The Real Biggest Losers
A story that captured my attention recently led me to explore a fascinating subject: what is the largest loss of money generated by one person acting alone. The story that stimulated this topic was that a civilian, Casey James Fury, age 25, in May 23, 2012, while working on the USS Miami, a nuclear submarine in repair dry dock in Portland, Maine, set fire to the ship resulting in a staggering $450,000,000 loss to Uncle Sam! When asked why he set the fire, he said he wanted to go home early that eventful day.
I searched Google looking for stories that revealed other cases of gigantic losses generated by one person acting alone. I found four tales that qualified, actually more than qualified, running from a factor of ten times Fury’s $450 million atomic marshmallow roast to fifteen times, and one, yea! twenty times greater! We are talking here about four Perfect Storms, all financial mega explosions, starting in 1998 and climaxing in 2007.
A Perfect Storm occurs in nature when two powerful storm systems collide over a dangerous surface such as an ocean, drawing up enormous amounts of water to flood coastal and inland communities for hundreds of miles. This is what happened in SuperStorm Sandy two winters ago, laying waste to the East Coast of the U.S.
In each of the four financial perfect storms examined here, we find two dangerous elements coming together over a very treacherous floor, resulting in billions upon billions of dollars being blown away. The two dangerous forces present were (1) overly aggressive human beings interacting with (2 ) excessively trusting and blatantly negligent employers – all whom had huge bankrolls. These money destroying storms took place on the many commodity trading floors of the world, where money is treated like Green Stamps.
In the first storm catalyst we find an aggressive human being exhibiting an ego-centric personality, needing to be the “smartest guy in the room” and wanting everyone to know it. Personal greed was there but it took a secondary position to ego glorification. The precipitant for the looming disaster is that these four men, reluctant to accept their early losses, maneuvered on in panic mode to employ ill-fated doubling-down schemes to avoid their losses, only to see the losses to grow exponentially. (If you, dear reader, have ever had a go in trading stocks, you know exactly how this works: you buy more of a losing position, averaging your price down in hopes of a bounce to get you back to even. This is the play of a loser.)
The cast of the second perfect storm catalyst was a large bank and three financial investment firm. These four firms employed four “very bright” guys as characterized above for the purpose of hedging their company’s large portfolios, consisting of either commodities (oil, copper, grains, etc.) or financial assets such as interest rates futures, collateralized mortgages, bonds of foreign governments, and many other esoteric pieces of paper.
Hedging is a widely used conservative management tactic designed to protect against losses that can occur due to volatile market prices. Hedging enters the danger zone when the management of this task is carelessly bestowed upon an aggressive grandiose human being who sees his role as the company’s hedger – not to safeguard his employer’s money – but to manipulate his employer’s money to make the proverbial killing! Oh, how they succeeded!
The storm surface is the various commodity exchanges which offer unlimited possibilities for hitting these glorifying jackpots by permitting excessive leveraging, requiring only a fraction of the money involved to be deposited. This available leveraging worked to excite these four biggest losers to increase their bets to astronomical and highly dangerous levels. The unsupervised trader, our hero, had better be right or all Hell will break loose!
And all Hell did break loose for these four men and their employers listed here:
In 1998 John Meriwether of Long-Term Capital, a U.S. Investment Co., lost $4.6 billion on bad bets on Russian bonds. Ouch! Nyet! Long-Term Capital was wiped out.
Brian Hunter, a trader for the U.S. hedge fund Amaranth made some bets on natural gas futures in 2006 and was unsuccessful to the symphony (no tune this one!) of a juicy $6.6 billion. You might say he took the gas! So did his employer Amaranth!
Not to be outdone, in 2008, Jerome Kerviel, described as a “rogue” trader, working for the giant French bank SocGen, arbitraged (bet) equity derivatives and passed GO without $7.2 billion!
The highest dishonorable mention goes to Howie Huber, the mortgage trader for the Wall Street Investment firm of Morgan Stanley, who, in 2007, rung up a $9 billion dollar “setback” for his firm!
Morals of this story: do not to hire “rogue” traders or egomaniacs; and “He who bets what isn’t his’n, will often go to pris’n.”