Quantitative Risk Management: A Practical Guide to Financial Risk, + Website

4.2 Idiosyncratic Financial Events

Financial and trading disasters are often discussed under the rubric “rogue trading.” Like many myths, this one contains some truth, but only partial truth. We will see, through examining a variety of events, that many financial disasters are not characterized by rogue trading. Trading disasters occur for a variety of reasons. Sometimes the cause is a rogue trader, as in the case of Barings Bank's 1995 collapse or AIB/Allfirst Financial's losses, but many events have resulted from legitimate trading activity gone wrong or a commercial or hedging activity that developed into outright speculation.

Table 4.1 shows a list of financial events over the years, focusing on events resulting from losses caused by trading in financial markets. It does not cover incidents that are primarily fraudulent rather than trading related, so it does not include Bernard Madoff's fraud. The list is long and, from my experience, reasonably comprehensive regarding the types of financial disasters, but it is not complete. The list clearly does not include events that are not publicly reported, and many fund managers, family trusts, and hedge funds are secretive and loath to reveal losses. For present purposes, Table 4.1 is sufficient; it both shows the scope of losses and includes losses from a wide variety of sources.

Table 4.1 Trading Losses.

Table 4.1 includes few entries ...