Cash money turk

Foreign-currency swings attract banking's biggest gamblers, and the only thing they fear is a more stable dollar

It's 8:35 a. m., and pandemonium reigns around David Godwin, chief froeign-currency trader at Union Bank of Switzerland's New York branch. The monthly unemployment figures have just come ouL The dollar is soaring to ward its yearly high. And fellow traders, eyes glued to video screens flashing exchange rates, are roaring buy-and-sell orders over a cacophony of ringing phones. Five minutes into a typical working day, Godwin is down $90 000

The situation is by no means unique. As economies grow more global, the demand for dollars, marks, francs and yen has turned foreign exchange from a banking backwater into a financial supercasino, where banks and multinational corporations speculate heavily on fluctuating currency rates-and young traders such as Godwin serve as croupiers.

High risk and huge rewards have made "forex" the hottest money game around. Gone are the days when businesses drew only enough foreign cash to cover overseas office expenses or the price of imported goods. Now, American pension funds buy stocks on the Paris Bourse, and Japanese snap up U.S. Treasury bills. All told, some $300 billion changes hands daily on foreign-currency exchanges, an amount that dwarfs the $21 billion traded on the New York Stock Exchange in the stock-market crash last October 19 and is 21/2 times the current U.S. trade deficit. London accounts for one third of the total, New York for some $50 billion, or double the 1983 volume. Tokyo, whose foreign-exchange market was a scant $2 billion a decade ago, today matches Manhattan's.

Inside the dealing rooms, the pace is always frenetic. "It never stops," says 28-year-old Fred Scala, senior foreignexchange dealer at Manufacturers Hanover in New I call Tokyo at night and London in the morning." Saturday afternoons, traders ring up Bahrain, the only market open.

Manna from heaven. For commercial banks burdened by Third World debt, the forex boom has been a profit-making godsend. Last year's foreign-exchange earnings at eight of the largest U.S. banks topped $2 billion, up 50 percent from 1986. Giant multinationals, mom and pop exporters and rust-belt manufacturers have benefited, too, hedging against dollar losses by putting part of their holdings into stronger currencies.

But if fluctuating rates have proved a boon for traders, they have unsettled international commerce and the governments that oversee it. The seven leading industrialized nations have vowed to stabilize the dollar near current levels, reiterating the pledge just last week at the International Monetary Fund meeting in West Berlin. They have put money, lots of it, where their mouths are. As the greenback swooned in 1987, central banks shored up rates by purchasing $140 billion worth. This year, fearing that an unexpectedly stronger dollar would undo hard-won improvements in the U.S. trade deficit, bankers have sold billions more.

While central-bank interventions have helped dampen the wild swings in rates, young-Turk traders at a handful of top banks are still capable of moving the markets. As on Wall Street, emotion often drives deals, and split-second decisions to buy or sell can be based on anything from a blizzard of official economic, labor and industry statistics to news of unrest in some faraway land or even plain old rumor.

Timing is crucial as Godwin, a phone to each ear, tries to cull the best prices from a storm of dollar/Swiss franc deals. At $20 million a throw, a one tenth of a percent slip in value can mean thousands in gains or losses. In some trading rooms, tension grows so acute that the banks must stockpile extra phones to replace those smashed by irate traders. On this particular morning, though, Godwin is smiling; acting quickly on news of an intervention, he is now within $10,000 of breaking even. "This is more exciting than a day at the races "he declares.

Big money-center banks account for almost three quarters of today's currency speculation worldwide, and a top trader like Godwin might handle up to 400 deals a day. Since as much as $7 billion can flow through a trading room daily, even tiny profit margins, say $1,000 on the typical $5 million trade, can add up to annual earnings of $3 million to $5 million per trader, Last year, Chemical Bank booked $152.8 million, while Citibank, the largest forex player with over 100 dealing rooms worldwide, made $453 million.

Bottom lines have fattened, thanks in part to sophisticated financial instruments such as currency options and futures that allow traders to take longerterm positions or to make wagers considered too chancy in the past. "There are countless ways to make money in foreign exchange today," says David Puth, head of foreign exchange for Chemical Bank in New York. One-billion-dollar positions are not unusual for Goldman, Sachs, the biggest participant in the options market. Even the Soviet and Hungarian central banks have begun using more-complex currency transactions such as futures trading.

Nor has the allure been lost on U.S. companies. Instead of merely buying or selling a currency to cover future transactions and protect reserves, firms now use foreign exchange to generate revenue. Eastman Kodak, whose in-house forex staff rivals that of many banks, has established currency trading as a separate operation, distinct from the management of its foreign operations' cash flows. "If a company can capture moves of 40-50 percent in a currency, it can make a major contribution to its bottom line," explains Craig Shular, a foreignexchange manager at Union Carbide.

Buyer beware. Such high returns do not come free of risk, however. One West German foreign-exchange broker masterminded a currency swindle that cost Volkswagen AG $280 million in 1987. Dai-ichi Kangyo Bank's Singapore branch lost tens of millions of dollars in unauthorized speculation because an inexperienced dealer refused to change his position when the markets turned against him. Even for the major players, forex income is unpredictable. Star trader Andrew Krieger earned Bankers Trust $300 million in 1987 by trading currency options before walking out last February because he was reportedly unhappy about his $ 3 million bonus. In the first quarter of 1988, Bankers Trust lost $19.4 million, only to recoup the next quarter with a $73.7 million forex gain.

A flurry of orders puts Godwin at break even by noon. At 31, the British-born trader has spent more than one third of his life in dealing rooms. At the top of his profession, his strategy has remained the same since going to work straight out of high school: 10 percent analysis, 90 percent instinct "You have to be a bloody good gambler," he explains.

The constant stress takes a toll on dealers, who tend to leave the business at an early age. "Traders realize they'll be washed up at 35, and they don't care," says James Hohorst, a managing director at Manufacturers Hanover.

The rewards are ample for those who survive the nerve-frazzling work. Salaries of around $200,000 are taken for granted, and some players make $1 million. "Currency traders are one of the highest-priced commodities in finance today," says Lee Pomeroy of Egon Zehnder, an executive-recruitment firm. "The crash never ruffled these guys."

Culture clash is also inevitable for those who stay. For years, currency trading was one of the few careers open to anyone who could master the markets, regardless of background or education. But climbing salaries and high-tech trading tactics are ushering in a new breed of computer-toting businessschool graduates who deal as much on analysis as instinct. Veteran traders are skeptical of the trend, countering that nothing can substitute for market feel. "There is almost an adverse correlation between education and trading success," says Mike Snow, head of Union Bank's treasury department and Godwin's boss. "It's certainly not an IQ game."

After a decade of straight growth, in which volumes and profits have increased geometrically, the industry's high times could be drawing to an end. Scores of smaller and less experienced trading operations are swarming to the action, threatening to narrow profit margins all around. What's more, the currency volatility that traders need to make money is threatened by policymakers and the central banks, determined to hold exchange rates steady. "If the world economy started to run very smoothly," warns Hohorst of Manufacturers Hanover, "things would get dull again." For now, however, traders like David Godwin are undeterred.