If you are feeling down about your trading losses, or feeling sorry for Ackman’s current disaster trades long J.C. Penney and short Herbalife, then this article may put both of these losses into perspective. These losses show how crucial it is to have a price level that will indicate that you were wrong and will need to stop out at. There is no reason to ever take a huge loss to your trading capital. Position sizing, stop losses, and managing the risk of ruin is the first job of a trader, growing capital comes second.
“Two basic rules: (1) if you don’t bet, you can’t win. (2) If you lose all your chips, you can’t bet.” -Larry Hite
Here are 12 of the biggest trading losses of all time, heed the lessons of these tragedies and realize the traders on the other sides of these trades made a huge amount of money,
#12: German billionaire Adolf Merckle, one of the 100 richest people in the world, killed himself by jumping in front of a train—emotionally “broken” over a bad bet on Volkswagen in 2008.
Merckle’s business interests came out on the wrong side of 2008′s short squeeze of Volkswagen. Rival Porsche silently cornered the market on Volkswagen shares, and when they revealed the extent of their stake, the price of Volkswagen stock shot up to levels that made it briefly the world’s most valuable corporation. Many hedge funds who had bet against Volkswagen shares lost huge amounts of money, while Porsche made billions in profit.
Merckle, whose personal wealth was estimated at more than $9 billion reportedly lost a billion alone on the Volkswagen stock, which shocked his employees. The loss led to margin calls from other creditors and threatened to unravel his entire private business empire. Full Article
#11: Nelson Bunker Hunt and William Herbert Hunt, the sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr., had for some time been attempting to corner the market in silver.
The Hunt brothers had invested heavily in futures contracts through several brokers, including the brokerage firm Bache Halsey Stuart Shields, later Prudential-Bache Securities and Prudential Securities. When the price of silver dropped below their minimum margin requirement, they were issued a margin call for $100 million. The Hunts were unable to meet the margin call, and, with the brothers facing a potential $1.7 billion loss, the ensuing panic was felt in the financial markets in general, as well as commodities and futures. Many government officials feared that if the Hunts were unable to meet their debts, some large Wall Street brokerage firms and banks might collapse.
To save the situation, a consortium of US banks provided a $1.1 billion line of credit to the brothers which allowed them to pay Bache which, in turn, survived the ordeal. The U.S. Securities and Exchange Commission (SEC) later launched an investigation into the Hunt brothers, who had failed to disclose that they in fact held a 6.5% stake in Bache. Full Article
#10: Under the leadership of CEO Heinz Schimmelbusch, German metals and engineering giant Metallgellschaft was on the brink of bankruptcy after losing $1.3 billion on speculative bets. The firm bet on an increase in oil prices in oil futures markets, but oil prices dropped instead. Full Article
#9: Robert Citron lost $1.7 billion for Orange County, California forcing it into Chapter 9 bankruptcy.In 1994, Citron was Treasurer-Tax Collector for Orange County, California. As treasurer, Citron used a series of highly-leveraged deals that included repurchase agreements and floating rate notes. Full Article
#8: Although much success within the financial markets arises from immediate-short term turbulence, and the ability of fund managers to identify informational asymmetries, factors giving rise to the downfall of the fund were established prior to the 1997 East Asian financial crisis. In May and June 1998 returns from the fund were -6.42% and -10.14% respectively, reducing LTCM’s capital by $461 million. This was further aggravated by the exit of Salomon Brothers from the arbitrage business in July 1998. Such losses were accentuated through the Russian financial crises in August and September 1998, when the Russian Government defaulted on their government bonds. Panicked investors sold Japanese and European bonds to buy U.S. treasury bonds. The profits that were supposed to occur as the value of these bonds converged became huge losses as the value of the bonds diverged. By the end of August, the fund had lost $1.85 billion in capital.
