Rogue trading makes headlines. In late 2011 an unauthorized trader lost $2 billion for the Swiss-based bank, USB. The idea of a single person losing millions and occasionally billions of dollars is always interesting, but it is even more so when that person is losing other people's money.
In this article we will look at six of the rogue traders (in no particular order) who became famous for their very public losses.
Nick and the Nikkei - $1.3 Billion
Nick Leeson is probably the most famous rogue trader in the world. He even wrote a book on the subject, which was aptly titled "Rogue Trader" (1996). In 1992, he was the stereotypical rising star and his magic touch allowed him to become the head of Barings operations on the Singapore International Monetary Exchange - all at the tender age of 28.
But, he soon lost his trading touch and started to rack up a number of large losses. He used his position as both the head trader and the one responsible for settling trades in the office to hide his losses in a secret account, which was numbered 88888.
At the beginning of 1995, his trading losses were already significant when he had the enormous misfortune of placing a short straddle on the Nikkei, which was a bet that the market wouldn't make a large move overnight. However, the next day there was an earthquake in Kobe, which sent the Nikkei lower and led to a massive loss In an attempt to recoup these losses, Leeson made large risky bets that the Nikkei would recover quickly form the quake, which it didn't, leading to further losses. (For related reading, see Are Derivatives Financial "Weapons Of Mass Destruction"? and Hedge Fund Failures Illuminate Leverage Pitfalls.)
In the end, Leeson lost an estimated $1.3billion for the bank, which resulted in the bankruptcy of Barings, a bank that had survived for more than two centuries in the industry. Leeson received a six-and-a-half year sentence but was released early for good behavior after being diagnosed with cancer.
John Rusnak and the Yen - $691 Million
John Rusnak of Allfirst Financial found failure in the Japanese yen. Initially, from when he was hired in 1993 and up until 1995, when the Asian markets were doing well, so did Rusnak. But, Rusnak started gambling and losing progressively larger amounts as the previously friendly markets turned against him in 1996. By 1997, Rusnak had lost $29.1 million. By 2001, he had lost $300 million. And, in a stroke of incredibly bad luck, he sold over $300,000 in options which brought his total losses to $691 million.
Like Leeson, it was Rusnak's ability to work the regulatory system to conceal his losses that allowed him to do much more damage than should have been possible. In the end, Rusnak received a jail sentence of seven-and-a-half years and is on the hook for paying back the $691 million.
Mr. Copper - $2.5 Billion
Yasuo Hamanaka, better known as Mr. Copper, was a trader for Sumitomo Corporation. Hamanaka specialized in, of course, copper. He is said to have controlled 5% of the world copper market, but failed in an attempt to corner the market. In 1996, Sumitomo Corp. disclosed $2.6 billion loss on copper trades.
The range of his activities and the time period in which they occurred (a full decade ending with a 1996 conviction and eight-year prison sentence) have raised questions about whether he was a rogue trader or simply a member of a price-fixing conspiracy. His conviction centered on his having forged his supervisor's signature in a letter, but the extent to which he went rogue is still in question.
Liu Qibing - $200 Million - $1 Billion (unconfirmed)
An even more mysterious 2005 copper caper occurred when Liu Qibing, a man who may or may not have been a metals trader for the Chinese government, took a huge bet (around 200,000 tons) that copper prices were going to fall. However, copper prices rose substantially over the life of the trade as global demand for copper increased, which led to massive losses on the trade.
As the paper trail led back to the Chinese State Reserve Bureau, other traders realized China would have to fill the amount shorted. This drove copper prices up. The Chinese government tried to depress prices by claiming copper reserves five-times larger than previously estimated and, in a bizarre twist, denied that a Liu Qibing had even existed to place a short. The extent of the losses are up for debate, as are the current whereabouts of the ephemeral Liu Qibing.
Brian Hunter and Amaranth - $6.5 Billion
Hedge fund traders get an easy ride when it comes to rogue trading because they are expected to take big risks, but Brian Hunter of Amaranth should be considered a textbook case.
His gambles in natural gas futures were initially successful, particularly so when Hurricane Katrina wreaked havoc on the infrastructure and pushed prices up while Hunter happened to hold a long position. The huge profits attracted more and more investors to Amaranth, providing Hunter with more capital to gamble with.
Sadly, Hunter's ability to predict the weather turned out to be no more consistent than the TV forecasters' and the natural gas futures turned on him. In one day, on September 14, 2006, Hunter and his colleagues lost $560 million alone. In total, he ended up losing around $6.5 billion, which led to closure of Amaranth. (For more on this, read Losing The Amaranth Gamble.)
Jerome Kerviel - $7.1 Billion
Surpassing even Hunter's losses, Jerome Kerviel has set the bar improbably high for future rogue traders. His losses from speculation in European futures cost his employer, Société Générale, more than $7 billion.
As with Leeson and Rusnak, Kerviel was able to manipulate the system using knowledge he gained while working in the office that monitored traders prior to being promoted to a trading position. He made no personal profit from his rogue trading. The 2007 mortgage meltdown probably hastened his fall from grace, but the highly leveraged and unapproved trades were bound to have disastrous consequences.
This is a far from complete list. It's missing Robert Criton, the scourge of OrangeCounty, Peter Young and his propensity to wear women's clothes at trials, and many other equally compelling tales. At the heart of all of these, however, is the old tale of hubris. When a trader begins to feel that he or she has a special gift for sniffing out money-making positions, it can be a dangerous situation. Unfortunately, luck is a fickle friend. When these formerly magical traders start losing, they often look for ways to magnifying their bets and win back their losses.
Aside from the financial damages that rogue traders inflict upon the market, they do serve one very important function; they remind us that seeking exceptional returns means taking on equally exceptional risk. There is no magic trick that can change this fact, so an investor has to know how much risk he or she can safely handle as well as when to quit.