A while ago, we created a presentation on some of the greatest trades of all time. It featured men who had achieved billions of dollars through their financial aptitude, brilliant investment strategies, and some luck.
John Paulson’s subprime trade, for example, qualifies big time. His Sino Forest trade, on the other hand, not so much. But for all the negative press Paulson’s Sino Forest trade has gotten, he actually only lost $107 million.
That’s nothing compared to the losses these 12 traders saw. This is a story of epic failure.
In 1994, Robert Citron was Treasurer-Tax Collector and the only Democrat to hold office in Orange County, California. Through a series of highly-levered deals that included repo agreements and floating rate notes, Citron was able to at one point achieve leverage of 292%. The funds he managed were worth around $8 billion and if interest rates went up, he stood to lose big time due to his collateral which consisted almost primarily of US Treasury bonds.
Well guess what? Interest rates rose and as a result, Orange County lost a boatload of money. From Wikipedia:
'The county's finances were not suspect until February 1994. The Federal Reserve Bank began to raise US interest rates, causing many securities in Orange County's investment pools to fall in value. As a result, dealers were requesting extra margin payments from Orange County. These extra margin payments were funded in part by another bond issue made by Orange County; the size of that bond issue was $600 million. However, this fix proved to be only temporary. In December 1994, Credit Suisse First Boston (CSFB) realised what was going on and blocked the 'rolling over' of $1.25 billion in repos ('rollover' essentially means issuing of another repo when the previous one ends, but, at the new prevailing interest rate).
At that point Orange County was left with no recourse other than to file for bankruptcy.'
Kerviel made headlines last year as the trader at 'a french bank,' which ended up being Societe Generale, He lost approximately $6.5 billion just like Leeson and others in this list through arbitrage of equity derivatives. unauthorised trades totaled as high as $66.7 billion. Kerviel was ultimately charged with creating fraudulent documents and making attacks on an automated system.
Leeson is most likely the most popular guy on the list. He started his career trading derivatives at Barings Bank and was eventually moved to Singapore where he enjoyed a lavish lifestyle and made plenty of money. That is, because he hid mounting losses in a special account known as the 'five eights' account. He was eventually caught and sentenced to five years in a Singaporean prison where he acquired cancer and his wife left him.
Consider this: when was the last time Chrysler made a car you would actually buy? I'm dead serious. Who buys a new Chrysler, excluding the Jeep brand? Treasury Secretary Tim Geithner must not have thought of this when he wrote Chrysler a check for $6.6 billion to keep the company afloat via a new company.
This isn't the first time Chrysler has needed help. In 1979, then-President Jimmy Carter approved a $1.5 billion loan package for the automaker called the Chrysler Corporation Loan Guarantee.
Since 2009, Chrysler has yet to fully recover and continues to be a money-losing business. Kyle Bass once said that this country needs to consolidate its auto industry. There is no longer room for three major players and perhaps, not even two. Ford will stick around, but it remains to be seen if Chrysler and GM can survive despite their divine intervention.
Rusnak was a currency trader at Allfirst Bank who placed bets he couldn't handle. He was sentenced to 7.5 years in prison for bank fraud and lost Allfirst a total of $691 million. As a result, Allfirst was sold by parent company AIB Group to M&T Bank. Over 1000 employees lost their jobs as a result of the case.
After GE purchased investment firm Kidder Peabody, it ended up finding out the company was more trouble than it was worth. Joe Jett, an MIT and Harvard Business School graduate, worked for Kidder in its fixed income department. He exploited a weak computer system to emulate trades to appear as if he was making sums of money. He appeared to have made $264 million when in reality, he had $75 million in losses that he covered up.
After becoming a rising star in the company, he was fired for reportedly causing over $250 million in losses according to then-GE CEO Jack Welch. As a result, the SEC charged him with record-keeping violations and ordered him to forfeit $8.2 million in bonus pay in addition to a $200,000 fine.
This story is one that's appeared in many a book about finance. It goes something like this:
Back in 1998, John Meriwether's hedge fund, Long-Term Capital Management, had levered up 100:1 on Russian bonds. Russia defaulted and as a result, the fund lost $4.8 billion in a matter of months. A consortium of Wall Street banks was brought together by the New York Fed in order to bail out the hedge fund and save the economy. Firms like Goldman Sachs and Credit Suisse were all forced to post hundreds of millions of dollars to keep the firm afloat. Over $1.9 billion in principal was completely wiped out, making Meriwether the laughing stock of The Street.
This Japanese copper trader used to be employed by the Sumitomo Corporation, which was one of the larger trading firms in Japan. Back in 1996, Mr. Hamanaka attempted to corner the copper market and was unsuccessful. At stake? $1.8 billion in authorised trading with losses as high as $2.6 billion. He was sentenced to eight years in prison and was released in 2005.
The downfall of Enron will forever be known as one of the greatest crimes (and tricks) in modern finance. As Enron's Chief Financial Officer, Fastow was responsible for unloading balance sheet debt into special investment vehicles, including the famous JLM and Raptor vehicles. He also set up off shore entities, directed traders on how they should make money, and lied to investors all in the name of Enron.
When the government went after Enron, he was able to cop a plea agreement that required him to serve a maximum 10-year prison sentence and forfeit $23.8 million in assets. He got six years and is awaiting release in 2011. His losses? Billions of dollars, wiping out shareholders completely, and costing thousands their jobs.
Young was a fund manager at Deutsche Morgan Grenfell (DMG) and had access to quite a bit of capital. He was known for making big, speculative bets in European markets. He set up shell companies so that he could circumvent financial regulation and place big bets on specific companies. After these bets, regulators came looking for answers and trading was shut down temporarily. Parent company Deutsche Bank was forced to offer DMG a $300 million cash infusion, only to have $400 million withdrawn from its funds in the ensuing weeks.
DMG was forced to pay a $1 million fine and investors profits were cut short after the bank announced to 80,000 investors that money was lost due to trading irregularities. Together, the three European funds Young managed were worth a combined $2.5 billion.
You know the story by now, so let's review:
- Former head of NASDAQ starts up Madoff Securities in mid-1980s.
- For years showed investors great returns, told them to keep their money in the fund.
- Turned out he didn't have anywhere near as much money in the fund as he claimed he did, bilked investors out of billions when it was discovered he was running a Ponzi scheme.
- Goes to jail for the rest of his life, assets and cash divested to claimants in case.
- New York Post has a field day with its headlines.
Lee, a natural gas trader for Bank of Montreal, ended up losing his bank $237 million due to his trading in natgas derivatives. He originally lost up to $853 million using a scheme to disguise his losses - a recurring theme in our presentation.
According to Reuters, it went down like this:
'Lee overvalued the positions on BMO's books by regularly recording inflated values that were then purportedly validated by Optionable Inc,' the SEC suit said.
It said the three Optionable traders 'schemed with Lee to have Optionable simply rubber-stamp whatever inflated values Lee recorded.'
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