Sumitomo Corporation And Yasuo Hamanakas Copper Scandal Finance Essay

Sumitomo Corporation And Yasuo Hamanakas Copper S pottydal Finance renderThe financial realness had been confronted heavily by craft scandals in 1995, with Japans Daiwa Bank and the rouge trader, Nick Leeson. When it seemed the scandals couldnt digest oft worse, the Sumitomo Copper Scandal emerged. This was the biggest scandal in the history of commodities traffic and ranked in the die fiver trading handoutes in financial history up until the late 1990s. Sumitomo Corporation is a Japanese trading house, which is currently one of the giantst worldwide trading companies headquartered in Tokyo, Japan. In the 1990s Sumitomo have crowing hearts of both physiologic cop, which was stored in w behouses and factories, as strong as numerous futures contracts. Copper was a relatively sm exclusively food grocery store place compared to other metallic elements, such as atomic number 13. According to Andrew Beattles article, The Copper King An imperium Built on Manipulation, tomentum is an illiquid commodity that cannot be comfortably transferred around the world to meet bypassages. For example, a rise in shit impairments due to a piddlingage in the United States will not be immediately cancelled out by shipments from countries with excess copper. This occurs because moving copper surrounded by computer memory and delivery costs money, which can cancel out the value differences. It is important to note that Yasuo Hamanaka was the chief copper trader of this trading house, and attempted to time out the full(a) worlds copper market leaving Sumitomo with a disadvantage of more than than $1.8 billion (Beattle).WHAT HAPPENEDFor ten-spot years, Yasuo Hamanaka had successfully managed to control the worlds cost of copper. He eventually came to control five pct of the entire supply of copper, which may not seem like much considering ninety-five pct was in other traders hands (Beattle). However, due to the fact the abundant and cumber approximately challenges that exist in the copper market (in movement, delivery, etc.) and the fact that even the largest traders in the market own an even smaller percentage, Hamanakas five percent was indeed very significant.During the ten years of his manipulation he was equal to(p) to use Sumitomos size and large cash reserves to corner and squeeze the market through the London alloy Exchange. The London Metal Exchange is the worlds biggest metal exchange. Furthermore, the London Metal Exchanges copper legal injury essentially dictated the worlds copper price at the time (Beattle). Although the London Metal Exchange was large in size, it was fairly poor in legal injury of regulation. In fact, this exchange had little to no regulation at the time of Hamanakas rampant market manipulation. The Sumitomo Copper Scandal lasted for some a decade due to these negligent and almost nonexistent regulations on behalf of this particular exchange.To put the entire crisis into laymens terms, one must first understand that Hamanaka was taking a yen futures position on copper and simultaneously corrupting up a substantial amount of physical copper as well. This caused any one trader who took a short futures position to have to buy long positions in order to cancel out their short positions. Due to the fact that Hamanaka had a large number of long positions, those slew looking to buy them had to pay increasingly higher prices. These skyrocketing futures prices are what Hamanaka was able to control the more the prices rose, the more money he made. This is because those with short positions were still paying this higher price in order to liquidate those positions. Another way that Hamanaka was making money was that while these prices continued to rise, some people holding short positions thought that instead of paying a high price for a long position they would buy the physical copper and deliver it to the holder of the long positions. So, because Hamanaka alike owned 5% of the p hysical copper he could charge a very high price to those with short positions because they didnt want to keep paying money to liquidate their short positions. Essentially, he was making money by owning long futures as well as physical copper.WHYThere are no secure reasons as to why Hamanaka engaged in such wicked trades. Perhaps he felt pressured to concord the consistent levels of annual revenue for Sumitomos traditional copper business-about ten billion dollars. He would therefore save his reputation as a phenomenal copper trader as well as his firms mastery in the commodities market.It is also important to note that individuals such as Hamanaka, do attempt to corner the market in order to create an unfair advantage by purchasing a significant amount of shares. This eventually increases the price of shares, making them appear to have a greater value. As the price of the shares continues to rise, more buyers become attracted, and then demand further increases the price of the shares. This causes short sellers to be driven out of the market through a short squeeze. In the article Short Squeeze, it explains that a short squeeze is a situation in which an increase in the price of the stock triggers a rush of buying military action among short