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Part: 3 Colossal Blunders

Part 3: Colossal Blunders

The self-inflicted problems (Part 1) and the problems that occur when trying to beat the market (Part 2) can even affect the professional investors. Indeed, the investment blunders of the rich and famous are often spectacular. Consider the hedge fund, Long-Term Capital Management, run by famous bond traders and two Nobel Prize winners in Economics. In a couple of months in 1998, they managed to lose $4 billion and put the word financial system in such a crisis that the Federal Reserved needed to orchestrate a rescue.

Or, consider the predicament of Orange County, California. One of the richest counties in the country, Orange found itself forced to declare bankruptcy after its highly respected treasurer lost $1.7 billion. He did it through common investor problems that could affect anyone. I guess he is not going to Disneyland!

Professional traders have let their problems get so far out of hand that they ruin their firms. The actions of rogue trader Nicholas Leeson bankrupted one of Britain's oldest merchant banks, Barings Bank. Barings history includes such varied endeavors as banking for the Queen and helping to finance the Louisiana Purchase. It no longer exists after Leeson lost $1.1 billion of the bank's money. The actions of Daiwa Bank's rogue trader cost it over $1 billion. The aftermath also resulted in the bank getting kicked out of the United States. These colossal blunders are detailed in the next three chapters.



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