Top 10 trading losses & how they happened (and what we can learn from
them) : Time Magazine, May 2012
---------------------------------
10. Metallgesellschaft, $1.3 billion
A German oil refinery and metalworking conglomerate Metallgesellschaft AG gambled hard and fell even harder. In 1993 the company lost $1.3 billion after speculating that oil prices would rise. Oil plummeted, however, forcing shareholders to hastily put together a $2 billion rescue package to keep the company from going under bankruptcy.
9. Orange County, $1.7 Billion
In 1994, the affluent enclave of Orange County, Calif., was forced into bankruptcy thanks to a series of bad bets made by Treasurer Robert Citron, who bet a borrowed $14 billion on interest-sensitive derivatives contracts in an effort to keep up his track record of remarkably high returns.
When federal interest rates increased, though, the plan collapsed, and bond dealers, as Businessweek put it, began panicking prompting a massive selloff of Orange County bonds.
8. UBS, $2 Billion
Switzerlands biggest bank tumbled in September 2011 after losing at least $2 billion in unauthorized trades allegedly made by Kweku Adoboli, a London-based trader who worked for the investment banks European equities division. UBS later admitted to ignoring a warning issued by its computer system to alert managers of the 31-year-old Adobolis trades.
Adoboli has been charged with multiple accounts of fraud and false accounting, to which he pled not guilty. He is being held without bail and the trial is slated for September 2012 after two delay requests and a change of legal representation by Adoboli.
7. JPMorgan Chase, $2 Billion
JPMorgan CEO Jamie Dimon announced, that the bank had somehow lost $2 billion in just six weeks as a result of disastrous trades by its risk-management division. Dimon chalked the monster loss up to errors, sloppiness and bad judgment, and the company traced the trail back to the Chief Investment Office in London, which manages the risk JPMorgan takes with its own money. No single person was responsible for the trading blunders, bank executives told Bloomberg, though a trader in that office known as the London Whale and Voldemort was under scrutiny for moving derivatives worth around $10 trillion.
6. Aracruz, $2.5 Billion
The worlds biggest eucalyptus-pulp maker found itself cleaning up a sticky mess after busted foreign exchange trades in late 2008 led to a loss of $2.5 billion. The trouble began when Aracruz bet big on another boom year for their currency, the Brazilian real. It was a fair hedge after all, the currency had beat the U.S. dollar each of the previous four years. So the company loaded their money into foreign exchange options just as the real started to slump. And slump some more. In eight weeks, Brazils currency lost 24% of its value, Bloomberg noted. And Aracruz lost a huge fortune.
5. Sumitomo Corp, $3.5 Billion
Perhaps its appropriate that the reputation of Japanese financial giant Sumitomo Corporation would be tarnished by a metal trade gone wrong. In 1995, it emerged that the companys top copper trader, Yasuo Hamanaka, had been covering up losses on his balance sheets totaling some $2.6 billion.
Hamanaka, known as Mr. Five Percent for his control over a vast portion of the worlds copper, had been hiding his losses and forging his bosses signatures on unauthorized trades for a whole decade of secret swindling. While investigators have questioned whether one man alone could have sustained such a coverup for such a length of time, the former copper connoisseur said he acted alone, admitted to charges of forgery and fraud in court and was sentenced to eight years imprisonment.
4. Long-Term Capital Management, $4.6 Billion
As one of the first big hedge-fund disasters, the failure of Long-Term Capital Management brought unprecedented attention to a previously secretive and little-understood corner of the financial industry. The Greenwich, Conn., based firm was founded in 1994 by John Meriwether and met with great success, averaging 40% gains over its first few years. However its main fund, Long-Term Capital Portfolio L.P., cratered following the Russian financial crisis of 1998 losing LTCM some $4.6 billion in just four months. As investors fled and the companys debts mounted, other financial institutions offered to bail out the firm under the supervision of the Federal Reserve, for fear that its total collapse would lead to catastrophic losses throughout the financial markets. The fund was liquidated in early 2000.
3. Amaranth Advisors, $6.5 Billion
Amaranth Advisors claimed to employ a multi-strategy approach to investing that allows nimble portfolio managers to seize opportunities in whatever markets seem to be most promising at the time, according to a 2006 New York Times article. However, the hedge funds downfall was largely due to huge losses in a single sector: natural gas. After making $1 billion in 2005 on rising energy prices and owning up to $9 billion in assets under management, the company completely collapsed in 2006 after losing more than $6 billion on natural gas futures, making it the third largest trade loss ever.
