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Trading & Options · Profile from Trading and Options Research Companion

Metallgesellschaft (MG Refining & Marketing, 1991–1995)

The Frankfurt metals, mining and engineering conglomerate — Germany's 14th-largest corporation in 1993, with sales of over DM 26bn (~US$16bn) (Mello–Parsons, Journal of Applied Corporate Finance 8(1), Spring 1995) — whose US oil subsidiary, MG Refining & Marketing (MGRM), sold independent US fuel retailers fixed-price gasoline, heating-oil and jet-fuel supply for up to ten years and hedged the obligation one-for-one with a rolling stack of short-dated NYMEX futures and over-the-counter swaps. By September 1993 the firm-fixed and firm-flexible programmes obliged MGRM to deliver 154 million barrels; the stack held about 55 million barrels of futures plus swaps for the rest (Mello–Parsons, citing the special auditors' report of 20 Jan 1995). When oil prices fell through late 1993 and the curve sat in contango, the futures lost cash every month while the offsetting gains on the supply contracts would arrive only over a decade. Funding ran out; the supervisory board, chaired by Deutsche Bank's Ronaldo Schmitz, replaced the management board and a new team took control on 17 Dec 1993 (Oil & Gas Journal, 26 Mar 2001); the positions were unwound and losses "eventually totaled nearly $1.3 billion" (Mello–Parsons). Banks put together a rescue reported at ~US$1.9bn (Mello–Parsons) or US$2.06bn (company history) — say which. The CFTC fined MGRM and its futures broker $2.25m on 27 Jul 1995 and found the short-term "45-Day Agreements" to be illegal off-exchange futures. For a trading book, MG is the canonical case of the edge equation's survival factor broken not by a wrong view but by a maturity mismatch between a hedge and the thing hedged, and by a parent that could not fund the gap.

At a glance

Founded
Metallgesellschaft AG: 17 May 1881, Frankfurt am Main (company history: Wilhelm Merton, Leo Ellinger and Zachary Hochschild; Wikipedia lists Wilhelm Ralph Merton, his father Ralph Merton and Leo Ellinger — founders' list differs by source). US subsidiary MG Corp. reorganised in 1986 with $50m equity (Mello–Parsons)
Headquarters
MG AG: Frankfurt. MGRM: New York trading and Houston operations (the CFTC order names MGR&M "of Houston, Texas" and MG Futures, Inc. "of New York")
Ownership / structure
Listed German AG, closely held: over 65% owned by seven institutions — the Emir of Kuwait, Dresdner Bank, Deutsche Bank, Allianz, Daimler-Benz, Australian Mutual Provident Society and M.I.M. Holdings (Mello–Parsons). Two-tier board: Deutsche Bank's Ronaldo Schmitz chaired the supervisory board (company history)
Type
Commodity-trading arm of an industrial conglomerate / blow-up; this profile is a single-event entity, 6 moves (rule 6)
Scale (dated)
Group 1993: sales > DM 26bn (~$16bn), assets DM 17.8bn (~$10bn), 43,292 employees (Mello–Parsons). MGRM Sep 1993: firm obligations 154m bbl (firm-fixed 102m, firm-flexible 52m) plus 54m bbl of renewable "guaranteed-margin" contracts; ~2% of the US oil-products market (company history)
The hedge
One-to-one "rolling stack": ~55m bbl of crude, heating-oil and gasoline futures, mostly near or next month, plus short-dated OTC swaps to cover the full 154m bbl (Mello–Parsons); MGRM's positions were 16% of NYMEX oil open interest on 30 Sep 1993 (OGJ, 2001 — secondary)
Loss
"Nearly $1.3 billion" (Mello–Parsons 1995; Wikipedia); group loss DM 1.97bn (~$1.06bn) for fiscal 1992/93 and DM 2.63bn for fiscal 1993/94 (company history; MG's fiscal year ended 30 Sep — from memory, verify). A "DM 2.3bn" figure also circulates for the oil loss (from memory, verify). State DEM vs USD every time; conversions differ by date
Regulators
CFTC (MGRM's 45-Day Agreements; MG Futures, Inc. as FCM); NYMEX (margin); German shareholders' special audit under §142 AktG
Moves in this profile
Six — the programme, the hedge, the 1993 funding squeeze, the close-out and bank rescue, the CFTC order and litigation, and the academic debate. Compare Amaranth Advisors (a concentrated curve bet) and Long-Term Capital Management (a correct model defeated by funding)
Signature moves (incl. failures)
MGRM's fixed-price forward programme (1991–93); the stack-and-roll hedge (1992–93); contango, the price fall and margin calls (Sep–Dec 1993); the supervisory-board close-out and bank rescue (Dec 1993–Feb 1994); the CFTC order, special audit and litigation (1994–96); the hedging debate (1994–99)

6 strategic moves analysed

Each one gets a full strategy file in the companion: context, the decision, the financing, what happened, and the lesson.

  1. 1991

    MGRM Fixed Price Forward Programme

    New strategy, product or market

  2. 1992

    Stack and Roll Hedge

    Large trade or position / leverage, sizing or risk-limit decision

  3. 1993

    Contango Price Fall and Margin Calls

    Loss, drawdown or blow-up response

  4. 1993

    Supervisory Board Close Out and Bank Rescue

    Restructuring, bailout or liquidation

  5. 1995

    CFTC Order Special Audit and Litigation

    Regulatory, enforcement or legal action

  6. 1995

    The Hedging Debate Culp Miller vs Edwards Canter

    Strategy post-mortem (contested) — closest template type: loss, drawdown or blow-up response

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