Stock Markets, Rogue Trading, and a Ginormous Debt

If you want to get into amounts of money that the guy wouldn't have available (IE, he's got X dollars to his name and loses 10X), then I'd suggest looking into stock "puts" or "calls." I suggest these "options" because one only needs a relatively small percentage of the money up front, say 10%.

I'm not an expert on the subject, but there's a suggestion of one direction you can go.

Two basic, simple scenarios:

He overplayed the stock market -- invested in a sure thing that was bound to give an excellent return, but trading went badly and the company collapsed. The thing is, he didn't just invest and lose their money, he used this as collateral to borrow a much bigger amount, and invested that too. The people he borrowed from want their money back.

He bought an "interest" in something, a share -- let's say a nightclub or casino just to give us something solid to focus on -- that didn't work out. Maybe mismanagement of funds, or withdrawal of other money sources as his "partners" saw cash-flow problems coming and got out fast, or deliberate fraud, left him high and dry and responsible for paying creditors (the builders/developers who supplied the workforce and materials that have still to be paid for).

-Derek

aruna said:

Thanks... excellent suggestions! Makes it all much more concrete.
I forgot to mention--for a couple years it all went well. They had an expensive loft in Docklands, posh cars, everything. Then it all went bust, mum and daughter moved down to a semi-detached in South London.

Click to expand...

So was he paying his taxes? HMRC have a lot of rights to collect on his estate if he died owed them a large wad.

In 1990, in Australia, the Pyramid Building society collapsed. It caused a bit of chaos in the financial world because the building society had attracted a lot of high-profile investors. I remember this one, because Glenn Wheatley, a well-known businessman in the music industry, had decided to open a nightclub. He had all his money tied up in Pyramid. It almost destroyed him.

I had a look on the net but all this money talk bores the living crap out of me. Maybe you will stay awake long enough to make sense of it! Good luck!

How about a day-trader gone bad? He bought on margin, basically using the initial investment (their life savings) as collateral to essentially buy 2-3x that amount on credit. If he's doing it on his own, he should have put in a "stop-loss" so that it automatically sells should the price drop to a certain point--but he didn't. You can make up the reason...he was drunk, with another woman, out celebrating his financial gain, basically not paying attention. The market tanks, not only has he lost $XXX, but now he's lost 2-s times $XXX and is hopelessly in debt. Distraught, he drives off a bridge, etc...

And then they all live happily ever after.

This sounds really interesting... I'm curious about what the consequences have been (aside from the deceased husband/father). Foreclosure? Garnishment of wages? Will she file for bankruptcy? Was any of the debt covered by the assets of his estate? Did the estate even have any assets (life insurance, etc)? I can imagine that your MC is very pathetic... and you have to love that in a story

How about actual gambling? There was a banker in Ontario, Canada a few years ago that got into gambling in Vegas in a big way, started making up fake loans and fiddling with accounts to get more money to 'play' with, and eventually got caught

A good rogue move that would be easy to explainwould be if the character sold naked out of the money calls that are supposed to stay out of the money until after expiration. Something happens so they are in the money. They are naked, and he cannot cover them, so he's out.

A number of things like this happened in 2008. Selling naked options is a good way to make money, if they stay out of the money.

An "out of the money" call is a "call option" (an option to buy) that has a "strike price" that is above market price. They become "in the money" when the market price is more than the strike price of the option. A "naked option" is one that is not owned (covered) by the writer (seller) of the call option.

Try googling - Rogue traders stock market

Shorting is a good way to lose money, yes. Doesn't need to be as scurrilous. Dad (going to use that name) borrows some Verillion Corp stock to sell - a normal transaction. Verillion is a small capital operation so when it lands a massive contract that Dad did not know about or was very doubtful about going through, the stock price comes back. In a short, the stock must be returned. The stock gets called upon right after the stock gets signed. Dad has to purchase the stock back from whomever he sold it to at the higher price.

Visualise it:

Dad borrows stock for a fee. $50 000 of 200 blocks of Verillion common stock, $2.50/share. The fee is $4 000. (No idea what the fee is for a short, but I imagine that is a bit more than a simple brokerage fee if only for the simple fact that the actual owner of the stock will need a reason to lend his stock.) This means that there is an outlay or money leaving his pocket of $4 000.

Dad sells the shares at $2.49, with a 2% brokers fee. 49 800 - 996 = 48 804.

At this point he knows he will have to buy back the stock for $44 724 or $2.24/share to break even. That means the price has to go down.

Big contract comes through. Stock price skyrockets to $25.00, meaning he has to purchase the stock back with fee at $510 000. He is out $465 196.

Those simple mistakes can quickly go sour. But a broker has a bit of cash behind him so something like this he can weather. When this happens say 10 times in a row or at once, then he is in a bit of trouble. Why did he short that many all at once and without enough of anything else to balance it out? Perhaps he was very pessimistic about a specific industry. Perhaps there was a running bet at work to see how many shorts they could pull off in a bull (booming) market in the same way a teenaged boy bets that he can make it down a hill in a shopping cart. Any which way, he did it all on his own dime. Boom, massive debt he will now have to saddle himself with.

Edit: oops, you want rogue trading. Meh, this post is still useful. Perhaps some of the liabilities is split between the firm and himself. This may be especially problematic when some of the shorts are being investigated for naked shorting (he sold more stock than he borrowed.)