Ten Years of Risk-Management Debacles
The best risk managers are judged by what doesn’t happen to their companies. They don’t have huge trading losses, their executives don’t get investigated for fraud, and the names of their institutions don’t disappear from the Street.
But when you’re in the business of taking financial risk, all your bets can’t be right. Sometimes the best you can hope for is that the self-inflicted damage is survivable.
Here’s a list of Wall Street’s greatest whiffs over the past ten years:
JPMorgan , 2012: a group of traders in the London branch of the bank’s chief investment officer unit make bets on an illiquid corporate credit-derivatives index, ostensibly to hedge the bank’s overall exposure to the markets. (Read More: JPMorgan Trader 'London Whale' Leaves - Source)
After prices move against them, the trades wind up costing bank $5.8 billion and a public drubbing. (An additional billion or so remain on the balance sheet of the firm’s investment bank.)
The debacle also prompts Congressional hearings, an organizational restructuring, and the departure of CIO head Ina Drew. (Read More: JPMorgan Profit Declines on $4.4 Billion Loss from 'Whale')
Lesson: Don’t let traders browbeat risk managers in to standing down, and don’t assume market conditions won’t move against you.
MF Global, 2011
MF Global, 2011: the futures and derivatives trading firm files for bankruptcy protection in October after revelations of large exposures to troubled European bonds spur credit-rating agencies to slash its rating.
The firm is later accused of misappropriating $1.6 billion in customer money that went missing in the days before the Chapter 11 filing as the firm fought margin calls, or demands for additional cash and collateral, from its creditors.
Lesson: Protect the firm from investments in risky assets, even sovereign entities, and segregate customer funds from those of the company.