The financial crisis of 2007/2008 shook the world to its core as it resulted in more than $10 trillion in lost wealth in the U.S. alone! In the following years, the U.S. economy slowly emerged out of the worst of the crisis and money started pouring back into financial markets. The race to the top was back. A lot of money has been made, however, some huge losses have been recorded too. Here is a list of some of the worst financial market losses in the last 10 years.
1. The London Whale
The London whale is a nickname that was given to Bruno Iksil a trader from the London branch of JPMorgan Chase & Co. It all began in February 2012 when Iksil started a series of credit default swaps (CDS) transactions in the derivatives market. As Iksil realized the market was moving against him, he engaged in more trades instead of unwinding the initial trades.
In prior similarly aggressive and risky trades Iksil had made some sizeable profits for JP Morgan This also resulted in sizeable losses for rivals on the other side of the trades. This angered them. Now they had the chance to get some revenge. Deducing that he lacked the liquidity to exit his positions, they traded against his positions. The news of these trades broke out and JP Morgan was accused of having poor risk management. The company closed all the trades. As a result, JP Morgan announced an estimated loss of $2 billion but it ended up amounting to more than $6 billion in losses and $920 million in fines.
2. The Valeant Big Mistake
Bill Ackman, an activist hedge fund investor, set his sight on Valeant Pharmaceuticals in 2014. The company’s business model and CEO Michael Pearson impressed him. He partnered with Valeant to push its bid for Allergan, a drug manufacturer. However, Allergan was against this acquisition. To counter the Valeant bid, Allergan made a deal with Actavis to buy the company instead of Valeant. Ackman fund’s held shares in Allergan so both ways he would benefit.
Ackman used the proceeds from the Allegan sale to invest in Valeant. That’s when things started going south. Within a few months of Ackman investing in Valeant, the company got into scandals. A lot of questions were being raised about Valeant’s practices from drug price manipulation to its accounting methods. The stock price crashed. The company’s board ousted the CEO, Michael. Some investors jumped ship and sold their shares, but Ackman stayed on, hoping for a turnaround. The turnaround never came. Two years later and almost $4 billion dollars in losses after selling Valeant shares, Ackman admitted that it was “one very big mistake”.
3. The We Work Failed IPO
A Japanese billionaire and founder of SoftBank, Masayoshi Son, is well known for his aggressive and high-risk investments in fast-growing technology-related startups. It’s late 2018, We Work was a rising star in the shared working space industry under the guidance of its founder Adam Neumann. In 2017 SoftBank had invested $4.4 billion in We Work at a valuation of $20 billion. This was a very large investment in a private company. Forward to 2018, SoftBank added another $4.25 billion into the company. Masayoshi agreed to a new valuation of $47 billion. But even with all these investments for SoftBank We Work was burning cash fast, spending $2.4 billion in the first six months of 2019.
We Work initial public offering (IPO) was coming up, and the company was aggressively marketing it to the public. However, worrying details about the company’s governance and culture were coming out. For example, Adam the CEO had charged the company nearly $6 million for the “We” trademark and hired close family members to senior management positions. Also, the valuation of $47 billion was too high for most investors. The company had no option but to shelve the IPO due to low interest from investors. SoftBank ended up having to lower the value of its investment in We Work by $4.6 billion as the company’s valuation sank from $47 billion to less than $8 billion.
4. The Bitcoin Bubble Burst
In the fall of 2017, Bitcoin price skyrocketed. In October Bitcoin’s price broke $5,000, rose to $10,000 in November and by December the price was nearing $20,000. It was a dream come true for bitcoin investors and speculators alike. The joy was short-lived for anyone who jumped in around the end of the year. Bitcoin crashed in 2018 and by April it was trading below $7,000 and by November it was down to $3,500. Since then, Bitcoin has not reclaimed its peak of $20,000.
Masayoshi Son, the Japanese billionaire, lost more than $130 million of his money after selling off his Bitcoin investment in 2018. He got in as Bitcoin was peaking in late 2017. He is just one example of the many Bitcoin losers. Its estimated U.S. investors lost more than $1.7 billion after selling their Bitcoins in 2018.
5. The Marijuana Craze
As Bitcoin was peaking towards the end of 2017, there was a new kid on the block. With the upcoming legalization of cannabis in Canada, investors were scrambling to get it as valuations of cannabis companies shot up. However, even after legalization, the industry was still facing a lot of challenges. These included weak supply chains, lack of financing and the fact that marijuana is still illegal at the federal level in the U.S. Most cannabis stock prices fell sharply in the early days of legalization and are yet to recover since then. Investors have lost billions of dollars across the cannabis industry.
In July 2018, Tilray a Canadian cannabis company priced its initial public offering (IPO) at $17 a share. Two months later, the stock had surged up to fifteen times the IPO price. Then it peaked at $300 per share and came crashing down. Since then the stock price has been on a downtrend and now back below the IPO price of $17. You have to feel sorry for anyone who bought the stock at $300 a share.
6. The Herbalife Short
In December 2012, Bill Ackman an activist hedge fund investor disclosed that his hedge fund, Pershing Square Capital Management had been shorting Herbalife stock for a few months to the tune of $1 billion. He released a research report that accused Herbalife’s multi marketing business structure of being a pyramid scheme. The company’s stock price fell following the report. A few months later, Ackman engaged in a heated argument with fellow billionaire investor Carl Icahn on live television. Carl called Ackman a liar and told him he would never invest with him even if he was the last man on Earth.
Soon afterward, Icahn started accumulating Herbalife’s stock. This resulted in the rise of Herbalife’s stock price putting Ackman’s short position in jeopardy. Ackman doubled his efforts, spending $50 million to promote his fund’s negative views on Herbalife. The more the company’s stock price fell, the more he stood to make. This did not happen. Five years down the line and Ackman finally exited the position, losing close to $1 billion.
Conclusion
The financial markets offer limitless opportunities to build wealth. However, the risks involved should not be ignored. As an investor learn from the experiences mentioned above and be prudent in your investment decisions. To get you started in the right direction, there are great resources such as The Motley Fool.