METALLGESELLSCHAFT

Laurent L Jacque

Chapter 6 in Global Derivative Debacles:From Theory to Malpractice, 2015, pp 73-96 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In the annals of financial debacles that rocked the 1990s, Metallgesellschaft (MG)'s loss of $1.3 billion was the first case of “derivatives malpractice” to bring a giant industrial firm to the brink of bankruptcy. In December 1993, Metallgesellschaft reported massive losses at its US oil subsidiary — Metallgesellschaft Refining and Marketing (MGRM)—which were traced to mammoth oil derivatives positions estimated at 85 days of Kuwait oil production (160 million barrels of oil). The oil derivatives positions were rumored to be the necessary hedging counterpart of an ambitious marketing program whereby MGRM had offered its US customers long term price guarantees on the delivery of petroleum products. Only a massive $1.9 billion rescue package mounted by as many as 150 German and international banks staved off bankruptcy for Metallgesellschaft, long known as a conservative blue-blood pillar of the German industrial establishment. Yet, it was not fraud as in the case of Barings SA, nor lax operating controls as in the case of Sumitomo, nor entrapment as in the case of Procter & Gamble. Rather it was a case of daring financial engineering based on somewhat tenuous assumptions about the inner working of oil markets that were ill-communicated and ultimately not shared between the audacious (possibly reckless) American “child” and its conservative German “parent.”

Keywords: Derivatives; Debacles; Options; Swaps; Futures; Forwards; Financial Engineering; Market Manipulation; Rogue Traders; Speculation; London Whale (search for similar items in EconPapers)
Date: 2015
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