Rough Trade.

• Author: THOMPSON, NICK
• Position: Currency traders and the economic crisis in Asia

How currency traders profited from the Asian meltdown

On July 2, 1997, Thailand's prime minister, Gen. Chavalit, stood screaming at his Minister of Finance, M.R. Chatu Monkul Sonakul, in his country's National Assembly. M.R. Chatu Monkul had advocated devaluing Thailand's currency for months and today, he argued, devaluation was absolutely necessary. The prime minister was in denial and furious. Thailand had conquered capitalism and, in the previous decade, the kingdom had literally grown as fast as any nation ever had. Paupers had become princes and cars were now clogging roads in towns where shoes had been rare two decades before. Thailand was too strong, too smart, and too successful to fall prey to currency speculation. M.R. Chatu Monkul was fired.

As the now ex-minister of finance left, he mumbled prophetically, "It will fall anyway ... but we won't be able to control it."

The most severe world economic crisis since the depression of the 1930s would begin that afternoon when even Prime Minister Chavalit had to throw in the towel. By the end of the day, Thailand's currency, the baht, was slipping into freefall. It would lose 40 percent of its value within weeks. Soon every other Asian currency would slip down with it and, by the end of the summer, the economies of Indonesia, Malaysia, and Thailand would be plummeting like Icarus. Within a year, the streets in two of the three nations would be on fire.

As this scene exploded in Bangkok, hundreds of young currency traders jabbered into their telephones around the world selling baht to anyone who would buy. Traders wore the same plain blue shirts as the day before and stared into the same blue computer screens. The scene in major companies was intense but not chaotic and the mood was one of satisfaction. Traders had predicted that Thailand would devalue and now they had hit a home run: They were both looking smart and making lots of money.

Traders that day weren't concerned that Thai businessmen were losing everything they had labored for a generation to achieve and that companies were going belly-up. They weren't concerned that losses would trickle down to construction workers in Bangkok, the women who sold pineapples to the workers, and to the peasant families of everyone up to the north. Thailand's currency was collapsing because it merited a collapse. Could it have been that the punishment didn't fit the crime, that Thailand had made mistakes but not enough to merit a collapse, and that the market was overreacting and overshooting?

"I don't believe in overshooting. The market couldn't overshoot in a billion years," said Robert Gray, a former trader with First Interstate. "The market is always right."

Political incompetence, corruption, and economic nonsense contributed greatly to the Asian crisis. Put the government of Thailand on trial for mismanagement and it would be judged guilty. But the more interesting trial would be of capitalism itself and of the trigger of the explosion: currency markets and traders. The traders could plead no contest and be given a slap on the wrist but the market would be judged guilty and sentenced to a stint in reform school.

Riders on the Storm

Currency markets arguably are the most important markets in the world and, with daily transactions exceeding one trillion dollars, they are certainly the largest. There are no regulations and there is no central trading center; it's free market capitalism at its purest--like Wall Street before Black Friday. Unlike the New York Stock Exchange today, collapses don't even trigger automatic shutdown mechanisms. In the past five years, these markets have kicked over the stones that started avalanches in Mexico, Southeast Asia, and Russia.

The money that flows through these currency markets comes from either speculative or non-speculative sources. Non-speculative sources include exchanges made by multinational businesses that need foreign currency. If McDonald's wants to build a restaurant in central Thailand, it will have to pay the workers in baht. To get the baht, it will have to trade some of the dollars earned selling Big Macs in the United States. If McDonald's is worried about the stability of Thailand it may also want to hedge against the currency's collapse by borrowing baht from a bank and then exchanging this money for dollars (selling baht short). Investors and their...