Blow Up

You don’t want to be the one responsible for a blow up in the world of finance. Or...anywhere, really.

A blow up refers to a really big mistake made by an individual or corporation, and the expression is often used in regard to hedge funds that...fail. A hedge fund might be making some highly leveraged, big bets on risky investments, and when they don’t come through, a fund could end up dissolving...i.e. blow up.

Take, for example, Nick Lesson in Singapore, who single-handedly sunk England’s oldest merchant bank called Barings in 1995. He managed to make a series of derivative trades on the Japanese stock market, leading to a loss of a whopping $1.3 billion. Yeah...that takes some skill.

And then there’s Howie Hubler, a former Morgan Stanley trader who entered a giant trade in 2006, with investments scattered across various mortgage-debt obligations. Upper management wanted to reduce the size of the company’s risk position, but couldn’t agree on how to do it. By the fall of 2007, it was too late, as subprime bonds tanked, so the company had to take a $9.6 billion write-off. Morgan Stanley admitted Hubler had broken no laws, nor had he hidden what he was doing.

So...the lesson learned with regard to avoiding future blow ups is to not let traders go rogue. And if they do make a bad move, fix it quickly.

As for hedge funds, sometimes they reap what they sow.