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19 December 2018

Tin Crisis - Part Three



In this, the third and final article of this series, Martin Hayes looks at the grinding legal processes following the collapse of the ITC and some of the changes ushered in for the LME.


Creditors, with Standard Chartered the first to reach for their lawyers, began individual actions against the ITC, and this legal foray would soon snowball.

The LME, for its part had been preparing for a ‘no-deal’ outcome to Newco, with the Executive looking to resolve all the unfilled tin contracts held in limbo since October 1985. Optimistically, this clean slate would allow a re-start of business – the KLTM had already re-opened its market.

So, 24 hours after the Newco plan collapse, Michael Brown put forward a proposal at a meeting of LME members not represented on either the committee or Board. This involved a ‘ring-out’ of all contracts at a price between the £8,140 suspension and current grey-market levels around £4,000.

On March 12, then, in the LME Boardroom in Plantation House, this took place at a settlement price of £6,250 per tonne – the principle being one of compromise. Those who sold at the higher level lost money, while those who bought took up tin stocks that were instantly valued in the grey-market much lower, thus spreading the pain – in all some £150 million in payments settled the outstanding contracts. Even so, the ITC still owed the brokers £180 million.  

But the ring-out, financially painful as it was, did end the possibility of a cascade of broker failures, caused by a domino affect in an uncleared market – parent companies stood by their LME units, but at a significant cost. JH Rayner, Gill and Duffus and Rudolf Wolff wrote off around £36 million, £26 million and £16 million respectively – big financial hits in the 1980s.

And the tin price continued to fall – rubbing salt into wounds – hitting a low of £3,250 in mid-year. Consequently, a string of ring departures took place, with Phillip and Lion first, soon followed by Gill and Duffus, Holco and JH Rayner. Henry Bath, meanwhile, notionally merged with Metallgesellschaft. In all cases most of the front-line metals staff of these firms were made redundant.

So, the brokers, like the banks, now opted to pursue the ITC through the courts.  One LME broker – Shearson Lehman, being American, took litigation one step further and sued the LME itself over the validity of the ring-out process. One side effect of this was that Phillip Jevons, who was an LME Director, as well as a director at Shearson, resigned from the Exchange’s Board – presumably to avoid suing himself.

The UK High Court dismissed that suit – it held that the LME was within its rights to take the steps it did in the ring-out, but lengthy appeals kept this going for many months, preventing the LME from re-starting tin.

It was a different matter where legal action against the ITC was concerned – crucially as an international organisation it had diplomatic status and immunity in the UK where it was based.

There was initially, however, a small technical chink in this broad-based defence – a facility letter where the ITC had previously waived immunity to secure loans from Standard Chartered. Also, two brokers - Maclaine Watson, who were owed money under previously-agreed arbitration, and Lazmet, who held tin it had bought from the ITC but had yet to pay for - were also in a position to sue the ITC to gain access to whatever free assets it had available.

In April, the ITC, as an organisation, artfully made out-of-court settlements to the bank and these two brokers.  However, all the other creditors were not so lucky – apart from some minimal administration funds, the ITC’s free assets cupboard was now bare. 

So, the only route was to take action against the ITC-member governments themselves – and that was where the tortuous legal battles were to unfold over coming months and years.

On the brokers' side, 11 of them formed a company imaginatively and optimistically called ‘Tinco Realisations’ which accused the 22 ITC member governments of gross irresponsibility and unlawful conduct. Others tried to have the ITC, which was notionally still in existence, wound up, while action was also taken in other countries by parent companies.

All of this became a reporting morass – Reuters, like all other agencies, was not prepared to spend days, weeks and months attending courts. As a daily news story, it was very much on the back-burner now.

Instead, a new recruit, Steve Whitehouse, who had some legal insight, came up with the idea of obtaining the daily transcripts of the main UK lawsuits, painstakingly reading through them, and putting a story together, if warranted, the next day. Hard work – but someone had to do it.

These transcripts were quite illuminating at times – Jacques Lion was the epitome of patience, courtesy and good humour in defending the actions of an LME his family company were now largely stepping away from.

And one creditor barrister pointed out the absurdity of the 22 individual expensively-retained defence teams sitting together and uniformly refusing to accept any legal liability for the ITC’s debts – a stance that all the UK courts were to uphold over the coming years.

    

For the LME, life of a sort went on. In 1987, it re-organised, by incorporating itself, doing away with its cumbersome Committee/Board structure, and introducing a new, more representative Board – directly-elected mostly, with expert invited directors. 

Membership was re-jigged as well, and the Exchange moved to full clearing within the ICCH (International Commodities Clearing House), with external market regulation under the AFBD (Association of Futures Brokers and Dealers).

Traders were also transitioning – Geraldine Bridgewater, the LME’s first-ever woman trader at JH Rayner, moved to the AFBD. Others switched into other markets, as I found out one day in summer 1987. I was covering the thriving LIFFE (London International Financial Futures Exchange) for a while, which was doing booming business in its trading pits in London’s Royal Exchange.