sellers. Therefore, it is necessary for the short sellers to buy stock in order to close out their short positions to minimize their losses, causing a further increase in stock prices. Overtime, this causes one to sell their holdings at an artificially inflated price and then leave their investment or opt to sell their shares with the cognition that the price will decrease once normal supply and demand forces return (Investing Answers).WHO WAS RESPONSIBLEYasuo Hamanaka, also referred to as Mr. Copper, was the former copper trading chief for Sumitomo Corporation. Following research of the Sumitomo Copper Scandal, one can confidently say that Hamanaka is the key player who is held responsible for the 2.6 billion dollar loss over a ten-year period. In fact, the article, Sumitomo Corporation states that, it believed that Mr. Hamanaka was solely responsible for the unauthorized trading (215). His attempted action to corner the worlds entire copper market by falsifying financial records and forging signatures alluded to such a significant loss for the participation.It is also important to note that prior to the discovery of Hamanakas accumulation of illegal trades, he was given a great amount of responsibility at heart the company. This was because he was perceived by top executives to have super knowledge and experience within copper trading. Therefore, one can also conclude that the top executives within the corporation can also be held responsible for the Sumitomo Copper Scandal. This is because the Sumitomo Corporation and senior focusing did not have secure safeguards in place to ensure that they knew exactly what their employees were doing. Furthermore, Hamanakas reputation as being a super star copper trader only ploughed to solidify the lack of regulation and discipline (Sumitomo Corporation).When Sumitomo Corporations reputation began to daub from individuals outside the company, they responded to the allegations by stating that Merrill Lynch and JPMorgan Chase were the dickens banks responsible. In the article The Copper King An empire Built On Manipulation, author Andrew Beattle explains that Sumitomo Corporation claimed that Merrill Lynch and JPMorgan Chase granted the loans to Hamanaka via future derivatives hence the two banks kept the scheme going. Consequently, both banks were found guilty to some extent (Beattle).RIPPLE EFFECTS ON THE MARKETHistorically, there has been a close correlation in the behavior of metal prices. When one metal falls, the others tend to follow. However, the Sumitomo announcement did not harm other metals notwithstanding the recent dramatic drop in copper prices. Copper is a relatively small market compared to other metals, such a s aluminum and gold. The price of the metal was above $1.25 a pound in New York in advance(prenominal) may of 1996, however it fell to $1.04 on June 13, just before Sumitomo announced its loss. Following the announcement, copper was trading at about 89 cents (Wall). The decline in prices of copper before the Sumitomo scandal was believed to have risen from people being relate about the number of new copper mines that were planned and the potential supply problems that it could buzz off about (Wall). Copper prices fell ten percent in the weeks following Hamanakas removal (Fletcher), however, prices had been falling for a while, and the scandal only exacerbated the trend (Uchitelle).The main effect of Sumitomos losses was the decline in public self-assertion in financial institutions. Americans wondered how well their local financial institutions were handling oversight of management. They also were concerned about a temporary decline in stock prices as well as higher pursuit r ates for money to seek to borrow from banks (Uchitelle).The dollar is driven by peoples perception of commodity price movements, and although the dollar had weakened before news of the Sumitomo scandal, the fall in copper prices has contributed to the dollars softness (Wall). The Sumitomo affair concerned the United States about the openness of Japans financial system and the implications for interest rates. These worries as well as the copper crisis had contributed to the decline of the yen. The collapse in copper prices also hurt the Australian dollar.RISK MANAGEMENT ERRORSIn the Sumitomo copper scandal, the financial debacle originates from the failures of proper risk management. By entering into fictitious trades for over ten years and manipulating several accounts, Hamanaka successfully misled his management into believing that he was making huge profits. Hamanaka had been trading on the London Metal Exchange forward market for copper. Sumitomo was the largest participant in th e physical market for copper-he handled doubly the volume as his competitors. Hamanaka was known in the copper markets as Mr. Five Percent because Sumitomos copper trading team traded approximately 500,000 metric tons of copper a year, which was five percent of the total world demand for copper (Weston).In regards to risk management, whenever any hedge fund or speculator who was aware(predicate) of manipulation tried to take short positions, Hamanaka invested more money into his positions, thus sustaining a higher price because he dominated the market. However, despite