Metallgesellschaft AG: A Case Study

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Metallgesellschaft AG: A Case Study

By John Digenan, Dan Felson, Robert Kelly and Ann Wiemert In December, 1993, Metallgescellschaft AG revealed publicly that its "Energy Group" was responsible for losses of approximately $1.5 billion, due mainly to cash-flow problems resulting from large oil forward contracts it had written. In a lucid discussion of this infamous derivatives debacle, Digenan, Felson, Kelly and Wiemart explore the trading strategies employed by the conglomerate, how proper supervision could have averted disaster and how similar financial crises may be avoided in the future. Background Metallgesellschaft AG, or MG, is a German conglomerate, owned largely by Deutsche Bank AG, the Dresdner Bank AG, Daimler-Benz, Allianz, and the Kuwait Investment Authority. MG, a traditional metal company, has evolved in the last four years into a provider of risk management services. They have several subsidiaries in its "Energy Group", with MG Refining and Marketing Inc. (MGRW) in charge of refining and marketing petroleum products in the U.S.[1] In December, 1993, it was revealed publicly that the "Energy Group" was responsible for losses of approximately $1.5 billion. MGRM's expanded venture into the derivatives world began in 1991 with the hiring of Mr. Arthur Benson from Louis Dreyfus Energy. It was Benson's strategy that eventually contributed to the massive cash flow crisis that MG experienced. The Deals: MGRM committed to sell, at prices fixed in 1992, certain amounts of petroleum every month for up to 10 years. These contracts initially proved to be very successful since it guaranteed a price over the current spot. In some cases the profit margin was around $5 per barrel. By September of 1993, MGRM had sold forward contracts amounting to the equivalent of 160 million barrels. What was so unique about