TXU bankruptcy holds lessons for risk managers

The bankruptcy of Energy Future Holdings – formerly known as TXU – should act as a warning to risk managers, who must be alert to excessive self-confidence and a failure to deal with unpleasant or inconvenient facts, argues Vincent Kaminski

This will never happen. Those words were uttered to me years ago, when they came from a young and successful trader sitting across the table from myself and another colleague, who was a risk manager. The trader was managing a large portfolio of natural gas options, which was exposed to a devastating loss if natural gas prices dropped below $4.50 per million British thermal units.

Our intention was not to challenge the trader or to compel him to trim his positions – in fact, we respected him and