Minyanville Professor Satyajit Das’ Traders, Guns & Money
is a wickedly comic exposé of the culture, games, and pure
deceptions played out every day in trading rooms around the world.
And played out with other people’s money. Das is an international
expert on financial derivatives and has more than 30 years of experience
in the financial markets. Having worked on both the sell side and
buy side for such banks as the Commonwealth Bank of Australia, Citicorp
Investment Bank, Merrill Lynch, and the TNT Group, he now acts as
a consultant advising banks and corporations and presenting seminars
on derivatives throughout the world. This is Part 1 in a multi-part
series. Look for the continuation in the weeks to come.
Part 1 –
Chronicle of a Loss Foretold
I was shown
into the conference room. The conference room was old-fashioned
– dark wood paneling, lined with slightly dusty old law reports.
Lawyers, especially in England, proudly resist modernity. Modernity
in the world of investment banks and dealers means trendy architecture
by the latest wunderkind. It manifests itself in acres of glass,
steel, marble and uncomfortable chairs. Lucre & Lucre was untouched
by these fads. The thickly padded leather chairs were comfortable.
It was, I feared, going to be a long meeting.
were already there. There were two of them – Indonesians of
Chinese extraction. They were part of infamous “bamboo”
network of ethnic Chinese business interests that crisscrossed South
East Asia. I was introduced. We exchanged business cards. I took
care to accept the proffered card with both my hands, my body slightly
inclined at a respectful angle.
studied the cards as required by custom. Adewiko – “President
Director” – was about 50. He was short and dressed in
a somewhat ill-fitting, designer-label suit. He appeared solemn.
The other man – Budi Titra – was younger, no more than
30, I guessed. Budi was the Chief Financial Officer. His card announced
that he had an MBA. The younger man’s ebullience seemed inconsistent
with the seriousness of the matter.
from a “Big 4” accounting firm were also there. It could
have been the “Big 3” this week after a new round of mergers.
Andrews, the partner, was an older thin reedy man with small intense
eyes. There was a junior, relatively innocent-looking, who did not
introduce himself. He said nothing during the meeting.
from the law firm was there. “Albert, call me Albie, everybody
does.” The partner eventually arrived. Short and with a full
figure, Morrison Lucre lumbered into the room. There were more introductions
Then, it was
down to business, well almost. Morrison produced four pencils and
carefully sharpened each one . He then laid them carefully next
to the thick legal writing pad on the table. It took about five
or six minutes to complete this activity. At the hourly rates of
the professionals present, I calculated that the total cost of pencil
sharpening was $2,000 – about $500 per pencil. It was truly
a Zen moment.
we begin,” Morrison intoned. “I think it would helpful
to go over the chronology of the transaction,” I began. “Splendid,”
Morrison beamed. Everybody presumably was familiar with the transactions.
But we were getting paid by the hour.
a noodle maker?” I asked. “Yes,” it was Budi’s
turn to beam. He unleashed a detailed history of the company. The
description was punctuated by the occasional detail supplied by
Adewiko. It was irrelevant. It was not even interesting. “Let’s
focus on the transactions,” I interrupted. “Splendid.
Yes, let’s,” it was Morrison.
in Indonesia and all its income is in rupiah (the Indonesian currency)?”
I asked. Budi confirmed it. “In 1995, you decided to convert
your borrowings into dollars?” I continued quickly before Budi
could launch another tangential verbal assault. “Yes,”
Budi confirmed. “Why?” I asked. “Cheaper, much cheaper,”
Budi said. Adewiko nodded his head in silent assent.
about the currency risk? You have borrowings in dollars but no dollar
income. If the dollar rose against the rupiah, then your dollar
borrowings would show losses. Did you consider the currency risk?”
I pressed. “No risk, no risk,” Budi countered. “Why?”
“Rupiah fixed against dollar, no risk,” Budi continued.
Adewiko nodded. “So you assumed there was no risk?” “No
risk, no risk,” Budi’s exasperation at the expert witness
– me – showed. He was contemptuous of my seeming lack
of financial acumen on this basic issue.
advise us. They tell us no risk,” Adewiko interjected. “They
advise us that we have low cost, no currency risk." I looked
skeptical. Morrison, Albie and the junior accountant were making
copious notes. “Bank advised them – no risk,” Morrison
wrote down with one of his pencils.
continued. “You did the first currency swap to convert your
rupiah loan into dollars,” I continued. Budi nodded.
Perhaps our expert would be good enough to elucidate the nature
of this complex financial transaction for the benefit of the humble
laymen present?” Morrison spoke. I launched into what I conceived
as a detailed, delicately nuanced but accessible description of
a “swap." The eyes in the room glazed over. I noticed
that the eyes of the Indonesians also glazed over. Surely, they
must know what a swap is? They had done enough of them.
the easiest way to conceptualize it is as an exchange. OCM has rupiah
debt. They would normally make interest payments and repay the principal
in rupiah to the Indonesian lenders. In the swap, the dealer assumes
the obligation to make the rupiah payments. In exchange, OCM agrees
to make a series of equivalent dollar interest and principal payments
to the dealer. This means that OCM no longer has any rupiah payment
obligation. In effect, it has borrowed dollars.” I had a pleading
look on my face.
That is very clear. It is always valuable to have an expert’s
view of things.” Morrison did not look entirely clear on the
“swap." “But why swap?” he asked. It was Budi
who replied. “Cheaper, cheaper. Cheaper than if we borrow dollars.”
He was surrounded by financial incompetents. “Bank advise us,”
Adewiko joined in. Morrison sighed audibly.
was first derivative OCM entered into,” I went on. “Yes,”
Budi replied. “We know about derivatives. We make study of
market.” “Bank advise us,” Adewiko corrected Budi.