TV drama creates a crisis that the City may wake up to
By Richard Irving
business.timesonline.co.uk
bbc.co.uk
A BBC Two film shows how rogue trading can pose a new terrorism threat City may wake up to
WARREN BUFFETT does not appear in the credits to The Man who Broke Britain, BBC Two’s “docudrama” charting the antics of a fictional rogue trader with terrorist links who brings down his bank, Sun First Credit Bank (SFCB).
But his sentiments run through the film, to be screened tomorrow night, like champagne through a trader’s veins on bonus day. Derivatives, a main protagonist warns, are the financial equivalent of weapons of mass destruction. His comments echo those of the so-called “Sage of Omaha” in a famous letter to investors.
By the time the film reaches its denouement, you could be forgiven for thinking that Mr Buffett has a point: pensioners are rioting in the streets, unemployment reaches record levels and the country is thrown into the worst economic recession for more than a century. All because Samir Badr, a derivatives trader who bets his bank on falling oil prices, gets wrongfooted by a terror attack that decimates the world’s largest oil refinery and prompts a savage squeeze on fuel supplies.
The Treasury floats a £2 billion lifeboat to rescue Badr’s bank but SFCB’s black hole gets blacker and the true exposure mushrooms to £4 billion or more. The plot turns when Osama bin Laden appears to claim responsibility for the bank’s troubles, and it twists again when a fictional Times journalist discovers a link between Badr and a financier suspected of bankrolling al-Qaeda.
There are more machinations but SFCB ultimately collapses, prompting a run on the retail banking sector. A terrorist plot to destabilise the world economy through dodgy derivatives dealings may sound fanciful, but some market watchdogs are prepared to keep an open mind. Following the terror attacks of September 11, 2001, regulators were sufficiently concerned at reports that members of the al-Qaeda organisation might have taken speculative positions in the derivatives markets to profit from a slump in airline shares, that investigators launched a full inquiry. One particular trade of concern was eventually traced back to a German airline and no evidence of terrorist activity in the stock markets was ever uncovered. Terrorist “sleepers”, opting for derivatives over the gun, might still be some way off, but the threat to the financial system from rogue traders remains clear and present.
In the nine years since Nick Leeson brought Barings Bank to its knees with an aggressively bullish punt on Japanese stock market futures, five more rogue traders have come to light. There was Yasuo Hamanaka, who lost $2.6 billion in copper derivatives; Toshihide Iguchi, who squandered $1.1 billion in US government bonds; and John Rusnak, who racked up $700 million in foreign exchange losses at Allied Irish Bank. Meanwhile, in January this year, four currency options traders lost $312 million at National Australia Bank. And just last week, China Aviation suspended Chen Jiulin, the chief executive, after the company lost $550 million trading oil derivatives. Like the fictional SFCB, China Aviation bet more than its market capitalisation against a continued rise in the oil price.
The Financial Services Authority, the City watchdog, last night sought to play down the threat to the financial system posed by a rogue trader. A spokesman would say only that the BBC programme was a work of fiction, adding that the system had so far proved itself capable of surviving the blight of the rogue trader.
Analysts argue that the real test will come only when rogue trading problems in the City spill over into the high street banks. David Shirreff, a consultant to the BBC programme, said: “Regulators proudly trumpet that after 9/11, the central banks pumped as much money into the financial system as was needed. But they did so only because they knew there was no black hole out there. If there had been an unquantifiable credit risk lurking in the system, I think they would have been much more wary.”
Mr Sherriff has twice organised seminars in which a financial crisis is simulated in order to test the mettle of regulators and bankers. In one, Mulhouse Brand, a British merchant bank, collapses after a US subsidiary takes a huge bet on property prices. In the other, Sigma Corporation is threatened with collapse after the bank’s larger-than-life chief executive ignores the basic principles of risk management.
But the idea is slow to catch on. The Bank for International Settlements asked Sir David Scholey, the former head of SG Warburg, to devise a simulation involving the collapse of a large European bank, but the exercise never came to fruition.
Shortly after Bank of England officials met with the film’s makers, the central bank announced new measures which would help the bank to pump money into the system in times of trouble.
Mr Shirreff is convinced that creating a crisis out of a drama could one day save the system from a fate worse than anything the scriptwriters at BBC Two can dream up.
He says: “If regulators were really honest with themselves, they should be rehearsing worst-case scenarios such as this in their sleep.”
FACT OR FICTION: WHICH SIMULATION REALLY HAPPENED?
SCENARIO A:
A multibillion-pound European financial conglomerate unravels when the company’s investment banking unit runs into trouble placing €8 billion in shares and bonds in a fledgeling telecoms company. On the day of issue, a medical journal publishes evidence that mobile phones cause brain tumours and the bank is left with the entire inventory of stocks and bonds on its books. Moreover, the parent company’s shares are under attack amid concerns that its insurance arm will face crippling claims from phone users in the US. A run on the bank’s deposits ensues but attempts to secure a lifeboat from central banks falters as a corporate raider breaks ranks and tries to carve up the business.
SCENARIO B:
A hedge fund with billions of dollars in assets under management collapses after a low-risk bet on bonds goes wrong. The fund manages to persuade its backers to continue financing its positions but one breaks ranks after discovering two rivals have more detailed information on the nature of the losses. US regulators vow to pump money into the system, amid fears that virtually every major bank on Wall Street is exposed to unquantifiable losses . . .
Answer: Scenario B is a precise summary of the collapse of Long Term Capital Management |
