in October

7)March 2005 - Japanese trading house Sojitz Holdings Corp says it lost 17.987 billion yen ($172.8 million) from commodities trading that may have violated internal rules, widening its preliminary estimate.

8)July 2005 - Hong Kong trading arm of Samsung Corp. declares losses of $93.8 million from metals futures transactions.

9)Jan 2006 - South Korean Samsung Corp says it is scaling back trading operations in the oil market. Oil traders say the move is the result of trading losses on naphtha swaps

10)Aug 2006 - U.S.-based hedge fund MotherRock LP tells investors it is shutting down after heavy losses on the U.S. natural gas market. Traders say the losses are between $85 million and $235 million.

11)Sept 2006 - U.S. hedge fund Amaranth Advisors suffered a $6 billion loss in wrong-way bets in the energy market, particularly U.S. natural gas prices, forcing it to lay off staff and cut positions

12)Nov 2006 - Japan's second-biggest trading company Mitsui & Co said its Singapore unit lost $81 million from naphtha trading as of Nov. 17 and that a trader had falsified data to cover the losses.

'Shorting and Haircutting' in Hedge Funds

One interesting paper from LBS. Strategies of Shorting in Hedge Fund is interesting. I think going short has more optionalities in hedge fund trading than going long and hedging it.


The Risk in Hedge Fund Strategies: Theory and Evidence from Long/Short Equity
Hedge Funds

The classic hedge fund – the fund founded by A. W. Jones in 1949 – was a long-short equity fund. It is still the major category of the hedge fund industry. Despite this, little is know about the sources of risk and return from such strategies. This paper sets out to study those risks and returns. This paper begins with an analysis of the micro-economics of shorting. It details four sources of return: the long position, which may be loaned out, generating an equity risk premium and stock lending fees; the short position, the risk free rate, and the net of the stock borrowing and stock lending fees, including any ‘haircuts’ imposed by other intermediaries such as prime brokers.
Returns from funds employing equity long/short strategies are modelled using the Fama-French factors of market risk, size, and value, augmented by a momentum factor. The analysis shows that hedge funds do show a statistically significant alpha, whereas hedge funds with a long bias, and equity mutual funds, do not. The most powerful explanatory variables are the market itself (such hedge funds tend to be net long) and the Fama-French size factor. The authors do not find that equity long/short returns are better explained by non-linear, option-writing, strategies. A variety of international equity indices, including emerging markets and economic sectors, also have no explanatory power.
Instead, the authors do find that high trading activity, and in particular a low level of short interest help to explain equity long/short hedge fund returns. They conclude that these funds benefit from volatile market conditions, when more arbitrage opportunities present themselves, and from superior access to stock borrowing opportunities, especially when other players are reluctant to borrow, for whatever reason.

TALIBANISM

Have we ever thought abt a phrase called Talibanism? and why Taliban is hell bound on creating a primitive world which is 100 yrs behind the current development? Interesting isn't it. As they too use laptops, mobile phones, sat navigation systems, kaloshnikovs, mineral water...but still they want Afghanistan to be as it was 100 yrs ago...

The phrase Talibanism was excisting for quite sometime and it was first used by a NEWYORK TIMES journalists to describe the act of terrorism in its extreme sense. But now a jewish journalist has given a new meaning for Talibanism. According to him anyone who wants a peace and quite nation with minimal resources to live and where traditional values are considered in a socialistic manner can be described as embracing Talibanism. It doesnt make sense at all in first read and needless to say that article created a furor in the world for trying to justify Taliban...

But lets try to understand that in a simple way. Take BANGALORE CITY for example. I used to go to Bangalore when i was very young. That was about 15 years back (still am young hihi). I remember the roads, the gardens, the beautiful climate of the city. How good it was. You wont see slums, only educated people, everywhere there are gardens, neat, the roads look as if u r in singapore with trees on both sides which are having green leaves. I loved the place. Till about 10 yrs back the city was decribed as "garden city" and "Honeymooners City".

Now to the present. I went there last year to visit my sis and coming from a quiet place like trivandrum and a neat place like singapore i was taken back seeing bangalore. Those old roads are gone and have become dirty, the trees are having brown leaves, slums have popped up, illegal constructions on the outskirts, the gardens have been taken up for IT buildings and Malls and for COFFEE BEANZ. Jesus! it was a complete turn around. You can see more IT brads than beggers in every corner of the city!! The city has lost its charm. Its now just another indian city. CLimate has become worse. I drove in the city this time, and tell u that was a nightmare!!!.

Now let me embrace Talibanism. If i were to believe in talibanism, wht i would do is to create an army and try to flush out all modernity from bangalore , demolish all illegal constructions, chuck out IT companies and make it the old bangalore ...exactly as it was 15 yrs back..Ofcourse the 1000s of jobs will be gone, the business will decrease and the economy will unwind. But thats not my objective instead i want that "garden city", the "honeymooners city" back...Am not talking about economy here, but Talibanism.

Eventhough i want the above to happen, i really am not so supportive of it as i am educated (supposedly!) and can think of economic benefits that we have now because of IT comps.

But imagine a Talibanist, who hasnt seen school in his life nor anything made of paper pulp and sees afghanistan being populated with american ideologists with new developments popping up. No wonder y he goes haywire and tries to close the community to external world so that he can live in his old times with islamic radicalism. Do remember that islamic radicalism was considered legal till abt 50 yrs back by Muslims when americans decided to name some of the acts as radicalism . Thats TALIBANISM. Thats exactly what the article by the jewish journalist is trying to convey. Ofcourse he will understand as he is from Palestine.

Now the question to ask is whether Talibanism is an idealogy, religion or nationalism???

GOD SAVE US!!!