As a result of these losses, LTCM had to liquidate a number of its positions at a highly unfavorable moment and suffer further losses. A good illustration of the consequences of these forced liquidations is given by Lowenstein (2000). He reports that LTCM established an arbitrage position in the dual-listed company (or “DLC”) Royal Dutch Shell in the summer of 1997, when Royal Dutch traded at an 8-10% premium relative to Shell. In total $2.3 billion was invested, half of which was “long” in Shell and the other half was “short” in Royal Dutch. LTCM was essentially betting that the share prices of Royal Dutch and Shell would converge. This might have happened in the long run, but due to its losses on other positions, LTCM had to unwind its position in Royal Dutch Shell. Lowenstein reports that the premium of Royal Dutch had increased to about 22%, which implies that LTCM incurred a large loss on this arbitrage strategy. LTCM lost $286 million in equity pairs trading and more than half of this loss is accounted for by the Royal Dutch Shell trade.
The company, which was providing annual returns of almost 40% up to this point, experienced a flight-to-liquidity. In the first three weeks of September, LTCM’s equity tumbled from $2.3 billion at the start of the month to just $400 million by September 25. With liabilities still over $100 billion, this translated to an effective leverage ratio of more than 250-to-1. Full Article
#7: A rogue trader lost UBS $2.3 billion on unauthorized trades in the bank’s London office leading to the resignation of the CEO. September 2011, UBS revealed an unexpected $2.3 billion loss believed to be caused by a lone rogue trader in the bank’s London office. Kweku Adoboli, 31, who worked on UBS’s Delta One desk, was identified as the alleged rogue trader. Full Article
#6: In 2008, a Brazilian pulp maker lost $2.5 billion on currency bets. At the time, Aracruz was the world’s biggest producer of bleached eucalyptus-pulp. In 2008, the firm lost big time on Forex trades when it bet that Brazil’s real would appreciate in an effort to hedge against a weaker dollar. The Brazil’s real ended up tanking. Full Article
#5: In 1996, Sumitomo’s chief trader attempted to corner the copper market and lost $2.6 billion. He went to prison. Yasuo Hamakana, who was once nick-named “Mr. Five Percent” and ”Mr. Copper” because of his aggressive trading style in the copper market, caused Sumitomo to lose $2.6 billion from his unauthorized copper trades on the London Metal Exchange. Full Article
#4: Bank officials claim that throughout 2007, Jerome Kerviel had been trading profitably in anticipation of falling market prices; however, they have accused him of exceeding his authority to engage in unauthorized trades totaling as much as €49.9 billion, a figure far higher than the bank’s total market capitalization. Bank officials claim that Kerviel tried to conceal the activity by creating losing trades intentionally so as to offset his early gains. According to the BBC, Kerviel generated €1.4 billion in hidden profits by the end of 2007. His employers say they uncovered unauthorized trading traced to Kerviel on January 19, 2008. The bank then closed out these positions over three days of trading beginning January 21, 2008, a period in which the market was experiencing a large drop in equity indices, and losses attributed are estimated at €4.9 billion. Full Article
#3: In April 2005, Brian Hunter was, reportedly, offered a $1 million bonus to join SAC Capital Partners. Nicholas Maounis, founder of Amaranth Advisors, refused to let Hunter go. Maounis named Hunter co-head of the firm’s energy desk and gave him control of his own trades. In 2006 his analysis led him to believe that 2006–07 winter’s gas prices will rise relative to the summer and fall – accordingly Hunter went long on the winter delivery contracts, simultaneously shorting the near (summer/fall) contracts. When the market took a sharp turn against this view, the fund was hard pressed for margin money to maintain the positions. Once the margin requirements crossed USD 3 billion, around September 2006, the fund offloaded some of these positions, ultimately selling them entirely to JP Morgan and Citadel for USD 2.5 billion.The fund ultimately took a $6.6-billion loss and had to be dissolved entirely. Full Article
#2: Bruno Michel Iksil, nicknamed the London Whale (for his risky trades) and Voldemort (for his supposed power on Wall Street)is a trader who worked for the London office of JPMorgan Chase who is held responsible for losses up to $9 billion. Reportedly he began working for JPMorgan in 2005 and lives in Paris, commuting to London. It is thought that Iksil, of whom it is said guards his privacy, is married with four children. Full Article
#1: In 2007, Morgan Stanley lost $9 billion on disastrous subprime mortgage bets, and heads were rolling. Hubler, now a former mortgage trader at Morgan Stanley featured in Michael Lewis’ “The Big Short,” lost the bank $9 billion on bets in the subprime housing market. Full Article