View from Frankfurt: The oil futures fire Deutsche Bank just cannot put out: John Eisenhammer watches the official account of the Metallgesellschaft disaster fall apart under US attack

Some debacles are extraordinarily resilient. Despite its best efforts, Deutsche Bank has failed to clear the rotten Metallgesellschaft whiff from its boardroom.

Earlier this year, the events surrounding the near collapse of one of Germany's foremost industrial conglomerates seemed clear: the source of acute, but only ephemeral, embarrassment for the big bank that heads Metallgesellschaft's supervisory board, and is both dominant creditor and shareholder.

Deutsche was roundly criticised for not appreciating the risks contained in the colossal expansion of MG's oil trading business in the United States.

But as soon as the problems were known, Deutsche took the credit for leading a swift operation that saved Metallgesellschaft from imminent bankruptcy. In Germany, where Deutsche Bank's authority is considerable, this first version of the Metallgesellschaft crisis would probably have remained the final one.

Across the Atlantic, however, the Metallgesellschaft story remained very much alive, twisting and turning over the summer and autumn until it ended up looking very different. In this one, Metallgesellschaft's sacked US executives emerge with some credit, while Deutsche Bank is identified, if not as the villain, then certainly as the knave of the piece.

The case of Metallgesellschaft's near collapse, linked to its ambitious foray into oil trading, has been seized upon by participants in the debate, particularly energetic in America, about the risks of derivatives, and whether these relatively new but fast-expanding financial instruments require greater regulation. If it were an example of futures trading gone haywire, then clearly Metallgesellschaft's experiences supported those arguing for stricter supervision.

But, sensationally, several prominent US economists came separately to the opposite conclusion. Far from being a bunch of reckless cowboys, the oil trading specialists led by Arthur Benson at Metallgesellschaft's US arm, MG Corp, were credited with having constructed a successful hedging programme covering long- term obligations to deliver petrol and heating oil at fixed prices.

'As a market professional I can say categorically that Metallgesellschaft's American business was doing all the right things. Instead of being sacked, the man (Benson) and his team deserved an award for their uniquely intelligent hedging strategy,' Steve Hanke, professor of applied economics at John Hopkins University, and himself a futures trader for institutional clients, said recently.

Because of the size of the oil delivery contracts, there was the risk that a falling oil price would trigger substantial cash demands to fund the hedging, which was rolled over monthly. But the overall hedging arrangement was watertight, the US economists argued. Against the temporary liquidity drain and paper losses stood expected real trading profits from the monthly oil sales.

In the event, the oil price did fall, the cost of maintaining the stacked hedge programme shot up, and in December 1993 Deutsche Bank got cold feet.

It replaced all the leading executives and in a fire sale, MG Corp's positions, having been bought at the top of the market, were dumped at the bottom, and massive book losses were turned into the real thing.

This was absolutely the wrong response to a temporary crisis that would have righted itself within a fundamentally profitable business, said Merton Miller, Nobel Prize-winning economist at Chicago University and a public director of the Chicago Mercantile Exchange.

Despite considerable efforts by Metallgesellschaft executives to persuade him otherwise, he has stuck to his interpretation of a gigantic cock-up.

'The MG traders had the correct understanding, until the new management came along,' he said.

Together, he and Mr Hanke lifted the stigma of corporate mismanagement from the disgraced executives of MG Corp and pinned it firmly on Deutsche Bank, and notably Ronaldo Schmitz, its board member in charge of Metallgesellschaft's supervisory board. The German prestige bank, anxious to build up its activities in the US, has been appalled at the extent to which the unfavourable version of its handling of the Metallgesellschaft crisis has gained currency among institutional investors over there. It was therefore with immense relief that Deutsche greeted the recent decision by a Baltimore court to dismiss on technical grounds Mr Benson's request to have his dollars 1.5bn damages claim heard in court under full public scrutiny.

Instead, it will be decided by the discreet method of arbitration.

The main weakness in the US economists' criticisms lies in the fact that they have not been allowed to look at Metallgesellschaft's books. It is indisputable that MG Corp's oil trading obligations, at 180 million barrels equivalent to 85 days of Kuwait's production, were hugely ambitious. In an unfavourable market, the dynamics of sustaining such a programme would have tested the strongest of hearts.

Metallgesellschaft argued the existence of the entire group was at stake, leaving no choice but to get out of an oil futures strategy gone awry. The fundamental reason given was that the business was technically bankrupt last December if actual and potential hedging losses were counted. But doubts have grown about this claim, as it appears to have ignored the profits from the oil contracts, some 70 per cent of which were monthly payments at fixed prices.

If indeed, Metallgesellschaft was suffering from a 'temporary liquidity crisis', as it was described by Hilmar Kopper, chief executive of Deutsche Bank, in his first public reaction to the difficulties, and was not technically bankrupt, then this sheds a rather different light on the rescue operation.

If nothing else, it leaves open some awkward questions for Deutsche Bank.

Given Metallgesellschaft's agony - with its market capitalisation halved, what was Germany's 13th-biggest industrial corporation is today a shadow of its former blue-chip glory - straightforward answers should not be too much to ask for employees, investors and creditors.

(Photograph omitted)

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before