For as long there has been financial alchemy, powerful men have gone over to the dark side, making headlines for all the wrong reasons. On the back of the LIBOR scandal, we bring you financial history’s hall of shame. By STYLI CHARALAMBOUS.
“The richest 1% of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullshit. You got 90% of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer instinct. Stick around pal, I've still got a lot to teach you.” – Gordon Gecko in Wall Street.
When you’re tasked with creating profits out of nothing, things can go seriously awry. Success can breed even more success, but it’s a fertile field for so many other nasty things too. Driven by greed or simply by gambling gone bad, those in the hall of shame will litter history books with feats that ruined reputations and lost billions in market value – destroying, in some cases, century-old institutions.
Trading, corporate finance and boiler room brokers can, and have added value to growing economies for as long as the free market has existed. But add a dash of ego to a melting pot of illusion, subterfuge and fraud, and you have the makings of financial napalm.
The men in our list (and why is it always men?) have been responsible for the biggest scandals in financial history. And these were just the ones that got caught. So onto the mob of scammers, gamblers and snake-oil salesmen below – the names and faces etched forever on the more notorious side of financial history.
Milken was the big brass of Wall Street during the 80’s and 90’s. In a four-year stretch he earned in excess of $1 billion trading interest rate products, a record for US income at the time. He was the king of high-yield bonds, or junk bonds as they were commonly known. The Securities and Exchange Commission were probing Milken from as early as 1979, when his bond trading division was beginning to make super profits for the investment firm of Drexel Burnham Lambert. For seven years they struggled to get anywhere close to prosecuting, until Ivan Boesky implicated Milken in a larger insider trading investigation. The SEC then launched a probe, headed by Rudy Guiliani, to investigate Milken – who was finally charged with 98 counts of racketeering and fraud and was sentenced to 10 years in prison with a whopping $200 million fine. Milken, along with Boesky, were said to be the inspiration for Oliver Stone’s character Gordon Gecko.
By 1986, Boesky had amassed a personal fortune of $200 million betting on the outcome of corporate takeovers. It turns out not all of his wealth was due to talent and research, with Boesky trading on information gained from people within the company in question. He would brazenly purchase large chunks of stock, only days before major announcements that affected the share price, with scant regard for an until-then toothless SEC. While insider trading had always been illegal, it had rarely resulted in prosecution until Boesky was charged, which ultimately lead to the conviction of Milken. Boesky, for his efforts, earned himself cover story on Time Magazine, a $100 million fine, and a three-and-a-half year jail sentence.
As head of RJR Nabisco, Johnson and his merry band of greedmongers inspired one of the most enthralling business books of all time, Barbarians at the Gate. The 80s were the high rolling times for Leveraged Buy-Outs (LBO), where management would take on huge amounts of debt to buy out public shareholders. RJR Nabisco was a merger of the tobacco company RJ Reynolds and the Nabisco Brands Company, which owned some of the biggest food brands in the USA. When Johnson got into a bidding war for control of RJR Nabisco, that raised the initial $75 per share offer to $109. Johnson ultimately lost the bidding war to LBO firm head Henry Kravis, but this resulted in the company being saddled with an inordinate amount of debt that led to the company going public again. Johnson, meanwhile, had arranged a $60-million golden parachute. Whilst he never did anything illegal, he became the face of ultimate greed in corporate America.
It takes special set of circumstances for one man to bring down Britain’s oldest investment bank singlehandedly. And Nick Leeson was that man. A futures trader in the Singapore office of Barings Bank, Leeson had spent years covering up trading losses in a number of error accounts held by the bank. Over a few years these losses amounted to £208 million, causing Leeson to start taking even bigger bets to try cover up his losses. With a massive position on the overnight level of the Nikkei, Leeson arrived to work on 17 January 1996, only to find out exactly what happens to stock markets when earthquakes hit. The Kobe disaster sent the Nikkei into freefall and Leeson’s losses spiralled further out of control. By the time it was clear that bigger bets, placed in the hope of a quick recovery, had failed to pay off, Leeson had lost £827 million of Barings Bank money, more than double its trading capital. Leeson fled, but was eventually caught and sentenced to six-and-a-half years in a Singapore prison.
As chief copper trader of one of Japan’s largest trading companies, Hamanaka earned accolades and bonuses for his aggressive trading style. He earned the nicknames of “Mr Copper” and “Mr Five Percent” – because that’s how much of the world’s yearly supply was traded by Hamanaka. After 10 years of unauthorised trades, Sumitomo Corporation reported a loss of $1.8 billion on the back of Hamanaka’s trades, although he later revealed the losses were more likely around $2.8 billion. Hamanaka was convicted in 1998 and sentenced to eight years in prison.
One would think that with years of experience in rogue trading scandals, and the backup of armies of accountants, modern-day banks would be able to prevent losses from unauthorised trading and cover-ups. Not so. Arbitrage trader Kerviel worked in the Paris office of Societe General. Kerviel started fake trading in 2006 and 2007. Although the amounts were relatively small, they grew significantly when the bank failed to detect his actions. Kerviel claimed he entered positions of up to almost €50 million, which was greater than the bank’s market cap, but because he was making profits, the bank turned a blind eye to his excessive positions. When the bank did eventually close out the trades, the market headed south and losses of €4.9 billion were incurred.
Imagine being able to fool some of the wealthiest and most savvy people in the world for twenty years. That’s what Bernie Madoff achieved in the largest fraud scandal in US history. Having created his wealth management firm in the 1960’s, Madoff started putting his Ponzi scheme into action in the early 1990’s. By then, Madoff was rubbing shoulders with the brightest and richest New York City had to offer, and had even served as non-executive chairman of NASDAQ. The longevity of the scheme was testament to Madoff’s ability to sell new clients on this too-good-to-be-true investment opportunity. He and his team would decide on a fictional rate of return for each client and then each month generate back-dated trades that would account for those profits. Client funds were never invested, and merely pooled into one account, which was used to pay clients who requested withdrawals. But as with any Ponzi scheme, even this one, the cash (and supply of new suckers) was bound to dry up, and the whole façade came crashing down. Madoff was sentenced to 130 years in prison in 2009.
An American banker in London, Diamond was appointed CEO of Barclays PLC on 1 January 2011, after 15 years with the bank. His tenure as a Barclays executive was never far from controversy, with accusations of money laundering and tax avoidance haunting the bank. The final nail in his coffin, the LIBOR scandal, finally saw Diamond resign on 3 July 2012. Barclays traders were under instruction to “massage” the London Interbank Offer Rate (LIBOR) used to price trillions of financial instruments every day, in order to make the bank appear more stable than it actually was. Whilst not directly involved in the manipulation of the LIBOR himself, it happened on his watch. His refusal to fall on his sword only led to more public outrage, and he became the unacceptable face of the global banking crisis – not least because he received a £63 million bonus in 2010. Barclays was fined by both US and UK regulators to the tune of $490 million – the biggest penalties in history. DM
Photo: Bob Diamond (REUTERS)