Chemical Lost $70 Million in 'Unauthorized' Peso Trading

Chemical Banking Corp. said Tuesday it had lost $70 million due to "unauthorized" foreign exchange trading in the recently devalued Mexican peso.

The bank said its trading revenues for the fourth quarter of 1994 would be reduced by approximately $40 million after taxes.

The transactions were undertaken by an employee in New York "who took positions in the peso in violation of authorized risk limits and then concealed these positions," the bank said.

A spokesman for Chemical declined to provide any details about the loss. "It's still part of an ongoing investigation but to the best of our knowledge, this is an isolated incident." Sources said the trader in question has been fired.

Chemical said it has brought its peso positions back into authorized limits and does not anticipate any further material impact on fourth- quarter earnings.

Analysts said they did not expect the currency turmoil would lead to major profit losses at other U.S. banks. However, banks holding large amounts of Mexican securities in their portfolio might post significant paper losses. Observers said it would be difficult to estimate how much banks have lost from trading in the securities of Mexico and other developing countries.

"We really don't know how it's going to wind up," said Raphael Soifer of Brown Brothers Harriman & Co. "There's probably not a risk in the short term but the question going forward is what happens if Mexico continues to have liquidity problems."

Brown Brothers reduced its estimate for Chemical's fourth quarter earnings to 59 cents a share from 74 cents, based on anticipated charges from the foreign exchange loss.

"Anybody who was a market maker in LDC paper lost money, but the good news is that most trading operations had reduced inventories for the yearend and losses will probably be relatively modest," predicted Lawrence Cohn with PaineWebber Inc.

The peso has dropped by nearly 45% since the beginning of last month after Mexico removed exchange controls and floated the currency. An equally dramatic fall in Mexico's foreign exchange reserves to a reported $6 billion from $18 billion has prompted the U.S. government, international financial institutions, and major U.S. banks to begin organizing an $18 billion credit facility.

The facility will be used by Mexico to meet its short-term dollar denominated obligations, in particular an estimated $17 billion worth of so-called tesobonos, or short-term dollar denominated securities issued by the Mexican government.

Approximately $3 billion of the credits will be provided by U.S. and foreign banks led by Citicorp and J.P. Morgan & Co. In a statement released Tuesday, Citicorp vice chairman William R. Rhodes said banks were involved in "detailed discussions" with the Mexican government and that banks expected to conclude arrangements for the facility shortly. Banking sources said the Mexican government is expected to grant U.S. and other foreign banks broader access to the Mexican financial markets in exchange for the support.

U.S. banks had $17.2 billion in loans to Mexico on their books as of June. Of that amount, the top eight U.S. banks hold $12.8 billion.

Citicorp is the single largest lender among U.S. banks, with some $2.9 billion in loans to Mexican borrowers and another $1.4 billion in loans and investments in its Mexican banking branches.

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