A Really Bad Bet

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Rogue traders have inflicted serious pain on banking institutions over the years. Nick Leeson crushed Barings Bank in the 1990s such that it ended up being sold to ING (NYSE: ING) for just one pound. Allied Irish Bank (NYSE: AIB) suffered losses of some $700 million as a result of illegal trades by one of its employees. And earlier this year, Credit Suisse was forced to write down $2.65 billion after a group of rogue traders fudged the pricing on collateralized debt obligations it held.

Now add to this ignominious list the finance department at Brazilian meat packer Sadia (NYSE: SDA), which apparently went all-in betting the dollar would fall against the Brazil real only to get caught when the dollar surged instead. It lost some $416 million -- or more than what it had earned for all of last year -- as Sadia’s financial team exceeded the company’s internal limits for currency risk.

Oh, you though you were investing in a poultry and beef processor? Welcome to the world of high finance, where even basic commodity companies find it necessary to hedge their businesses against not only commodity prices, but currencies as well.

Sadia wasn't alone in betting against the dollar. Brazilian paper and pulp giant Aracruz (NYSE: ARA) followed Sadia to the gallows, reporting undisclosed losses from its hedging activities, and iron ore producer Vale (NYSE: RIO) may have lost as much as $313 million on currency derivatives. Heck, even Warren Buffett has been long for the real. As he disclosed in his annual letter earlier this year, it was Berkshire Hathaway's (NYSE: BRK-A) only direct currency position last year.

So it makes you wonder who else was placing side bets here, and to what extent. Although a number of Brazilian companies rushed out press releases saying they weren't so heavily exposed, investors are still skittish and sent the Bovespa index down 2%.

The country's economy has been red-hot in recent years, and the real's appreciation over the years -- up 44% since the end of 2004 -- has caused exporters like Sadia to lock in exchange rates using futures contracts. Yet it's also been a successful trade for Sadia, until now, as it realized gains of more than 1.15 billion real -- or $600 million -- over the past five years.

The Brazilian meat packer watched as the market ground its stock up as a result of the disclosure, with shares losing nearly a third of their value within 15 minutes of the announcement. Worse, perhaps, is that management's reputation went through the grinder as well. While the CFO responsible was fired, the company had to secure a short-term line of credit to cover the losses, and its credit rating was dropped, with further downgrades still possible.

The good news here, if there's any to be found, is that while the loss puts the company in an extremely bad situation, the business itself still remains healthy. Brazil's chicken exports grew 56% in the first five months of the year, and even Tyson (NYSE: TSN) acquired two poultry producers and partnered with a third in the belief that Brazil will be where the profits are.

Expect Sadia's stock price to remain volatile. If you've been looking for an opportunity to get in on the meat processor, this could be it -- just not yet. Better to miss the bottom than find your shares going through the grinder because other chickens have come home to roost.

Here's some related Foolishness:

• Traders also went rogue recently at MF Global and Societe Generale.
• Some smart Fools had good reason to peg Sadia as the best international stock around.
• Buffett's annual shareholder's letter didn't disappoint.