Sean Quinn’s €3.2 billion punt on Anglo-Irish Bank is unparalleled in Irish investment history, but ignominious blow-ups are nothing new in the financial markets. Various rogue traders, Nobel economists and finance professors, hedge fund giants and billionaire Texan oilmen have all been involved in some truly spectacular collapses over the years.
So-called rogue traders have amassed some serious losses down through the years. Nick Leeson – now living in Galway – famously downed Barings, Britain's oldest merchant bank, after losing over £800m (€975m) in secretive bets on the Japanese market. John Rusnak, a currency trader with AIB's US subsidiary Allfirst, served six years in jail after pleading guilty to hiding $691m (€500) in trading losses in 2002. That was chicken feed compared to Societe Generale's Jerome Kerviel, who lost €4.9bn after making illegal bets worth up to €50bn between 2005 and 2008.
Rogue traders can go undiscovered for years – 12, in the case of Toshihide Iguchi. Working at the New York branch of Japan's Daiwa Bank, Iguchi's downfall began in 1983, when he covered up a $70,000 (€51k) trading loss. His losses snowballed as he attempted to recoup the money, and $1.1bn (€0.8bn) had been lost by the time he was finally outed in 1995.
In his time in prison, he became friends with members of the Mafia and Hamas as well as bank robber George Harp, a founding member of the Aryan Brotherhood prison gang. Harp says he helped the trader out of a suicidal depression, while Iguchi later wrote a book about his bank-robbing friend.
Bank robbing “is much like trading”, according to Iguchi. “You have to do your research, set up a viable strategy with a clear exit plan, and execute it.”
Good traders, of course, tend to be flexible thinkers, but Iguchi’s own website indicates anything but. “It is no secret that the world economy is living on borrowed time,” he writes. “There are no ifs, ands, or buts about it. What comes after the current global money printing binge is inevitable hyper-inflation followed by outright deflation.”
Canadian trader Brian Hunter always liked a flutter, and his big bets on natural gas prices earned him a bonus of some $100m (€72m) in 2005. The following year was also shaping up to be a fine one for Hunter and his employer, hedge fund Amaranth – by the end of April, the fund was said to be up $1bn (€0.7bn) due to Hunter's aggressive bets.
This hedge fund trader didn’t like to hedge, however, and Amaranth was left badly exposed when gas prices dropped precipitously later in the year, losing $4.6bn (€3.3bn) in a single week in September. Losses hit $6.6bn (€4.8bn) by the end of the month, causing the biggest hedge fund collapse in history. It’s not that Amaranth wasn’t warned - one trader had earlier left the firm, warning Hunter “could blow up the entire firm”.
"More than any single trader has ever lost in the history of Wall Street," said bestselling author Michael Lewis, "and no one knows his name."
Lewis was speaking about Morgan Stanley trader Howard Hubler, who lost $9bn (€6.5bn) in 2007 during the US housing collapse. The irony is that Hubler had bet big on weakness in the subprime mortgage market, but the collapse he expected was slow in coming.
To cover his costs as he waited for the trade to work, Hubler decided to sell insurance on slightly better mortgages.
Unfortunately for Morgan Stanley, which nearly went under in 2008, they turned out to be worthless.
Legendary hedge fund manager Victor Niederhoffer went bust not once but twice. His $130m (€94m) losses during the Asian financial crisis of 1997 may pale in comparison to the aforementioned traders, but the case deserves mention for several reasons.
An eccentric intellectual, the former finance professor and George Soros partner returned an incredible 35 per cent annually in the 15 years prior to the bust – "the greatest run of success in the history of speculation", to use his own words. In 1997, ideas were proving hard to find. Usually rigidly quantitative in his trading, he took a punt on Thailand after a friend told him the brothels were cleaner and safer than before – a sign of economic development, thought Niederhoffer, who later admitted to having no knowledge of the country.
His fund contained his own money as well as clients, and the loss of his fortune forced him to mortgage his house and sell his prized antique silver collection.
Niederhoffer, a libertarian who eulogises markets and speculation, made a comeback in 2002, returning more than 40 per cent annually until 2007.
However, his leveraged approach again ran into trouble when the credit crisis struck, his fund folding after losses of 75 per cent.
After, although admitting to be “not as smart as I thought I was”, Niederhoffer said his “basic ideas” about markets remained unchanged, adding: “I am going to keep going, for better or worse.”
Many hedge funds have blown up in spectacular fashion, although few had a pedigree like Long-Term Capital Management (LTCM). It was founded by legendary trader John Merriweather, who recruited future Nobel Prize-winning economists Myron Scholes and Robert Merton.
The fund enjoyed huge returns in its early years before becoming undone during the Russian financial crisis of 1998, losing $4.6bn (€3.3bn) in just four months. Fears that LTCM's implosion would lead to a wider financial collapse led to the Federal Reserve organising a massive bailout, with the firm eventually liquidated in 2000.
What would you do if you inherited billions? Texan oilmen Herbert and Nelson Hunt decided to bet the lot – and more – on buying up over half of the world's silver supply. For a while, it worked, silver prices rising from $6 (€4.3) an ounce in early 1979 to almost $50 (€36) in January 1980.
The Hunts' position was worth almost $10bn (€7bn), but not everyone was happy. Jeweller Tiffany's took out a full-page New York Times ad, saying it was is "unconscionable" that the brothers were hoarding silver to "drive the price up so high that others must pay artificially high prices". The Hunts' attempt to corner the market led to a change in exchange rules regarding leveraged purchases. The brothers, who had borrowed billions, faced margin calls when silver prices subsequently collapsed. The selloff climaxed on March 27th – Silver Thursday – when prices more than halved, hitting $10 (€7).
Lawsuits resulting from the Hunts’ speculation led to the pair, once among the richest people in the world, being declared bankrupt in 1988.
The story doesn't end there, however. A trust that was not subject to the bankruptcy contained $150m (€109m) in oil assets, and a deal last year helped Herbert Hunt, now 85, reclaim his billionaire status.
"I was a fool to believe," Sean Quinn said of his Anglo stake. This, like Amaranth's argument that it "viewed the probability of market movements such as those that took place. . . as highly remote", misses the point. The real sin in the above cases was the size of the bets, not the beliefs underlying the bets. The moral is a simple one – using too much leverage and putting all your eggs in one basket is never a good idea.