2. Socit Gnrale, $7.2 Billion
In January 2008, Jerome Kerviel, then a 31-year-old trader at Socit Gnrale, was accused by the bank of fraudulent trading that cost the bank an astonishing $7.2 billion the largest trading loss in history at the time.
His employers insisted that the eye-watering loss, prompted by a plunge in European equity markets, was a result of the Paris-born Kerviels strategy of balancing each real trade he made with a fake one, using intimate knowledge of the banks systems to avoid detection.
However, due to lack of evidence, in the end he was charged not with fraud but with breach of trust and illegally accessing computers, for which he served three years in prison.
1. Morgan Stanley, $9 Billion
As explored in Andrew Ross Sorkin's Too Big to Fail, Morgan Stanley received a $9 billion investment from Mitsubishi UFJ in 2008 that kept the firm afloat More than any single trader has ever lost in the history of Wall Street, said Michael Lewis, author of The Big Short, And no one knows his name. While you may not have heard of Howard Howie Hubler before the financial crisis, it was impossible to avoid his name after he came to embody the financial misdeeds that led to the massive economic crisis of 2008.
Hubler, who is blamed for the catastrophic losses, was a thriving derivatives trader up until his excruciating blunder. From 2004 to 2006, he placed big bets against the U.S. real estate bubble using credit default swaps complex financial instruments that pool and repackage risky sub-prime mortgages to sell on to investors. But the economys decline happened slower than he expected, and Hubler had to cover his costs by delving even deeper into the CDO business. When the real estate market collapsed in 2008he was wiped out nearly taking
What we can learn from them :
------------------------------
1. Don't bet your shirt on a single idea/trade.
2. No matter the level of conviction in a trade or idea, manage risk
or position size.
3. Know level you accept the trade is not working and quit or
reduce position size.
4. Be flexible/adapt. Understand that a strategy that is successful can stop
working. (e.g A long/short strategy that works in an extended
bull/bear will not when market reverses direction)
5. Don't overtrade with leverage.
6. Don't trade more to cover up losses.
7. If loosing money consistently, take a break and a fresh look at the
strategy.
8. Be disciplined. A winning strategy can lead to huge losses in a few wrong
trades if the bet size is increased exponentially.
9. If holding a big position, hedge your bets, or be mentally prepared to quit
at a certain level of loss.
10. Discipline and Risk Management is the key to success and a long trading
life.
them) : Time Magazine, May 2012
---------------------------------
10. Metallgesellschaft, $1.3 billion
A German oil refinery and metalworking conglomerate Metallgesellschaft AG gambled hard and fell even harder. In 1993 the company lost $1.3 billion after speculating that oil prices would rise. Oil plummeted, however, forcing shareholders to hastily put together a $2 billion rescue package to keep the company from going under bankruptcy.
9. Orange County, $1.7 Billion
In 1994, the affluent enclave of Orange County, Calif., was forced into bankruptcy thanks to a series of bad bets made by Treasurer Robert Citron, who bet a borrowed $14 billion on interest-sensitive derivatives contracts in an effort to keep up his track record of remarkably high returns.
When federal interest rates increased, though, the plan collapsed, and bond dealers, as Businessweek put it, began panicking prompting a massive selloff of Orange County bonds.
8. UBS, $2 Billion
Switzerlands biggest bank tumbled in September 2011 after losing at least $2 billion in unauthorized trades allegedly made by Kweku Adoboli, a London-based trader who worked for the investment banks European equities division. UBS later admitted to ignoring a warning issued by its computer system to alert managers of the 31-year-old Adobolis trades.
Adoboli has been charged with multiple accounts of fraud and false accounting, to which he pled not guilty. He is being held without bail and the trial is slated for September 2012 after two delay requests and a change of legal representation by Adoboli.
7. JPMorgan Chase, $2 Billion
JPMorgan CEO Jamie Dimon announced, that the bank had somehow lost $2 billion in just six weeks as a result of disastrous trades by its risk-management division. Dimon chalked the monster loss up to errors, sloppiness and bad judgment, and the company traced the trail back to the Chief Investment Office in London, which manages the risk JPMorgan takes with its own money. No single person was responsible for the trading blunders, bank executives told Bloomberg, though a trader in that office known as the London Whale and Voldemort was under scrutiny for moving derivatives worth around $10 trillion.
6. Aracruz, $2.5 Billion
The worlds biggest eucalyptus-pulp maker found itself cleaning up a sticky mess after busted foreign exchange trades in late 2008 led to a loss of $2.5 billion. The trouble began when Aracruz bet big on another boom year for their currency, the Brazilian real. It was a fair hedge after all, the currency had beat the U.S. dollar each of the previous four years. So the company loaded their money into foreign exchange options just as the real started to slump. And slump some more. In eight weeks, Brazils currency lost 24% of its value, Bloomberg noted. And Aracruz lost a huge fortune.
