This article was written by Trevor Tarring. All views and opinions are strictly his own.
It’s only 25 years since the closing chapters of the Yasuo Hamanaka story were being written, yet it’s surprising how many people in copper trading today admit to having a less than perfect grasp of the story. It’s one that is well worth the re-telling
In essence, it’s about one man’s thundering impact on the world copper market over a period of more than ten years, beginning in 1987. As the man responsible for all of Sumitomo’s copper concentrate purchases in those years, Hamanaka was never going to be a bit player. Especially as those purchases were not just for Sumitomo but, in the manner of the time, for all the members of the Japanese Smelter Pool. Nor, even without any sophisticated manoeuvres, was his hedging going to match, tonne for tonne, his physical trading. But it is a feature of the story that the multiplier between his physical and futures trading was abnormally large.
This was because when he took over the Sumitomo copper book, it was already in the red to the tune of $6.5m, a fact not known to the market at large nor, remarkably, to the board of Sumitomo. Credit, if that is the right word, for this goes to Hamanka’s predecessor Saboru Shimizu, who was ousted from his post with little fanfare. It was also not known at the time that Hamanaka was still – apparently unofficially – liaising with Shimizu over his trading programme. Among the other aspects of the story that came out at Hamanaka’s eventual trial, the part played by Shimizu was not revealed – he replied “No comment” to every question he was asked.
It reflects the slow spiral down which Hamanaka slid that it was not until 1991, when the LME opened an inquiry into his trading, that the conviction grew that there was more to the story than that it was a very elaborate solution to what had all along been a very simple inherited problem. But perversely, because the UK’s Securities and Investments Board (SIB), the body officially responsible for overseeing the LME, said it could not see there was anything in the situation that called for it to act, the spiral into obscurity continued.
So it came as a shock to most when the final announcement came from Sumitomo on June 13 1996 that it had discovered what had been going on and that it had suffered a $1.8bn loss (soon revised to $2.6bn). As so often with stories of this type, the trigger for the denouement was nothing more than Hamanaka being moved away from his desk in the course of a widespread investigation by the US and UK authorities into what had been going on in copper. It took only one message from a bank about one transaction to be opened by another trader in Hamanaka’s place for the whole artificial edifice to be exposed.
As the investigations and court case that followed unrolled, the intense complexity of Hamanaka’s actions was exposed. Not least of the surprises was the wide range of other market professionals who had been willing to play along with Hamanaka to reap some of the magnificent commission bills he was meeting. And the LME itself did not escape censure for being in the middle of the story. It could hardly help being the only futures market on which Hamanaka operated as it was LME prices on which all his purchases of concentrates were indexed. But, in that the LME did take some steps to try to unravel and regularise the situation, it compares favourably with Sumitomo’s inactivity throughout. On three occasions it took the classic step of imposing a limit on daily backwardations – moves which only intensified Hamanaka’s difficulties, as he had adapted his hedging strategies to operate in a climate of wide backwardations.
Beyond Hamanaka himself, it is also necessary to consider the involvement in the story of third parties – some of them corporate, some individual. For most of those parties, the lure was the handsome commission payments that were needed to get Hamanaka’s deals done on the LME. The outlier was a Montreal scrap merchant called Herbie Black who was busy betting his own money heavily against Hamanaka in the market and who, by a narrow squeak, ended up at the last minute looking the smartest of anybody.
Three more individuals now come on stage – David Threlkeld, Charles Vincent and Ashley Levett. As the story opens, Vincent and Levett were working for Threlkeld, but they then broke away and started trading on their own as Winchester Commodities, so no love lost there. Moreover Winchester set about gaining the brokerage business from Sumitomo which had previously been done by Threlkeld. In 1991 Hamanaka telexed Threlkeld to ask him to confirm some back-dated invoices for non-existent trades worth a trifling $280m. Instead Threlkeld forwarded the message to David King, LME Chief Executive. But as already narrated, he took it to the SIB which decided it was an offshore matter and outside its remit.
Hamanaka and Winchester then cooked up a trading strategy codenamed RADR which involved even larger slugs of money, so they turned to Credit Lyonnais Rouse (CLR) for backing, which readily made $100m of credit available; this led to a plan to buy 1m tons of copper on the LME over a three year period. Among other novel features of this plan was the intention to trade as far forward as three years, when the farthest forward date then available on the LME was 27 months. Once again Hamanaka’s trading came into full public view, when in 1993 the LME imposed one of its limits on the huge backwardation. It then blotted its copybook by taking actions (which have never to this day been officially explained) in the shape of a fine of £100,000 on CLR and the extraction from it of an apology for its involvement in the recent development of the market – without specifying what that development was!
Inevitably, all of this eventually ended up in court, where the judges had difficulty wrapping their minds round the intense sophistication of the deals that were being done. In the end they sent Hamanaka to prison for a fairly modest period, all things considered and three senior Sumitomo principals responsible for copper trading resigned. But in terms of all this teaching the market a lesson, I come back to the first sentence of this piece.
Readers who may be keen to brush up their knowledge of this affair through the means of a fictionalisation might wish to read 'Tarnished Copper', available here: https://amzn.to/2IT4cyj