these illegal practices no action was taken against Hamanaka because of the profits he generated for the company (Weston).There are several reasons from a management perspective as to why the scandal carried on as long as it did. The middle office may have bypassed early warning signals perchance because Hamanaka was perceived as an experienced senior trader. Hamanaka was chief of the trading office and intentional ly had an incentive to maximize profit opportunities through illegal ways. Employees within the firm may have allowed the fraud to occur by turning the other way. This is a case of decentralization (Tschoegl).The Sumitomo scandal has provided valuable insight and enables one to regard and understand the importance of internal and external controls. If there had been any controls, it is believed that the scandal would have been detected much earlier and before a loss of $1.8 billion.WAS IT PREVENTABLE? IF SO, HOW?The Sumitomo Copper Crisis was, at its core, a very preventable crisis-almost embarrassingly so. The huge financial swings that the copper market saw in the late 1980s and early 1990s as a result of Hamanakas indiscretions were exactly that the result of one mans greed and indiscretions. Hamanaka initiated and participated in the illegal trade of copper-like making off the book deals in order to recover unrealized losses-and incited a curl of regulatory laws by the London Metal Exchange and the Commodity Futures Trading Commission (CFTC).Hamanaka exploited respective(a) agents and partnerships in his ten-year long market-manipulating extravaganza. He was able to do this due to serious misgivings and loopholes in the commodity futures markets, as well as taking advantage of gaps in the chain of command and knowledge. Hamanaka maintained two unlike sets of trading books one that recorded fabricated profits for the Sumitomo Corporation and another real record of all the off-the-book and under-the-table deals that were made to maintain control of the market. This long-term interference and domination of the copper market was until now very hard to maintain due to one key fact in order to corner a commodities market, the company must actually hold the assets, which presents an additional strain on resources and funds. This very need may be the answer to preventing scandals like this in the future (Wall).As aforementioned, the Sumitomo Copper Crisis was largely undeniable simply because one mans poor decisions affected the rest of the affiliated market. The essence of the problem was unauthorized trading that the culprit undertook to enhance his firms profitability and then his own career and pay, Adrian Tschoegl mentioned in The Key to Risk Management. However, the full-strength debacle is a result of a lack of internal and external controls. The Sumitomo Corporation, which was divided into essentially troika separate offices (front, back and middle), simply did not harbor or even encourage communication between departments and sectors (Tschoegl). The middle office (which is responsible for one of the most key business functions risk management) can easily be said to have failed most spectacularly in this scandal. The lack of risk awareness and management led to a loss of $1,800 million dollars and a stain on the Sumitomo name, all because of a decentralized, non-communicative collective structure (Tschoegl).The most effectiv e approach to reverseing something like this in the future is basically three-pronged more and get out management-level controls, independent transaction monitoring, and more stringent regulation (of the London Metal Exchange, by the government, and of corporations e.g. corporate kindly responsibility) (Tschoegl). The management-level controls should consist of a conscious effort at centralizing every part of the company, as well as maintaining strict inter-company discipline and training. Independent transaction making should be monitored so no two-book history systems are permissible that is to say, that there is a system of checks and balances within the corporation to ensure above-board transactions. In terms of regulation on behalf of various agencies and governments, its only necessary to say that more of it is probably needed to avoid price manipulation. Perhaps a system of rigorous reporting and accounting policies could be implemented, which would strengthen the markets long suit anyways.CONCLUSIONIts fair to say that the Sumitomo Copper Crisis leaves the skilled and careful trader with a few frigid takeaways. First, both internal and external management controls are absolutely crucial to the success of any company, but if said management is left to run unchecked through the system, mishaps and misdeeds are bound to occur. Strict and exchangeable corporate training and discipline is the remedy to this pitfall. Second, given the right amount of determination and finesse, the market on almost any given commodity can be cornered, for better or for worse. Events like this, despite their far-reaching negative implications for the perpetrator, always help make the market a more efficient and fluid network. The lessons that are learned from scandals such as the Sumitomo Copper Affair in the long run only work to better and enhance the market.