This year has seen its share of major financial mishaps. Here is Quartz’s armchair ranking of the Street’s bad trades with the biggest ramifications.
1. The Whale
When word emerged that a J.P. Morgan trader at the bank’s London-based chief investment office had a massive, money-losing derivatives trade on that he couldn’t get out of, the bank’s Chief Executive Jamie Dimon pooh-poohed the story as a “tempest in a teapot.” The company line soon changed as losses tied to the trades spiraled ever larger, eventually amounting to more than $6 billion. Departures followed, including those of Chief Investment Officer Ina Drew, and traders Javier Martin-Artajo and Bruno Iksil, whose outsized bets on the credit markets earned him the nickname “the London Whale.” J.P. Morgan Chase has recently sued Artajo in British court. Beyond the billions in financial losses tied to the trade, the loss of credibility for J.P. Morgan chief Dimon—who had become one of the most vocal critics of government efforts to impose new regulations on Wall Street in the wake of the financial crisis—may have the farthest-reaching implications for the financial world.
2. The Facebook IPO
It was supposed to be a classic Wall Street payday. Get in on the ground floor of a sure-thing stock offering — the most dominant entity in the red-hot social networking space—and notch some sweet gains on the opening “pop” that almost always accompanies the debut of the shares. After a technical glitch delayed trading at the Nasdaq for half an hour, things seemed to start according to plan. Facebook shares jumped from their $38 opening price to as high as $45 a share on Friday, May 18—its first day of trading—before turning tail and finishing roughly flat at $38.23. Then things took a turn for the worst. The following Monday Facebook fell 11%, setting off a cascade of selling that ran until Facebook’s all-time low of $17.55 on Sept. 4. The decline of the shares was seen as a black eye for Morgan Stanley, the lead banker on the deal. But there was no shortage of finger-pointing in the aftermath, with some suggesting that Facebook itself was overly agressive in pushing for a price that was far too lofty. At any rate, though the stock has rallied off its lowest levels, investors who got in on the opening are still underwater. Facebook closed Friday shy of $28.
3. Wall Street goes long Romney
The financial industry was decisive in placing nearly all of its chips on Republican presidential hopeful Mitt Romney. According to the Center for Responsive Politics, which tracks campaign contributions, folks tied to banking and finance overwhelmingly channeled cash towards Team Romney, after taking a much more balanced approach in 2008. Hedge funds and private equity pumped roughly $6.2 million to Romney, compared to $1.3 million to President Obama. Individuals with ties to “miscellaneous financial” entities sent $10.2 million to Romney, versus $3.1 million to Obama, according to the CRP. In Washington, where such donations open access and help provide leverage and influence on policy makers, Wall Street’s decision to go massively long on Romney could come back to haunt the industry over the next four years.
4. Giving money to John Paulson
Since making his name with the brilliant bet against the housing market that made him a billionaire during the financial crisis, John Paulson and his hedge fund Paulson & Co. have had a rough run. In 2011, his Advantage Plus fund lost 51%, after counting on a smart rebound in the US economy. In 2012, the fund fell a further 22%, thanks largely to an overly bearish view that the European debt crisis would worsen. A separate Paulson fund focusing on gold fell 21% since the start of 2012, according to Bloomberg. A small bright spot for Paulson has been his relatively small Real Estate Recovery Fund, that has notched paper gains of roughly 100%, according to The Wall Street Journal.
5. Knight Capital’s $440 million electronic oops
On Wednesday, Aug. 1, Knight Capital—a well-known electronic market maker—attempted a software upgrade that set off a flurry of erroneous electronic trades. In approximately 45 minutes, the firm lost more than $440 million thanks to the glitch. (After taxes, the loss was around $270 million.) The loss led to real questions about the viability of the firm, which accounted for roughly 11% of all stock trading during the first half of 2012. And Knight’s market capitalization plummeted in the days after the trade. Chief Executive Tom Joyce’s upfront acknowledgement of the seriousness of the issues was widely credited with helping Knight re-establish confidence with regulators and other trading outfits, as did a $400 million line of financing from private equity firms and other brokerages. Even so, the trading snarl exposed the risks inherent for brokerage firms without the deep well of capital needed to weather such screw-ups. Knight’s days as an independent firm are numbered, as hedge funds, rival brokerages and banks are in the midst of a bidding war for the company.