Case studies: 22 market failures explained

The 1990s

• 1993
  MetallgesellschaftThe right hedge, on the wrong clock. Funding liquidity and hedge basis risk.
• 1994
  Bankers Trust and P&GA cheaper loan that was really a sold option. Model and valuation risk; mis-selling.
• 1994
  Orange CountyA conservative bond portfolio, borrowed three times over. Leverage and interest rate risk; collateral calls.
• 1995
  BaringsOne trader, both sides of his own desk. Operational risk: rogue trading and missing segregation of duties.
• 1995
  Daiwa BankEleven years of losses, hidden by the man who kept the records. Operational risk: concealment and late disclosure.
• 1996
  Sumitomo copperOne trader, a grip on world copper, and ten years of hidden losses. Operational and concentration risk; market manipulation.
• 1998
  LTCMConvergence trades, twenty-five times over. Liquidity and model risk; leverage and crowded trades.
• 1999
  Ashanti GoldfieldsSeven years of production, sold forward. Hedging, collateral and funding liquidity risk.

The 2000s

• 2001
  EnronHedges against itself, and loans dressed as trades. Accounting, counterparty and wrong-way risk.
• 2002
  Allied Irish and AllfirstFake options, real losses, and rates the trader supplied himself. Operational risk: fictitious trades and unconfirmed deals.
• 2006
  AmaranthA spread trade too large to leave. Market liquidity and concentration risk.
• 2008
  Société GénéraleFictitious hedges, and a €4.9bn exit. Operational risk: rogue trading and the cost of the unwind.
• 2008
  Lehman BrothersNine hundred thousand trades, closed out at once. Counterparty risk, close-out netting and central clearing.
• 2008
  AIGProtection that could not pay its collateral calls. Wrong-way risk, collateral calls and rating triggers.

The 2010s

• 2011
  MF GlobalA broker’s bet on euro bonds, and its clients’ missing money. Funding and liquidity risk; client money segregation.
• 2012
  The London WhaleA hedge that grew into the market it was hedging. Market and model risk; basis risk and position size.
• 2015
  The Swiss franc floorA guarantee withdrawn in a morning. Gap risk, suppressed volatility and leverage.

The 2020s

• 2021
  ArchegosFive banks, one position, and none of them could see it. Counterparty, concentration and margin risk in prime brokerage.
• 2022
  The LME nickel squeezeA hedge that could not be delivered into. Basis risk, margin calls and market closure.
• 2022
  The gilt LDI crisisPension hedges that worked, and could not be funded. Leverage, collateral calls and funding liquidity risk.
• 2023
  Silicon Valley BankLong bonds, unhedged, funded by deposits that could leave in a day. Interest rate risk in the banking book and deposit run risk.
• 2023
  Credit Suisse AT1Bondholders wiped out while shareholders were paid. Contingent capital and contract (trigger) risk.

By theme

Funding and collateral: hedges that could not be paid for

Metallgesellschaft, Ashanti Goldfields, AIG, The LME nickel squeeze, The gilt LDI crisis, MF Global.

Rogue trading and missing controls

Barings, Daiwa Bank, Sumitomo copper, Allied Irish and Allfirst, Société Générale.

Leverage, liquidity and crowded positions

Orange County, LTCM, Amaranth, The London Whale, Archegos, Silicon Valley Bank.

Contracts, counterparties and sudden breaks

Bankers Trust and P&G, Enron, Lehman Brothers, The Swiss franc floor, Credit Suisse AT1.