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Date: 2024-07-16 Page is: DBtxt001.php txt00000510

Money, Banking and Financial Services
Who are the worst rogue traders in history?

From Jérôme Kerviel of Société Générale to Nick Leeson of Barings, the Guardian looks at how unauthorised trading has cost major banks billions

The media and commentators from the capital market keep pushing back against regulation and matters like capital requirements ... but the history of bankers and the capital markets suggest that good rules and regulations are absoutely vital. This article sets out some of the rogue trader incidents of the past few years. There are others, another organization that got into trouble and not included below is General Electric who got caught out, not once, but at least twice. With a powerful culture of profit at any cost, and a culture that has profit as the ultimate goal ... traders that bend the rules while delivering profit get a free pass. It is a human nature, but it is a formula for periodic catastrophe. It is not serious banking ... even if it is profitable!

From Jérôme Kerviel of Société Générale to Nick Leeson of Barings, The Guardian look at how unauthorised trading has cost major banks billions

IMAGE Rogue trader Jérôme Kerviel was found guilty and sentenced to three years in prison. Photograph: Joel Saget/AFP/Getty Images

Rogue traders are back in the headlines after UBS admitted on Thursday that 'unauthorised trading' has cost the bank $2bn (£1.3bn).

That may be enough to ensure UBS makes a loss for its third quarter, the bank said, but it will not top the list of the worst rogue traders in banking history.

That title belongs to Jérôme Kerviel, who lost Société Générale a staggering £3.7bn in 2008.

Société Générale – £3.7bn

SocGen revealed in January 2008 that a rogue trader had lost the bank £3.7bn. The trader was swiftly named as Jérôme Kerviel, then 31 years old, who had been taking unauthorised positions on stock futures, the bank said.

A subsequent court case suggested Kerviel had been betting €50bn of the bank's money on the trades. Kerviel said that the bank had turned a blind eye when his trades were turning a profit.

Kerviel had worked in compliance, and bank bosses suggested he was adept at hiding his losses and bypassing checks.

Kerviel was sentenced to three years in jail in October of last year, and told he must repay the money lost, a conviction which is currently subject to appeal.

Coming in the midst of the banking crisis, the losses had surprisingly little impact on the market generally, with US losses from sub-prime mortgage lending dwarfing Kerviel's activities.

Barings Bank – £827m

The most famous 'rogue trader' in history, Nick Leeson brought down one of the grandest names in British banking.

Working in Barings' Singapore office, Leeson initially made large profits for the bank by dealing in derivatives and futures. But after running up losses, he hid his bad trades in a single account in 1992.

These losses grew over several years, forcing him into a series of increasingly desperate but unsuccessful attempts to make the money back. Leeson finally fled in February 1995 after a bet that the Tokyo stock market would rise went badly wrong.

Once the full scale of the losses became apparent, Barings was sold to Dutch bank ING for just £1.

In the aftermath, Leeson's managers were criticised for giving him too much leeway. Crucially, he had been allowed to settle his own trades, letting him disguise his actions.

In December 1995 Leeson was sentenced to six years imprisonment in Singapore, and was released in 1999. He subsequently ran Irish football club Galway United, and is now an after-dinner and conference speaker.

Allied Irish Bank – £697m

Friends and colleagues saw John Rusnak as a typical 'Mr Middle America', but the Baltimore-based trader was jailed after hiding trading losses of almost $700m (£355m).

He was hired by Allfirst Financial, a division of Allied Irish Bank, in the mid-90s as a dealer on the foreign exchanges. Betting mainly on the Japanese yen, Rusnak used fictitious options contracts to hide his losses over several years.

Some outsiders suspected that all was not well, with Goldman Sachs reportedly refusing to do business with Rusnak. But it took until 2002 before routine checks finally uncovered the true nature of the bank's exposure.

By that stage, rather than sticking to his trading limit of $2.5m, Rusnak had secretly bet $7.5bn of AIB's money on the yen rising against the dollar.

At his subsequent trial, prosecutors said he had created a false identity under the name David Russell and used an address in New York to send confirmations of false trades.

Rusnak was jailed for seven-and-a-half years in a plea bargaining deal.

Daiwa Bank – $1.1bn

The president of Japan's Daiwa Bank received a particularly nasty shock on 13 July 1995. Toshihide Iguchi, one of its senior US executives, confessed in a 30-page letter that he had lost $1.1bn through unauthorised bond trading.

Like Leeson and Rusnak, Iguchi ran up the losses over several years. Having risen from the back offices to become a trader in 1984, a lack of segregation within his division meant he could hide his losses from his superiors while he tried, and failed, to trade back to profit.

Following his confession, it emerged that he had conducted the cover-up for over a decade, falsifying some 30,000 trading slips.

Having once been seen as the golden boy of the department, in 1996 he was jailed for four years and fined $2.6m.

In court, he told the judge that his life was filled with guilt, fear and deception after 11 years trying to recover his losses.

Interviewed in jail, Iguchi said he had seen his earlier actions as merely a violation of internal rules.

'I think all traders have a tendency to fall into the same trap. You always have a way of recovering the loss', he told Time magazine.

Daiwa was also penalised heavily. The Federal Reserve ordered it to end all of its operations in America, leading to a sale of most of its US assets in January 2006.

Sumitomo Corporation – $2.6bn

Yasuo Hamanaka was jailed for eight years for fraud and forgery in 1997 after the one-time king of the copper market was found to have conducted rogue trading and fraud for more than a decade.

At the height of his power, Hamanaka was said to control 5% of the global copper market. His off-the-book trades forced prices up and generated large profits for years, but ultimately cost Sumitomo $2.6bn when the scandal was uncovered.

A year after his conviction, Sumitomo paid about $150m to settle claims from British and US regulators.

In 1999, Merrill Lynch was fined a total of £16m for helping to finance a copper trading scandal. The London Metal Exchange said it had provided the finance to clients to undertake actions that it should have known was the basis of an attempt to manipulate the market

Other major trading losses

Although actual fraud is rare, many other traders have run up huge losses simply through a bad call on the markets.

These include Brian Hunter, an energy trader at hedge fund Amaranth. He had made large profits by speculating on natural gas prices, but ended up losing $6.6bn in 2006 after betting that the price of gas would rise. Unfortunately for him (but not for traders who took the opposite view), they plunged after a heatwave helped to slash the price of gas future contracts.

And Morgan Stanley's oil trader David Redmond risked $10m in a frantic series of trades following a drink-fuelled lunch. Redmond managed to recover most of the losses the next day, but was still banned from the City.

Alex Hawkes and Graeme Wearden ...,
Thursday 15 September 2011 08.34 EDT
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