Biggest Trading Losses In History - Even Financial Titans Get It Wrong

Picture this - you press the buy button and get yourself loaded up on some juicy-looking asset and half an hour later it starts to fall way below your purchase price.

Seem familiar? Congratulations, you’ve just joined the “I must be the worst trader in history” club!

But don’t fear. It happens to the best of us, and, yes, if you think you’ve taken a few bad haircuts that make a feathered mullet look positively groovy, it’s nothing compared to the losses that some massive trades realised - sometimes through bad luck - and occasionally because of fraud.

So, to make you feel better about your trading, we’re taking a look at some of the biggest financial smackdowns in history, and why they were so bad. Buckle up, it’s about to make you go “ouch”, but at least you’ll probably feel a bit better about your own underwater positions.

‍

Black Scholes creators get rekt

John Meriwether's hedge fund, Long-Term Capital Management (LTCM), had some huge names on their board, including Myron Scholes and Robert C. Merton, two of the three winners of the 1997 Nobel Prize for Economics for their part in developing the Black-Scholes model.

LTCM employed a number of interesting strategies, including convergence trading, where traders find a pair of bonds which generally have a predictable spread between their prices.

Sometimes this spread between the asset prices would widen, and so the strategy was to place a bet that the two prices would eventually converge back to their normal spread and in doing so the fund would pocket a tasty profit.

LTCM used this method to invest in a combination of high-yielding government bonds and low-yielding, short-term securities. This strategy worked fine for a while and made some great profits, but after a while, competing hedge funds started to get in on the action, and this had the effect of squeezing profitable opportunities for the company.

So, the hedge fund did what hedge funds do - they diversified, and their new investment strategy included getting leveraged up 100:1 on Russian bonds. What could possibly go wrong?

Well, obviously nothing - until the Russian government defaulted on its debt. This disrupted the entire market and caused the prices of the assets to diverge rather than converge and directly led to the fund realising massive losses - to the tune of $4.8 billion. Oopsie.

Meriwether might well have found himself in deep trouble, but luckily, being a Wall Street titan, the normal rules don’t often seem to apply. A group of Wall Street banks were strong-armed by the New York Fed to bail out the fund and save the economy. What an incredible turn of events.

Buffett's Blunder: How the world's most famous investor lost billions

Warren Buffett is probably one of the most famous investors in history and a household name across the globe, building one of the largest fortunes ever through his legendary company Berkshire Hathaway.

But despite his almost deified persona in financial circles, Buffett isn’t immune to making some terrible trading losses.

One of his biggest screw-ups came when he invested heavily in ConocoPhillips (COP) between 2006 and 2008. Buffet bought around 84 million shares in COP with an average cost per share of about $80, and things were going well until the 2008 financial crisis led to a significant drop in oil prices.

As a result, ConocoPhillips’ stock price tanked, dropping to around 60% from its peak, and by 2009, Berkshire Hathaway was left with losses of around $3.7 billion.

But this wasn’t all. In 1990, Buffett was embroiled in a serious controversy involving his firm's 12% stake in investment bank Saloman Brothers. This firm was regarded as one of the “fearless foursome” alongside Lehman Brothers, Blythe and Merril Lynch, and its aggressive CEO John Gutfreund was said to have told his employees that “a trader needs to wake up every morning ready to bite the ass of a bear”. This should provide some insight into the culture at Saloman Brothers, which was described in the book Liar's Poker as having a “frat boy culture”.

Things were going well for Saloman until one of the company’s bond traders, Paul Mozer was discovered to have submitted fraudulent bids in U.S. Treasury auctions in the names of customers who hadn’t authorised them.

Before he was found out, this had the effect of increasing Salomon Brothers' market share in Treasury auctions, but afterwards, the Treasury Department stripped the firm of its primary dealer status. But never fear, Buffett came to the rescue and intervened directly with the US Treasury Department to reverse the ban on Saloman Brothers ability to bid in government bond auctions. Nice when you have connections on high. 

