1.9.6 Publicized Losses

Timing for the release of RiskMetrics was excellent, as it came during a period of publicized financial losses. In February 1993, Japan’s Showa Shell Sekiyu oil company reported a USD 1,050MM loss from speculating on exchange rates. In December of that year, MG Refining and Marketing, a US subsidiary of Germany’s Metallgesellschaft AG, reported a loss of USD 1,300MM from failed hedging of long-dated oil supply commitments.

In 1994, there was a litany of losses. China’s state sponsored CITIC conglomerate and Chile’s stateowned Codelco copper corporation lost USD 40MM and USD 207MM trading metals on the London Metals Exchange (LME). US companies Gibson Greetings, Mead, Proctor & Gamble, and Air Products and Chemicals all reported losses from differential swaps transacted with Bankers Trust. Japan’s Kashima Oil lost USD 1,500MM speculating on exchange rates. California’s Orange County announced losses from repos and other transactions that would total USD 1,700MM. These are just a few of the losses publicized during 1994.

The litany continued into 1995. A notable example is Japan’s Daiwa Bank. One of its US-based bond traders had secretly accumulated losses of USD 1,100MM over a 10-year period. What grabbed the world’s attention, though, was the dramatic failure of Britain’s Barings PLC in February 1995. Nick Leeson, a young trader based at its Singapore office, lost USD 1,400MM from unauthorized Nikkei futures and options positions. Barings was founded in 1762. It financed Britain’s participation in the Napoleonic wars. It financed America’s Louisiana purchase and construction of the Erie Canal. Following its collapse, Barings was sold to Dutch bank ING for the price of one GBP.

By the mid-1990s, regulatory initiatives, concerns about OTC derivatives, the release of RiskMetrics, and publicized losses had created a flurry of interest in the new risk management and related techniques. Today, “value-at-risk” is not quite a household word, but it is familiar to most professionals working in wholesale financial, energy, and commodities markets.

1.10  Further Reading for Chapter 1

See Holton (2004) for a philosophical discussion of the definition of risk. For more information on the origins of regulatory value-at-risk measures, see Dale (1996) and Molinari and Kibler (1983). Bernstein (1992) and Markowitz (1999) describe the origins of PMMRs in the context of portfolio theory. See Guldimann (2000) for the history of RiskMetrics. Our discussion of measures is largely operational; see Lad (1996) The classic text—and still one of the best—on financial risk management is the Group of 30 (1993) report. See also Culp (2001), Steinberg (2011) and Malz (2011). For market risk management specifically, see Goldman Sachs and SBC Warburg Dillon Read (1998) For an alternative treatment of value-at-risk measures, see Morgan Guaranty (1996) or Sironi and Resti (2007).