Wednesday, October 19, 2005


Financial 'Meltdowns' Happen All Too Often

This Bloomberg article reviews past Refco like 'meltdowns.' "Refco Inc.'s two-week slide into insolvency stirred memories of the last time a big Wall Street firm teetered, then collapsed, except it was quicker. Fifteen years ago, rumors swirled for weeks that Drexel Burnham Lambert Inc. was being targeted by regulators before the 1980s junk-bond financier filed for bankruptcy, author Martin Mayer said. The demise of Refco took just seven days."

"Between Drexel and Refco, at least half a dozen major financial companies have melted down. Long-Term Capital Management LP, a hedge fund run by John Meriwether, lost $4 billion in 1998 after a debt default by Russia."

"Barings Plc, a 233-year-old British merchant bank, collapsed three years earlier after Singapore-based trader Nick Leeson racked up $1.4 billion in losses. That same year, Tokyo-based Daiwa Bank Ltd. was forced to shut U.S. branches after revealing a $1.1 billion loss from 11 years of unauthorized trading by its chief New York government bond trader."

"Apart from Daiwa, so-called rogue traders have made an appearance most often when financial companies imploded during the past decade. That was the case in 2002, when Allied Irish Banks Plc discovered that John Rusnak, a trader at its Allfirst Financial Inc., had amassed and hidden $691 million in losses in more than five years before the bank noticed any discrepancies."

"It was much the same situation in 1996, when Sumitomo Corp. disclosed a $2.6 billion loss on copper trades. The Japanese firm blamed unauthorized trades by its chief copper trader, Yasuo Hamanaka, who was known as 'Mr. Copper' in the markets because of his aggressive trading."

"A wrong-way market bet spelled doom in 1998 for Peregrine Investments Holdings Ltd., a Hong Kong investment bank run by Philip Tose. The bank fell under the weight of at least $300 million of bad debt that it bought from insolvent Asian companies, including a $265 million loan to Indonesian taxi company PT Steady Safe."

"Four years earlier, Orange County, California Treasurer Robert Citron used borrowed money and derivatives to try to expand the municipality's investment fund. When interest rates rose in 1994, the fund tried to hide the trades before reporting it lost $1.7 billion. The county later filed for bankruptcy."

"Refco's stock plunge wiped out about $924 million in market value, after the company asked a bankruptcy court in Manhattan for permission to reorganize its $48.6 billion in liabilities. The company's bonds due 2012 yesterday traded at 55 cents on the dollar, down from 108 cents on Oct. 7, according to Trace, the bond price reporting system of the NASD."

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