Through bad character, bad decisions or bad luck, these six traders lost billions!
According to celebrated billionaire investor Warren Buffett, there are only two rules to investing:
Rule No. 1: Never lose money.
Rule No. 2: Never forget Rule No. 1.
Everyone's a loser
Of course, the world's most acclaimed investor -- dubbed the 'Oracle of Omaha' -- sometimes slips up.
Indeed, Buffett's worst investments have cost Berkshire Hathaway shareholders billions of dollars. For example, Buffett's purchase of Dexter Shoes in 1993 ended up losing $3.5 billion over the next eight years.
The simple fact is that all investors and traders -- no matter how rich or experienced -- sometimes screw up. However, in the words of billionaire hedge-fund manager and philanthropist, George Soros (this saying is sometimes attributed to Soros’s protégé, Stanley Druckenmiller),
"It is not whether you’re right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."
Mr Market's biggest victims
Obviously, the biggest losses come when linked to leverage -- using borrowed money or derivatives to magnify your gains (or losses). Indeed, making big, bold bets with borrowed money can come spectacularly unstuck, as these six now-infamous traders found out to their cost.
(Losses are in date order and recorded in US dollars based on exchange rates at the time).
1. Hunting silver (1980; $1 billion)
The past fortnight has seen a surge in news reports regarding the price of silver, which has risen 150% in a year, reaching within a whisker of $50 an ounce.
The last time silver was this expensive was in 1980, when Texan billionaires Nelson Bunker Hunt and William Herbert Hunt tried to corner the market in silver. In the late Seventies, the Hunt brothers bought vast amounts of silver, at one point owning roughly $100 million ounces of the precious metal.
The Hunts' cornering effort saw the price of an ounce of silver soar from $11 in September 1979 to $50 four months later. However, following rule changes to leveraged investments in silver, the price plummeted (see Silver Thursday) and was back below $11 within two months.
As a result, the Hunt brothers lost over $1 billion. Oops.
2. Oranges and lemons (1994; $1.7 billion)
Robert Citron was the long-standing Treasurer of Orange County, California. In an attempt to boost the county's income, and egged on by US investment bank Merrill Lynch, Citron used billions of municipal dollars to take huge, leveraged positions in bonds and floating-rate notes.
Alas, these financial instruments are very sensitive to changes in interest rates. When the US Federal Reserve unexpectedly began raising interest rates from February 1994 onwards, Orange County's losses began to mount up. Eventually, its losses peaked at $1.7 billion.
As a result, Orange Country filed for bankruptcy in December 1994. In 1996, Citron was fined $100,000, but never served any jail time. In a wryly ironic twist, a 'citron' is a lemon-like fruit, making Citron something of a lemon.
3. Busting Barings (1995; $1.4 billion)
In bringing down Britain's oldest merchant bank, Barings Bank, Nick Leeson became the poster boy for rogue trading.
From humble beginnings in Watford, Leeson rose to become a leading derivatives broker for Barings in Singapore, trading equity futures on the Tokyo and Singapore exchanges. Sadly, when Leeson slipped up and made losses, he hid them in a secret account numbered 88888.
Following the Kobe earthquake in January 1995, Leeson's losses grew exponentially, so he fled overseas. Thanks to Leeson's losses of $1.4 billion, once-proud Barings was bought for £1 by Dutch bank ING.
Following a prison sentence and a brush with cancer, Leeson became CEO of Irish football club Galway United.
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4. Shocking SocGen (2008; $7.2 billion)
Jérôme Kerviel will forever be remembered as the man who blew a massive hole in the balance sheet of Société Générale, the highly respected French investment bank.
When Kerviel initially crossed the line from authorised to unauthorised trading, his early success allegedly racked up profits of €1.4 billion. However, Kerviel grew over-confident, eventually building up a colossal €50 billion position in European equity index futures.
When SocGen discovered Kerviel's rogue trading and began unwinding his position, it caused a mini-market crash, generating losses of €4.9 billion for the bank. In October 2010, Kerviel was sentenced to five years in prison, with two years suspended, but is appealing against his conviction.
5. Unnatural gas (2008; $6.5 billion)
Brian Hunter was a highly regarded trader at hedge fund Amaranth Advisors. Having spotted a durable seasonal anomaly in natural-gas prices, Hunter piled up huge profits for his employer and himself.
Alas, Hunter's position became too unwieldy; in some months, he bought the majority of all natural-gas contracts. As a result, he went from trading the market to being the market.
When gas prices plunged, Hunter's losses of $6.5 billion ended his career and finished off Amaranth in September 2007. Ironically, Amaranth is Greek for 'unfading'.
6. Mashing Morgan Stanley (2008; $9 billion)
Howard 'Howie' Hubler and his team at US investment bank Morgan Stanley were big players in the market for credit default swaps (CDS). In effect, these contracts are 'insurance policies' against debt defaults, with modest upsides but potentially huge downsides.
When US house prices began to slide in 2006, Hubler's trading desk continued buying up mortgage-linked CDS contracts. As the values of these home loans began to slump, Morgan Stanley's CDS losses skyrocketed, reaching $9 billion and forcing Hubler to resign.
For further reading about rogue traders and rash gambles, try The Rogue Traders' Gallery.
What has been your all-time worst trade or investment? Please let us know in the comments box below!
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