The life of Brian: how the Amaranth trader lost $6bn
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This week Bernie Ebbers drove to Oakdale Correctional Complex in Louisiana. He got out of his Mercedes and joined former state governor Edwin Edwards in the pen. Edwards faces ten years for extorting money out of riverboat casinos. Ebbers got 25 years for his role in the Worldcom affair. Accountants working under him took some numbers out of the operational columns, they say, and slipped them into the capital budget.
Both men did naughty things. But putting poor Bernie behind bars for a quarter of a century for financial hanky-panky seems excessive. Ebbers, an ex-sports teacher from Alberta in Canada, was never good with numbers. He ought to get 24 years off for public service; Ebbers reminded investors how slippery numbers can be – especially in the financial world.
Both Morgan Stanley and Goldman Sachs put money into Amaranth Advisors, the $9 billion hedge fund that blew up earlier this month. So did the Schroder S&P Cautious (!) Managed Distribution Portfolio (see: Hedge funds feel the heat after Amaranth debacle). What went wrong? Hedge funds are supposed to be able to do arithmetic.
“Somebody was not monitoring this correctly,” said one pro, referring to the extraordinary bet that Brian Hunter, Amaranth’s lead trader, had placed on gas prices. At one time, he held about 10% of the global market in natural gas futures. The story in a nutshell: Hunter guessed prices would go up. They went down. And then, even the best mathematicians in the world couldn’t regain the $6 billion investors lost.
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“It appears we have had a major malfunction,” would have been one way to describe the collapse. But that famous under-statement was already taken. It was made on 28 January, 1986… as 50 million TV viewers watched the Challenger space craft explode before their very eyes. Nobel-winning physicist Richard Feynman said the NASA debacle was an institutional failure. NASA scientists and engineers had been upstaged by bureaucrats who had been allowed to ‘pervert standards’, he charged.
But in the financial world, standards are perverted so easily they must have a twisted gene to start with. That’s why we can’t help but feel sorry for Hunter, Ebbers, and the whole community of high rollers who let fortunes slip between their fingers; they can’t help it.
Hunter, like Ebbers, came from humble beginnings in rural Canada to achieve great riches. Unlike Ebbers, Hunter was good at maths, especially financial modelling. The numbers worked like magic for several years – in which he earned between $75 million and $100 million annually and drove around Calgary in a Ferrari or a Bentley, depending on his mood. Even better was the perverse arithmetic of the hedge fund business which allowed the trader to keep money when he won, and not give it up when he lost. Heads, Hunter won; tails, investors lost. (A hedge fund typically takes 20% of the gain, but none of the loss.) But the poor 32-year-old had barely gotten used to being extraordinarily rich and extraordinarily talented, when a very ordinary little slip-up with numbers derailed his extraordinary career.
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