In an industry with so many supposed “watch dog” organizations, oversight and risk management protocols, it is hard to believe that a single trader can cost their company billions of dollars. It seems to come in waves, which makes sense, because stricter protocols are enforced after media latches onto a trader nearly (or completely) decimating his company. The early ’90s saw a number of rogue trader incidents. 2008 was another high loss year corresponding to the financial crisis, but that hasn’t curbed the trader losses. After 2011 there continues to be a steady stream of traders who cost their company billions. Here are 10 of the biggest trader losses of all time.
10. Kwedu Adoboli at UBS
The UBS trader lost $2 billion while working for the bank’s Delta division, and was arrested in September 2011. The division traded on behalf of clients and the firm, and trades were supposed to be hedged to minimize risk.
Adoboli made un-hedged bets, hid trades in false accounts and created fictitious counterparties to cover losses. The trader pleaded not guilty to fraud and false accounting charges, saying in court that others in the firm knew what he was doing but failed to do anything about it . Final reports tally the losses at 1.4 billion Pounds, or approximately US$2.2 billion based on the exchange rate at the time of the arrest.
In November 2012 the UBS trader was sentenced to seven years in prison after being found guilty on two counts of fraud.
9. Heinz Schimmelbusch at Metallgesellschaft
In 1993 Heinz Schimmelbush, the then CEO of the German industrial conglomerate Metallgesellschaft, lost approximately 2.63 billion Deutsche Marks on oil futures when a hedging strategy went sour. In today’s dollars and accounting for the exchange rate at the time, the loss equates to about US$2.3 billion.
The losses arose after the company entered into long-term contracts selling fuel at a fixed price. Oil prices fluctuate, though, so the company attempted to hedge this risk in the futures market. As oil prices fell in 1993 the paper losses mounted as the hedging strategy didn’t work. Deutsche Bank, the largest shareholder in the company, forced Schillembusch out of the company and liquidated the positions, realizing the loss.
Schimmelbusch was not the sole party responsible in this case, although was forced to take the blame because he was the CEO and overseeing the operation. He is currently the CEO of Advanced Metallurgical Group, a material science firm [see also Top 21 Trading Rules for Beginners: A Visual Guide].
8. Robert Citron of Orange Country
In 1994 Robert Citron—Democrat and Treasurer—thought we would help the constituents of Orange County, California by partaking in risky investment strategies in the Orange County funds he oversaw. He took highly leveraged positions in repurchase agreements and floating rate notes by offering up treasury notes as collateral. But as interest rates rose the position became unprofitable, to the tune of just under US$2 billion. Orange Country was forced to file for bankruptcy .
In today’s dollars the loss equates to about $US2.38 billion. Citron faced multiple felony charges, and was sentenced to one year of work release (going to prison in evenings after the work day) five years of probation and 1000 hours of community service .
Citron died in 2013 at 87.
7. Isac Zagury at Aracruz
Isac Zagury resigned in November 2008 from Aracruz, a Brazilian pulp maker, following massive losses in the foreign exchange market. Five other board members resigned as this currency play was not an individual decision, and there wasn’t foul play involved.
In total the company lost US$2.13 billion (US$2.43 billion in today’s dollars) by placing massive bets on the strength of the Brazilian real, which had been strong in prior years. The timing couldn’t be worse; from August to October 2008 the Brazilian real fell 24%. The shares of the company were also down more than 60% for the year following the announcement of the loss .
In 2009 the company was merged and renamed Fibria [see also 4 Ways To Exit A Losing Trade].
6.Yasuo Hamanaka at Sumitomo
Frequently squeezing and cornering the copper market backed by loads of cash, Hamanaka—known as “Mr. Copper”—lost Sumitomo US$2.6 billion in 1995. Today, that is roughly US$3.46 billion.
Over a 10-year period the copper company trader routinely tried to hold the price of copper artificially high, thus increasing revenues for the company where he worked.
As global copper supplies increased in 1995 copper lost nearly half its value, and as a result Hamanaka was staring down a huge loss. Forced to liquidate and no longer hide his actions, Hamanaka was sentenced to eight years in jail, but got out a year early .
Upon his release he stated amazement at the rise of copper prices while he was jailed.
5. Bruno Iksil at JPMorgan Chase
On May 10 2012 JPMorgan held an unscheduled conference called where it disclosed that the bank had lost $2 billion in aggressive trading activity. On July 13 the loss was updated to $5.8 billion. One of the traders implicated was Bruno Iksil, although a number of other traders and employees were involved. Based on reports the company was aware of the trades.
