Those who cannot remember the past are condemned to repeat it.
Nowhere is George Santayana’s famous admonition more applicable than in the field of risk management. As a reminder of all the ways things can go wrong, I maintain an informal list of prominent risk management failures. I just updated the list and thought I would share it with you.
My list includes mishaps since 1994, when J.P. Morgan published RiskMetrics, So this update covers 21 years from 1994 through 2014. In preparing the update, I reviewed a similar list by Riskviews, which has more of an insurance focus. Motley Fool also has a list of sorts. Here is mine.
Bankers Trust derivatives sales scandal (1994)
Granite Fund hedge fund failure (1994)
Kidder Peabody trading scandal (1994)
Orange County bankruptcy (1994)
Barings Bank rogue trader (1995)
Daiwa Bank rogue trader (1995)
Sumitomo copper trading scandal (1996)
Tokyo-Mitsubishi Bank derivatives loss (1997)
Bre-X gold mining fraud (1997)
NatWest trading loss (1997)
UBS derivatives loss (1997)
Griffin Trading bankruptcy (1998)
LTCM hedge fund failure (1998)
American Express CBO loss (2001)
Enron bankruptcy (2001)
HIH bankruptcy (2001)
Allied-Irish Bank rogue trader (2002)
Bankgesellschaft Berlin bailout (2002)
Conseco bankruptcy (2002)
Eifuku Master Fund hedge fund failure (2002)
Worldcom bankruptcy (2002)
Mutual fund market timing scandal (2003)
Parmalat accounting fraud (2003)
National Bank of Australia trading losses (2004)
AIG accounting fraud (2005)
Amaranth Advisors hedge fund failure (2006)
Bank of Montreal natural gas trading loss (2007)
Bear Stearns hedge fund failures (2007)
AIG bailout (2008)
Bear Stearns emergency sale of company (2008)
Countrywide emergency sale of company (2008)
Fannie Mae bailout (2008)
Freddie Mac bailout (2008)
IndyMac bankruptcy (2008)
Lehman Brothers bankruptcy (2008)
Madoff ponzi scheme (2008)
Merrill Lynch emergency sale of company (2008)
MF Global rogue trader (2008)
Morgan Stanley bailout (2008)
Northern Rock failure (2008)
Société Générale trading loss (2008)
Wachovia emergency sale of company (2008)
Toyota unintended acceleration recalls (2009)
BP Deepwater Horizon oil spill (2010)
Fukushima tsunami and nuclear accident (2011)
MF Global bankruptcy (2011)
UBS rogue trader (2011)
JPMorgan “London whale” trading loss (2012)
Knight Capital high-frequency trading loss (2012)
Libor-fixing scandal (2012)
Peregrine Financial embezzlement (2012)
JPMorgan $14.6 billion in regulatory fines (2013)
General Motors recalls (2014)
The purpose of a list like this is educational, so I haven’t tried to be comprehensive—a comprehensive list would be enormous.
For example, my list includes one ponzi scheme, Bernie Madoff’s. Over the 21 years covered, there have been at least 51 ponzi schemes. Wikipedia maintains a running list. Similarly, I don’t try to record every accounting fraud, bank failure, insurance company failure and corporate bankruptcy.
I mostly focus on prominent mishaps that either made headlines or for which plenty of information is available, should readers want to learn more. I give preference to mishaps in jurisdictions that have reliable legal systems, so those mishaps happened despite regulation and not because of an absence of regulation.
I do not include market crashes or general disasters. This is a list of mishaps that befell individual organizations. Two exceptions are the 2003 mutual fund market timing scandal and 2012 Libor-fixing scandal, which I include. While both involved multiple firms, I consider both to have been a risk management failure for each individual firm.
While the 2011 Fukushima tsunami and nuclear accident was a general disaster, I include it as a risk management failure of Tokyo Electric Power Co.
I use the term “risk management failure” broadly. While many of these events involved risk management efforts that failed. Others involved a failure to apply risk management. In some cases, risk management was applied but intentionally undermined.