Corporate training

September 30, 2011 07:00 PM
Editor's Note

This morning I woke to the news that UBS, the giant global bank of Switzerland, suffered a $2 billion plus loss, allegedly because of a rogue trader on its London equities desk. If true, apparently UBS management didn’t get the memo on Barings or Société Générale, both of which suffered huge losses because of rogue traders and, in some ways more disturbing, bad oversight of traders.

News like this can lead the public to think all traders are rogues. That’s not the case. Fraudulent trading may cause these extreme losses, but bad trading can lose even more, and usually it’s cock-eyed executives with poor risk management that cause the most losses.

This month’s issue is packed with interesting stories of traders who come from the corporate world. Case in point is our Futures interview with Larry McDonald, who was head of the convertible bond trading desk at Lehman Brothers (see "Larry McDonald: Inside the fall of Lehman," by Managing Editor Daniel P. Collins). McDonald wrote a book, "A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers," providing his view of how a combination of senior management blindness and/or greed mixed with government policy led to Lehman’s end. With the three-year anniversary of that failure just passed, and with markets still roiling, we believe his story is one to hear.

McDonald says he worked with senior managers to warn the upper echelon about the problems in the real estate market and that Lehman’s risk was too concentrated, but to no avail. And we all know what happened. Did Lehman’s end have the wake-up effect then-Secretary of Treasury Hank Paulson thought it would? McDonald says that letting Lehman fail made things worse. He now has moved on to Newedge.

Having lived through somewhat of a similar tale is the subject of our Trader Profile, Jean Mrha Beach (see "Beach: Building a new business," by Dan Collins). Beach started her own commodity trading advisor (CTA) in 2010, but has years of corporate trading experience. Most recently she was heading up trading and risk management for Tyson Foods, but prior to that she was head trader of Enron’s daily swap and options book for natural gas and then moved over to run Enron’s broadband and upstream product units. She notes how, working at a commercial firm like Tyson Foods, "you get a perspective of how commercial end-users think." And while at Enron, she learned "how to get information out of the market and how to trade off of that information into hopefully a profitable position." She is using those same techniques to trade today.

One of our hot new trader selections, Randall Cleland, now runs CTA Tanyard Creek Capital (see "Tanyard: Bringing home the bacon," by Dan Collins). Cleland got a master’s in agricultural applied economics from the University of Georgia, and upon graduation went to work for Sara Lee. His basic job was to buy meat (bacon) as well as help customers with forecasting and forward pricing. He even traded pork bellies at the Chicago Mercantile Exchange for awhile, but went back to Sara Lee to run its hedging desk. He says he learned a lot about how to get information on the market from the corporate position but became frustrated that he couldn’t use it. Eventually he opened his CTA to take advantage of that market information in the livestock market.

At least two of these traders lived through a rough corporate downfall, not of their doing, but still managed to retain the correct lessons learned from those days: Diversify risk, use market information to your advantage and don’t over-trade.

About the Author

In her many years covering the futures industry Ginger has interviewed some of today's best global hedge fund and commodity trading advisors. Ginger received a master's degree in journalism at Northwestern University's Medill School of Journalism and a bachelor’s in communication arts from the University of Wisconsin – Madison