The division Iksil worked for was betting the credit market would strengthen by shorting a derivative that measures the difference in interest rates between high quality companies and LIBOR (London Interbank Offered Rate). Concerns over the European financial crisis devastated JPMorgan’s massive position. An internal investigation was conducted involving a large number of firm employees. Millions in pay to three employees—Achilles Macris, Javier Martin-Artajo and Bruno Iskil—was seized by JPM .
A number of hedge funds, including Saba Capital Management and Blue Mountain Capital, were on the other side of the trade, and directly profited from the JPMorgan blunder.
4. John Meriwether at Long-Term Capital Management
LTCM, founded by John Meriwether, suffered a $4.6 billion dollar loss in 1998 (approximately $5.85 billion today)—in just four months—as the Russian financial crisis progressed. The fund was a star in years prior, dishing up 40% gains in years two and three of operation based on arbitrage strategies. Other principles in the firm included Myron Scholes and Robert Merton—winners of the Nobel Prize for their work in pricing derivatives, including the Black-Scholes option pricing model.
With success the firm took larger positions, deviating from just focusing on government bond discrepancies. Leveraged at more than 25 to 1, and betting on merger arbitrage plays and a lack of S&P 500 volatility, when the Asian crisis (1997) and Russian financial crisis hit in 1998 losses mounted quickly.
The Federal Reserve stepped in to avoid further financial panic and help structure a settlement to pay off debts; the fund was dissolved in 2000 [see also The Best Investments of All Time].
3. Brian Hunter at Amaranth Advisors
A single trade idea by the co-head of energy trading at Amaranth Advisors was the firm’s undoing. In 2006 Hunter placed massive positions in the natural gas market believing that winter gas prices in the future would rise relative to summer prices. He bought winter contracts and sold summer contracts; the market did the opposite.
Unable to the hold position, as margin payments grew to more than $3 billion, the firm was forced to liquidate and realize a loss of $6.6 billion and cease operations .
Multiple accusations and suits were brought against Hunter by the Commodity Futures Trading Commission and Federal Energy Regulatory Commission. Ultimately, none of these held up.
2. Jerome Kerviel at Societe Generale
In an interview with Spiegel, Kerviel indicated the firm was aware of his trading activities and that it was encouraged. That was, until he lost $7 billion of Societe Generale’s money.
According the interview Kerviel had amassed big profits for his firm, so he was given more capital to take larger positions; the firm also raised his profit targets by 1,700%. The desk Kerviel traded for was supposed to have a 125 million euro cap on positions, yet Kerviel was taking 30 billion euro positions routinely.
Beginning January 21, 2008, after supposedly being alerted of the rogue trades, Societe Generale closed out Kerviel’s positions resulting in loss of 4.9 billion euros.
Kerviel spent three years in jail for breach of trust and illegally accessing computers, was ordered to pay 4.9 billion euros in restitution to his employer and is banned from working in the securities industry. At an average salary the restitution will take more than 170,000 years to pay, although Societe Generale is not enforcing the repayment .
1. Howie Hubler at Morgan Stanley
It’s 2007 and Howie Hubler is overseeing a trading unit of Morgan Stanley, which loses $9.4 billion. The loss resulted from multiple positions in credit default swaps, over hedging, poor timing and subprime-linked investments. He saw the subprime disaster coming, and positioned himself accordingly, what he didn’t see that is that slightly better mortgages would also fall, which he was using as a hedge. When the whole market collapsed, his bet on slightly better mortgages tanked, and resulted in Morgan Stanley declaring its first quarterly loss in 72-years.
Hubler left Morgan Stanley, with several million in compensation, and was largely unknown to the public until a “60 Minutes” interview with Michael Lewis, author of “The Big Short.”
Hubler now works to help solve issues related to underwater mortgages through a company he launched in 2010.
The Bottom Line
No matter what measures are put in place, certain traders will find ways around those protocols, either by deceit or simply because no one around them cares what they are doing … until the bill comes. When traders make money, the financial industry encourages them to take on more risk to increase profits, yet this is a double-edged sword – like doubling down at the casino after every hand, win or lose. These traders didn’t set out to lose, yet lack of oversight, greed, fear, and a culture of tolerance in some cases all conspired to put these men on the front page as traders who cost their company billions.