 |
Eliezer Fishman: said to have been hit for $400 million |
“Slowly up the stairs and rapidly back down on the escalator” is how one veteran foreign exchange trader describes the typical behaviour of high-yielding emerging-market currencies. Those speculators who got burnt by the recent plunge in the Turkish lira will fully agree with the sentiment.
Turkey had been portrayed as one of the bigger success stories in the emerging markets. The country’s inflation had fallen from a peak of around 73% at the beginning of 2002 to almost 7% in June 2004. A booming equity market and hopes of European Union membership added to the country’s investment attractions.
The Turkish lira also came into focus, and not purely because it was the medium required to buy into the country’s apparent success story. With one-month deposit rates trading above 70% five years ago, the lira became one of the favoured cost-of-carry plays. This strategy, according to well-placed sources, was incredibly popular with Israeli punters.
Until the recent blow-out, one-month Turkish deposit rates were trading at around 13.5%, still significantly higher than many other currencies. Many Israeli speculators were happy to buy lira against virtually anything and a popular way they positioned themselves was by selling reverse European-style knock-in options on lira against the Canadian dollar. The trade seems odd for a couple of reasons: both currencies have been widely perceived to be strengthening and the Canadian dollar can be thin when it moves quickly.
Caught out in option plays
According to one option trader in London, the exotic option play has been popular with Israeli investors for about five years. It evolved after the speculators took some hefty losses selling American-style reverse knock-ins. The crucial difference with the European digitals was that the option could only be triggered on its expiry date, which the speculators regarded as less risky. Even if the option did get exercised, it left them long of the high yielder. Typically, the barrier was set close to the at-the-money forward rate when the option was written. The positive carry was meant to soon cover any losses that were incurred.
However, the large positive carry provided little protection against the sharp fall in the lira, which dropped about 20% in a few days in May against major currencies such as the euro, and US and Canadian dollars. Not only did spot move rapidly against them, leaving them massively short of deep-in-the-money options and hugely out of court when they were exercised, but implied volatility spiked sharply higher as well. This meant that buying back any options that had not been exercised incurred further hefty losses. Industry sources say that the speculators were not in the habit of leaving any kind of stop-loss orders, suggesting they had grown complacent, were overly confident or were just very naive.
Not surprisingly, as the news filtered out in Israel, the domestic media had a field day. Attention has concentrated primarily on the activities of prominent businessman Eliezer Fishman, although it is believed that he is not the only speculator to have got plucked by Turkey. Israeli newspapers published astonishingly full details of Fishman’s trading and how much money he has lost.
The reports say that Fishman was long of lira both as a private investor through Fishman Holdings and through positions held by Darban Hashkaot and Alliance Tire, two publicly owned companies he controlled. The public companies reported modest losses of NIS55 million ($12 million), which are dwarfed by Fishman’s total hit, said to be as much as $400 million. Israeli business daily Globes, of which Fishman is the controlling shareholder, quotes his spokesman as saying: “Losses were recorded in foreign currency activities. Fishman will make sure to provide the relevant banks with all necessary guarantees.”
Ha’aretz, another Israeli newspaper, reported that Fishman Holdings would sell assets to shore up its balance sheet. The paper went on to say that a planned disposal programme would be accelerated to bring in around $200 million. “These sales will enable the group to contend properly with the loss created by the currency transactions,” the paper quoted Fishman’s spokesman as saying.
Market sources say that most of Fishman’s exposure was with Israeli banks, which typically backed the trades out profitably with bigger players elsewhere. Ha’aretz reported that the majority of the positions had been initiated with Bank Hapoalim, which, perhaps not surprisingly, declined to comment.
Ha’aretz also reported that Fishman told investors at a breakfast meeting that his punting days in FX were over. “There will be no more forex transactions initiated by me at my companies. I don’t have the strength for it any more,” he is reported to have said.
What nobody knows is whether the losses incurred by Fishman and his co-speculators have eroded the gains they have made over previous years. But once again, the lesson from Turkey shows that risk is not always relative, especially when it comes to illiquid currencies; at times of panic everyone has a nasty habit of heading for the exit at the same time.