Chemical Bank Takes $70-Million Hit on Peso
Chemical Banking Corp. is off to a rocky start in the new year, revealing Tuesday that a foreign currency trader’s bad bets on the Mexican peso resulted in a $70-million pretax loss in the fourth quarter.
Chemical said the trader took positions in the currency “in violation of authorized risk limits” and then concealed the actions.
The losses will reduce the bank’s trading revenue during the fourth quarter by $70 million, or about $40 million after taxes.
The losses occurred when the peso plummeted in value in late December after the Mexican government devalued the currency. The peso began sliding due to a restive election year marred by unrest in Chiapas state, then plummeted after the government stopped supporting it.
John Myers, a Chemical spokesman, declined to name the trader and said he didn’t know whether the person still works for the bank. Sources close to the situation said the trader had been fired.
The trader’s positions “have now been brought within authorized risk limits,” Chemical said, adding that it does not expect any further material impact from the employee’s actions.
Chemical, one of the largest currency trading banks in the country, will report full fourth-quarter financial results on Jan. 17. In the third quarter, the bank earned $439 million, or $1.60 a share, and $212 million in trading revenue.
Prior to the announcement, analysts had estimated that Chemical would earn about $1.16 a share in the fourth quarter, according to Zacks Investment Research Co.
Investors shrugged off the news, sending Chemical’s shares up 37.5 cents to $36.25 on the New York Stock Exchange.
Myers said the trade did not involve risky derivatives, which are a type of security with values tied to, or derived from, underlying assets. Losing investments in derivatives led to the bankruptcy of Orange County.
Myers declined to comment further on the size of the peso position or when the problem surfaced, saying an investigation is under way.