Rogue traders

A bank can lose billions because of a single person. It has happened several times, and almost always the same way.

Singapore, the nineties. Nick Leeson, under thirty, is the star of the old British bank Barings.

He bets on the Japanese stock market. And he hides his losses in an error account, number eight eight eight eight eight.

The catch: he runs both his trades and their checking. Nobody really looks over his shoulder.

To win it back, he raises his stakes. In January nineteen ninety-five, an earthquake hits Kobe, and the Japanese market plunges.

The loss exceeds eight hundred million pounds. Barings, a bank more than two centuries old, goes bankrupt.

It is bought for a symbolic one pound.

Doubling down to win it back is a mathematical trap. Say a loss of one hundred. You bet two hundred to recover it, then four hundred.

After five lost bets, total losses reach three thousand one hundred. A single bad run is enough to sweep everything away.

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Paris, January two thousand eight. Société Générale discovers that Jérôme Kerviel has taken positions of nearly fifty billion euros.

That is more than the whole bank's equity. These positions were masked by fictitious trades.

By unwinding them in the middle of the storm, the bank loses four billion nine hundred million euros.

Kerviel is convicted. But on appeal, the court also points to flaws in the bank's controls.

London, September two thousand eleven. Kweku Adoboli, at UBS, exceeds his limits by hiding positions. Loss: two billion three hundred million dollars.

He is sentenced to seven years in prison. Once again, the controls had seen nothing in time.

London, two thousand twelve. This time, no hidden trader. A JP Morgan portfolio, run by Bruno Iksil, grows so big it moves a whole market.

He is nicknamed the London Whale. When it is time to get out, nobody can absorb such positions. Loss: six billion two hundred million dollars.

Four stories, the same ingredients. First, past gains that silence the questions.

Next, controls too weak, or got round by someone who knows them from the inside.

And the temptation to bet more to win it back, instead of accepting a loss while it is still small.

This trap is not just for traders. Endlessly buying more of a falling share, just to win it back, is the same reflex.

The lesson: decide before you start what you accept losing. And never invest to erase a loss.