5. Sumitomo Corp, $3.5 Billion
Perhaps its appropriate that the reputation of Japanese financial giant Sumitomo Corporation would be tarnished by a metal trade gone wrong. In 1995, it emerged that the companys top copper trader, Yasuo Hamanaka, had been covering up losses on his balance sheets totaling some $2.6 billion.
Hamanaka, known as Mr. Five Percent for his control over a vast portion of the worlds copper, had been hiding his losses and forging his bosses signatures on unauthorized trades for a whole decade of secret swindling. While investigators have questioned whether one man alone could have sustained such a coverup for such a length of time, the former copper connoisseur said he acted alone, admitted to charges of forgery and fraud in court and was sentenced to eight years imprisonment.
4. Long-Term Capital Management, $4.6 Billion
As one of the first big hedge-fund disasters, the failure of Long-Term Capital Management brought unprecedented attention to a previously secretive and little-understood corner of the financial industry. The Greenwich, Conn., based firm was founded in 1994 by John Meriwether and met with great success, averaging 40% gains over its first few years. However its main fund, Long-Term Capital Portfolio L.P., cratered following the Russian financial crisis of 1998 losing LTCM some $4.6 billion in just four months. As investors fled and the companys debts mounted, other financial institutions offered to bail out the firm under the supervision of the Federal Reserve, for fear that its total collapse would lead to catastrophic losses throughout the financial markets. The fund was liquidated in early 2000.
3. Amaranth Advisors, $6.5 Billion
Amaranth Advisors claimed to employ a multi-strategy approach to investing that allows nimble portfolio managers to seize opportunities in whatever markets seem to be most promising at the time, according to a 2006 New York Times article. However, the hedge funds downfall was largely due to huge losses in a single sector: natural gas. After making $1 billion in 2005 on rising energy prices and owning up to $9 billion in assets under management, the company completely collapsed in 2006 after losing more than $6 billion on natural gas futures, making it the third largest trade loss ever.
2. Socit Gnrale, $7.2 Billion
In January 2008, Jerome Kerviel, then a 31-year-old trader at Socit Gnrale, was accused by the bank of fraudulent trading that cost the bank an astonishing $7.2 billion the largest trading loss in history at the time.
His employers insisted that the eye-watering loss, prompted by a plunge in European equity markets, was a result of the Paris-born Kerviels strategy of balancing each real trade he made with a fake one, using intimate knowledge of the banks systems to avoid detection.
However, due to lack of evidence, in the end he was charged not with fraud but with breach of trust and illegally accessing computers, for which he served three years in prison.
1. Morgan Stanley, $9 Billion
As explored in Andrew Ross Sorkin's Too Big to Fail, Morgan Stanley received a $9 billion investment from Mitsubishi UFJ in 2008 that kept the firm afloat More than any single trader has ever lost in the history of Wall Street, said Michael Lewis, author of The Big Short, And no one knows his name. While you may not have heard of Howard Howie Hubler before the financial crisis, it was impossible to avoid his name after he came to embody the financial misdeeds that led to the massive economic crisis of 2008.
Hubler, who is blamed for the catastrophic losses, was a thriving derivatives trader up until his excruciating blunder. From 2004 to 2006, he placed big bets against the U.S. real estate bubble using credit default swaps complex financial instruments that pool and repackage risky sub-prime mortgages to sell on to investors. But the economys decline happened slower than he expected, and Hubler had to cover his costs by delving even deeper into the CDO business. When the real estate market collapsed in 2008he was wiped out nearly taking
What we can learn from them :
------------------------------
1. Don't bet your shirt on a single idea/trade.
2. No matter the level of conviction in a trade or idea, manage risk
or position size.
3. Know level you accept the trade is not working and quit or
reduce position size.
4. Be flexible/adapt. Understand that a strategy that is successful can stop
working. (e.g A long/short strategy that works in an extended
bull/bear will not when market reverses direction)
5. Don't overtrade with leverage.
6. Don't trade more to cover up losses.
7. If loosing money consistently, take a break and a fresh look at the
strategy.
8. Be disciplined. A winning strategy can lead to huge losses in a few wrong
trades if the bet size is increased exponentially.
9. If holding a big position, hedge your bets, or be mentally prepared to quit
at a certain level of loss.
10. Discipline and Risk Management is the key to success and a long trading
life.
