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
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.
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