Interestingly, Mozer’s supervisor at the time was none other than… John Meriwether.

‍

JP Morgan Chase’s massive trading loss a “tempest in a teapot”

In 2012, investment bank JPMorgan Chase made a $5.8 billion trading loss after complex derivatives trades involving Credit Default Swaps (CDS) executed by the bank's London-based investment office went pear-shaped. 

These were entered apparently as part of the bank's “hedging strategy” with a trader called Bruno Iksil, who had the honorific nickname “the London Whale” accumulating huge CDS positions.

In 2012, Boaz Weinstein, a hedge fund manager, became aware that the CDS market was being affected by these anomalous and aggressive trading activities, which were moving the markets.

Weinstein recommended buying a credit derivative contract called Markit CDX North America Investment Grade Series 9 10-Year Index. Weinstein had noticed this was a cheap way to buy credit protection relative to other more liquid indices, and this was because JPM was shorting the index making these huge CDS trades, essentially betting that the credit markets would eventually strengthen.

JPMorgan's position caused investors who followed Weinstein's tip to initially perform poorly, however, just a few months later JPMorgan suffered huge losses in May due to concerns about the European financial crisis - and boom! Just like that, the house of cards fell down.

Of course, JPM’s chief executive and head Bitcoin basher Jamie Dimon tried to downplay the whole debacle, calling it “a tempest in a teapot” despite sitting on $2B losses that month alone.

JPMorgan Chase ultimately lost around $6.2 Billion in losses, including almost a billion dollars in fines, and the incident led to the resignation of several top executives at the firm. Now that’s a bad trade.

Surprisingly, Dimon is still the CEO, and JPM has been fined many dozens of times for various financial violations since this all happened. It just goes to show that having a great relationship with regulators and donating millions to lawmakers pays off well.

Britain’s Rogue Trader

The British are known for their incredible financial acumen and risk-averse view on life, but in the early 1990’s one British trader by the name of Nick Leeson managed to single-handedly bring down one of the oldest and most prestigious financial institutions in the UK, Barings Bank. 

Leeson was working for the bank’s Singapore office and was a futures trader on the Tokyo Stock Exchange. He began making unauthorized highly speculative trades using the bank's own money and initially made large profits which he hid from the bank by using a secret account known as the "88888" account.

However, as is generally the case, some of his trades started to go south and he tried covering up his losses by making bigger and even riskier bets, using his knowledge of Barings' back-office systems to create false accounts in an attempt to hide his losses.

But it was too late, and soon, Leeson was trapped in a spiral, and rather than come clean, he doubled down and tried (unsuccessfully) to trade his way out of it like a gambler on tick.

Eventually, he was left with losses of over £800 million, an amount that was more than double the bank's available capital and Barings Bank was forced into bankruptcy, ending an almost 250-year legacy literally overnight.

‍

The lesson for all traders everywhere.

If you’re going to play at the big boy's table, it’s absolutely vital that you have a great hedging strategy - and ideally no rogue traders on your books.

It also helps to have friends in high places, mainly by making regular donations to whichever political party you think might wield some power and influence if you’re ever under investigation. This strategy has worked for some of those mentioned in this article, and most of the biggest contributors in the US during the 2022 political cycle happened to be huge funds such as Soros Fund Management, FTX (yes, that FTX), Citadel, and Susquehanna.

For the rest of us who don’t have such powerful allies, ensuring you don’t get Rekt in the market is very much more difficult, and most of the time, we have to absorb our own losses.

The problem for most retail investors is that risk management is pretty limited. Sure, you can buy Options, or set a stop loss, but both of these methods have their downsides.

That’s why we built Bumper, a completely unique risk management protocol for cryptocurrency users - Bumper protects the value of your holdings when the market bombs, but if it rips, well, you still get to enjoy the upside too! Who wouldn’t want that?

It’s simple, price efficient and fair, and has the potential to disrupt hedging altogether. Best of all, it’s Web3, so anyone can participate. Get to know more about Bumper here.