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Urban Trade Breakdowns, Rogue Trader Edition - Mr. 5%


1978 was fucking crazy. Like here’s just some of the shit that happened that year: Ted Bundy was caught, Roman Polanski fled the US after pleading guilty to screwing a minor, the founder of Hustler Magazine, Larry Flint, is shot and paralyzed, CBS airs the first episode of “Dallas”, the US gives back the Panama Canal, Pete Rose hits 3000 home runs, the first Unibomber bomb is sent to Northwestern University, the movie “Grease” debuts, President Jimmy Carter legalized home-brewing, and Hilary Clinton develops in interest in options, and with only $1000 in her account, she is somehow allowed to buy $12,000 in cattle futures contracts which returned $6,300 overnight and just shy of $100,000 ($352k in todays money) in less than 10 months for a return rate with odds estimated to be roughly 1 in 31,000,000,000,000 making her the most successful commodities trader of all time.

But that’s not my point, that’s just some shit I read on the Internet. The point is, one winter evening in 1978, on a crowded commuter train packed full of tired Japanese salarymen on the long ride home from central Tokyo to the bland and anonymous suburb of Kawasaki, a quiet and totally unremarkable trader in a cheap suit and wire-rimmed glasses sat thinking about copper. Yasuo Hamanaka had recently joined Sumitomo, a large Japanese industrial conglomerate as a nobody, and copper was in Sumitomo’s DNA. The company was founded in feudal Japan on copper refining, and by the early 17th century, Sumitomo was one of the largest providers of copper to the Japanese Shogun. But by the time Hamanaka joined their trading division, Sumitomo owned no copper mines, and Hamanaka begin thinking about ways to strengthen their trading profits vs. several large competitors, all of whom owned both mines and extensive refining businesses.

By 1986, Hamanaka had worked his way up to a mid-level management role and was tasked with leading a small team of copper future traders. But shit did not go very well at first, and between 1986 and 1989, Sumitomo suffered huge losses on Hamanaka’s purchase of both physical copper and copper futures, but Hamanaka began to see how large purchases of copper moved prices, a big buy resulted in a small but significant drop in global inventory, which increased prices while the market rebalanced. Fuck, he thought, this is a game of scale. Copper is a bitch to store and move and people need it for plumbing and wires and shit. Owning just 5% or so of supply would make global prices his bitch. But this shit only worked if he could keep it all on the down-low, because, well: 1. It’s illegal, and 2. If traders are on to his shit, they will jack up the price and it’s really hard to make money rigging prices when everyone else is rigging prices (the trick to market manipulation is to be the big-daddy price manipulator and make the market suckers play by your rules. Like the Federal Reserve, for example). And Sumitomo had a ton of cash, which is cool because global investment banks don’t ask questions when you have tons of cash, they just loan you more. And with options, fuck, leverage motherfuckers. Hamanaka thought this could work.

And fuck, it did. For the next 10 years, Hamanaka became known in international trading circles as “Mr. 5%” or “Mr. Copper” and he totally owned that shit. With Sumitomos deep pockets and a carefully constructed web of shady Chinese money landers and global Investment banks, he would take control of 5% of the global copper market, whiplashing traders the world over by creating artificial shortages and then release limited amounts of metal which he sold as huge profits. Traders at the London Metal Exchange (LME) would kick through the glass doors of their fancy corner offices as they took losses betting they could break the motherfucker, but they couldn’t, because Hamanaka had built the world’s greatest margin account, racking up massive profits while his bosses looked the other way and took their bonuses.

Ever find yourself rooting for the Mafioso on the witness stand when some low-level loser who couldn’t hang turns state witness? It’s some conflicting shit. To me, anyhow.

In 1991 losing traders at the LME tipped off regulators to some “irregularities” in the global copper market and an investigation ensued and the shit fell apart. Sumitomo lost at least $2.6B (some say as much as $4b) when it was “discovered” that Hamanaka was trading off-book, which, in the annals of rogue trading history, dwarfed Jerome Kerviel but didn’t quite reach the level of Nick Leeson.

Oh, and in 2002 JPMC paid $125M, without admitting any wrong-doing, for allegedly loaning money to Hamanaka to fund his trading. And the same shit happened to Marrill, who, “to avoid the distraction of protracted litigation” settled for $16m. And, well, you get the point. Hamanaka spent 6 years in prison and currently lives a quiet life somewhere near Tokyo. Hard to imagine that people once went to jail for this shit.

Peace!


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