A Brief on Andrew Krieger – raiding the kiwi dollar.

NZ Election 2008 – In the Public Interest

The Registrar – Tuesday, 04 November 2008

A Brief on Andrew Krieger

In 1986, Bankers Trust, New York, hired a young currency options trader from Salomon Brothers called Andy Krieger who had graduated from the Wharton School after studying Sanskrit and philosophy at the University of Pennsylvania. He quickly became one of the most aggressive dealers in the world, with the full sanction of the Bankers Trust executive. While most of the bank’s currency traders [forex dealers] had an upper dealing limit of $50 million, Krieger’s limit was in the region of an unprecedented $700 million – around a quarter of the bank’s capital at the time.

By using options, Krieger could leverage this exposure to many times that size ($100,000 of currency options would buy control of $30 million to $40 million in actual currency). In 1987 he did this to launch a speculative attack on the New Zealand dollar.

If Krieger’s own claims can be believed, he sold short the entire money supply of New Zealand. In a matter of hours, the NZ dollar plunged 5 percent against the U.S. dollar. Some reports indicating fluctuations rising upward to 10 percent –  It was enough, at any rate, to draw an angry complaint from the New Zealand central bank. But with typical arrogance, Stanford. at Bankers Trust later turned this on its head. “We didn’t take too big a position for Bankers Trust,” he grumbled, “but we may have taken too big a position for that market.” [a reference to the ‘kiwi$’ market] in other words, it was New Zealand’s fault for being too small to cope with Bankers Trust operations.

Krieger resigned the following year in disgust, supposedly at the ingratitude of his employers who had paid him a mere $3 million for his efforts which had netted the bank a profit of more than $300 million from the raid on kiwi$. But after his departure an odd thing happened. Regulators discovered discrepancies in the way Bankers Trust valued its currency options portfolio. The bank was forced to admit that $80 million of foreign exchange trading income had disappeared and that it had deliberately overstated its earnings. It seemed, on the face of it, that the bank had been simply unable to understand Krieger’s complex options positions.

Dealers in other banks, however, wondered how it was that Krieger’s options portfolio only maintained its value as long as Krieger himself was in charge of it. Whatever the reason for the readjusted profit, the whole episode was a serious embarrassment. An even bigger embarrassment, though, should have been that Bankers Trust had been willing deliberately to publish figures that were inaccurate by $80 million as if it didn’t matter. But the bank showed no sign of blushing.

This was yet another warning of its attitude: anything goes as long as the suckers don’t find out. Bankers Trust was lean and very, very mean and there were no bigger suckers in sight than in the derivatives markets.

Sourced from Apocalypse Roulette: The Lethal World of Derivatives, by Richard Thomson. Published by MacMillan U.K.