Trevor Klein, formerly a silver trader with AMT, was there, as AMT had a LIFFE seat. Meanwhile in the Eurodollar pit, I saw another familiar face – Kevin Thomas, who had traded lead and zinc with Phillip and Lion. I asked him how difficult it was to make the change from metal fundamentals to macro-economics.

He showed me his ‘point-and-figure’ chart: “I’m a trader – I just trade – Eurodollars, gilts, German bunds, they’re all just numbers and movements.”

But life was not so good for the global tin industry, with the price having slumped below the cost of production for all producers, bar Brazil. Malaysia had closed a third of its mines at a cost of five thousand jobs, Thailand shut some forty per cent of its mines, shedding 8,500 jobs, while Bolivian production was down some thirty percent, and export revenues halved. In the longer-term this would lead to an increase in the Bolivian drug trade. 

In the UK, the Wheal Jane mine and the Capper Pass smelter closed, with questions raised in Parliament. Labour MP Dennis Skinner – then as now a fiery socialist - asked whether the Government would cut miners and smelter workers adrift, having in 1984 injected millions of pounds in to the collapsed Johnson Matthey Bank. All to no avail, as all the legal cases wound their weary way through appeals and towards the House of Lords – the final arbiter.

In 1987, bizarrely, the ITC, whose five-year term was up, extended its existence for a further two years. This was ostensibly to handle the legal cases, as well as passing over statistical work to the ATPC (Association of Tin Producing Countries). The ATPC – dubbed ‘Tinpec’ - also took over the responsibility of sorting out the stockpile mess bequeathed to it by the ITC.

Ironically, there was producer solidarity here, and managing the disposal of the tin stocks and initiating a price recovery was achieved through hard-fought export quotas and production curbs to the extent that the tin price by 1989 was back up near pre-suspension levels.

That helped the LME, where in April the UK Court of Appeal had finally and conclusively justified its actions in the ring-out – the Shearson lawsuit from 1986. The road was clear now, and the Exchange brought back the tin contract on June 1, 1989. Good news, and for me as well – Chris Piper was soon to retire, and the ‘joys’ of Reuters TNLB pricing weren’t coming my way.

Even though the ITC was going to expire at the end of June, 1989, Canada marshalled the other members to resume a negotiated settlement. True to form and in typical ITC fashion this was a painfully slow process - negotiations hit the buffers when the gap between what members offered and what creditors would accept was substantial.

Nevertheless, the creditors ploughed on, with the indefatigable Ralph Kestenbaum again prominent in trying to find a solution. 

By December 1989, we heard that the UK and Japan had offered to close the gap by paying more than their proportionate share of the ITC Council's debts – surely the end-game was in sight?

Reuters by now had moved offices to premises overlooking Tower Bridge, called the World Trade Centre – Steve Whitehouse and I were working on this story. A couple of floors below us were LME traders Refco and Gerald Metals, where Ralph Kestenbaum worked. Like many others, unpaid and giving up their own time, Kestenbaum’s sterling efforts were on behalf of the LME institution to which he had devoted most of his working life.

As the market wound down ahead of the festive period, we were informed by the creditors’ PR that a deal had been struck. At midday the UK Bank of England sent a fax which confirmed the details we had written up under embargo - all creditors accepted the compromise, which, shamefully, only met some forty percent of claims, with, of course, no admission of liability from the ITC member states.

I walked down two flights of stairs to the Gerald Metals office, where, over coffee and biscuits, Ralph Kestenbaum gave me the first post-deal interview – dotting the ‘I’s and crossing the ‘T’s’. That was the formal end of the Tin Crisis, fittingly as the decade drew to a close.

     

The fall-out rumbled on, however. Despite the settlement, the ITC’s behaviour as an international organisation was shabby, secretive and at times beyond the bounds of legality. Governments, many of them from highly-developed countries and the EC, were also less than dutiful in meeting their responsibilities – so much for the sanctity of international law.

The ITC’s high-profile and costly demise ushered in the end of most other commodity agreements – none so dishonourably, it has to be said.

The International Cocoa Organisation – a statistical body – ran out of money. The International Coffee Organisation, ceased its price-influenced export quota programme. The International Natural Rubber Organisation soldiered on for a few years, but the challenge from synthetic rubber meant that its buffer stock model waned into insignificance.

On the LME, departures from the ring continued in coming months - Ametalco, Anglo Chemical and Entores all gave up their status, while Charles Davis (as Boustead Davis had by then become) of ‘Don’t deal’ fame did not deal anymore, as it was absorbed into the growing power that was Metallgesellschaft. 

But even though ring numbers had fallen to 16 by the early 1990s from pre-crisis levels of 28, the Exchange was in better shape. Tin, with the drama stripped out now, was trading normally for a contract of its size. The multi-tiered membership structure that largely prevails to this day was bedded in, while under new CEO David King the LME was preparing to launch a new contract – secondary aluminium alloy.

However, there were fresh storm-clouds developing. Far away in Tokyo, Japan, in a nondescript  office building a so-far anonymous copper trader was already heavily losing money in unauthorised trading – stacking up problems that would again shake the LME in the last decade of the twentieth century. But that is another story.

  

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