Stories of major market failures

Who is to blame and what to do? These eternal questions come to the fore when the focus is on the history of major stock market failures. The article will focus on those whose names the whole world knows, films have been made about them and, of course, every trader in the financial markets should know such high-profile stories.

And they are lucky, hard workers or losers – let everyone draw a conclusion for himself based on the results of reading the material. Everyone is equal before the market. No one is immune from losses, even professionals can make mistakes, only the price of their mistake can be much higher. Find out the main thing and do not allow this on your account.

People who lost their fortune on the stock exchange

It would seem that if a trader loses to the market, only a large loss of money should be expected, how could it be otherwise? It turns out yes. History knows many cases – from the physical possession of assets (as was the case with the Hunt brothers in the early 70s), which led to the collapse of the entire market, to the bankruptcy of banks due to the excessive confidence of one person. It’s worth starting the top market “failures” with him. So, ladies and gentlemen, get acquainted.

Barrings bank trader Nick Leeson

The name of Nick Leeson at the end of the 20th century thundered almost all over the world. Then he was a senior trader in the Singapore branch of the oldest English bank “Barings” (“Barings”). And when it comes to the “oldest” bank, this is not an exaggeration. “Barings” had more than 230 years of history, since it was established in 1762, even Queen Elizabeth kept her assets here.

And Leeson was not just a trader – he was the best, one of the most successful. Only in the first year of operation, his transactions amounted to 10% of all profits, and Leeson did not plan to stop, by the third year of operation, increasing the figure to 30%. Of course, this could not pass by the management, which decided to allow the young specialist to conclude any trade transactions on behalf of the bank. In fact, this decision put at the disposal of Leeson all the financial resources of the bank, which was the beginning of the end.

So what was Leeson trading? His profile was derivatives on the Japanese index NIKKEY 225. He was confident in himself and his abilities, but this is what played a cruel joke on him. In January 1995, Leeson decided to sell a futures straddle, effectively betting that the contract would only trade within a narrow price range overnight.

Perhaps everything would be in order, but in the morning, at 5 o’clock, a strong earthquake hit Japan, which was estimated at 7.2 points. As a result, the Japanese market collapsed, followed by the collapse of Leeson’s position. He could have closed the position and minimized his losses, but instead he bought over 20,000 futures contracts, hoping to have a significant impact on the market. The price continued to fall. Eventually Leeson’s position was closed, reaching a loss that was twice the bank’s assets.

History result? Barrings suffers a $1.4 billion loss before being sold to Dutch conglomerate ING for £1. And Leeson himself went to prison, from where he was released three years later because of cancer discovered in him. In 2011, a book was published – Nick Leeson “How I Bankrupt Barings”. And based on his story, a film was made in 1999.

You can watch it to better understand the market and avoid fatal mistakes. Here is the link:

Kweku Adoboli and the Lost Two Billion

The name of Nick Leeson at the end of the 20th century thundered almost all over the world. Then he was a senior trader in the Singapore branch of the oldest English bank “Barings” (“Barings”). And when it comes to the “oldest” bank, this is not an exaggeration. “Barings” had more than 230 years of history, since it was established in 1762, even Queen Elizabeth kept her assets here.

Adoboli worked very hard, and all his efforts were appreciated – he became a member of the “Musketeers-traders”, a team dealing with transactions both for clients’ funds and for the bank’s funds. At the same time, the department was given a key role in the financial future of the bank – after the crisis that erupted in 2008, UBS was faced with the task of earning $ 900 million a year, most of which, according to the plan, was to come from the Adoboli department, which eventually grew to the head of the team.

Due to the increased responsibility, Kweku slept for a maximum of three hours a day, which led to burnout and work on “automatic pilot” – which, according to him, had dire consequences, but in reality the situation turned out to be even worse. All this time, Kweku was cheating on the bank. The fact is that Adoboli used the funds provided to him to conclude unauthorized transactions, and then entered falsified information into the system to hide the risks. For example, the bank itself might have believed that in the event of an unsuccessfully closed transaction, all losses would be stopped by hedging, but in fact such “insurance” was only an illusion created by Adoboli.

The technique chosen by Kweku brought really huge profits, but only until the risks were realized. Over time, she failed, control over losses was lost, which forced the financier to double the stakes in an attempt to recoup – the problems started in 2011. At that time, Kweku made many mistakes – when the market grew, he opened “shorts”, when the market fell – “longs”. By August, the loss had grown to $2.3 billion, and it became impossible to hide it – the bank decided to launch an internal investigation, and Adoboli had no chance to escape.

If you want to delve into the story and watch the video, the link is here:

John Rusnak and a big loss for the bank in Forex

And finally, let’s talk about the “worst trader” of the currency markets – this is how John Rusnak is known in the media. In 1993, he became a trader for Allfirst Bank when the bank was expanding its workforce. Before that, Rusnak built his work on the basis of his own arbitrage scheme – he profited from the difference in prices between currency options and forwards. It seemed to the bank that the risks were minimal – that’s why he became interested in trading, allowing John to trade on his own behalf, but assigned managers unfamiliar with the financial markets to control him. This was the beginning of a whole history of failures.

After being hired, Rusnak decides to change the strategy, but does not notify the bank about it, and simply switches to directional trading. But as a trader, he was useless, because he was not able to correctly predict possible fluctuations in the value of currencies – this naturally led to an increase in losses. Indeed, thanks to the bank’s money, he made transactions that were really large, with corresponding risks.

Over the years, he continued to build up losses and hide his results through false reporting, while constantly demanding that the bank increase available funds. But a series of bad trades and subsequent attempts to bounce back eventually aroused suspicion – management was worried about the excessive volatility of the bank’s overall balance sheet due to foreign exchange transactions. After the demand to close all positions and confirm reporting, Rusnak simply stopped going to work, which caused even more suspicion. Eventually the bank determined that it had lost over $690 million and Rusnak was arrested.

These stories are a clear indication of how important it is in the markets to choose the right strategy, control risks and, most importantly, monitor your emotions and not let greed take over.

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