September 29, 2023
Marketing Director
Followers of our blog will know that we regularly mention the pitfalls of using spreadsheets in distribution waterfall calculations, but there is a bigger picture in financial services where there have been some truly epic failures using Excel.
It’s reported that nearly 90% of spreadsheets contain errors, and half of spreadsheet models used in large businesses have ‘material defects’. Despite this, Excel is still the go-to tool for accounting teams with a myriad of handy features for number crunching and getting quick results. The problems usually arise when spreadsheet models are employed in more business-critical processes and incorporated in operational processes, where they are unable to stand up to scale, and room for human error creeps in.
Here’s some of the costliest Excel blunders we could find in financial services in recent times:
In 2016, when Lazard Investment Bank was advising SolarCity Corp on its $2.6 billion sale to Tesla Motors, a ‘computational error in a spreadsheet’ was made leading to an inadvertent discount of $400 million.
“An analysis by Lazard for SolarCity that indicated an equity value of between $14.75 and $34.00 per share was wrong because it double-counted some of the company’s projected indebtedness, according to Tesla’s filing with the U.S. Securities and Exchange Commission.”
In 2014, when Tibco Software was being sold to Vista Equity Partners, Tibco shareholders received $100 million less than originally anticipated due to a spreadsheet error that overstated Tibco’s equity value.
According to a subsequent SEC regulatory filing, Goldman Sachs, who advised Tibco on the deal, used the spreadsheet in calculating that Tibco’s implied equity value was about $4.2 billion. The valuation was later revised by Goldman to $4.1 billion.
The SEC filing noted: “Although the numbers contained in [the] spreadsheet accurately reflected Tibco’s outstanding equity awards and common stock, the portion of the equity awards representing restricted stock was also included in the common stock outstanding number, as restricted stock is outstanding when issued.”
In 2012, a trader called Bruno Iksil, nicknamed “the London Whale”, managed to lose at least $6.2 billion for JPMorgan Chase & Co after errors were discovered using a risk model that involved copying and pasting across multiple spreadsheets. Bruno accumulated a large amount of outsized Credit Default Swaps (CDS) as part of the bank’s hedging strategy, but the value at risk model (VaR) used formulas that were not adjusted appropriately, and before long $2bn losses were spotted (and this was just the start).
Referring to the official JPMorgan Chase & Co 130-page report that came after investigations into what happened, it was said:
“...further errors were discovered in the Basel II.5 model, including, most significantly, an operational error in the calculation of the relative changes in hazard rates and correlation estimates. Specifically, after subtracting the old rate from the new rate, the spreadsheet divided by their sum instead of their average, as the modeler had intended.”
The fallout included $920 million in fines for JPMorgan Chase and chief executive Jamie Dimon's 2012 salary being halved, from $23 million to $11.5 million.
In 2005, Australian bank Westpac was left looking embarrassed after they inadvertently announced record profits of $2.818 billion earlier than planned. Before the official release, it was discovered that the results had been emailed to 37 analysts from 16 broking firms, with the new figures embedded in an Excel template of last year's results, which were accessible with minor manipulation of the spreadsheet file (later reports mentioned an employee thought that a black cell background fill would hide black text.)
Due to concerns that information had been leaked to the market, Westpac was forced to halt trading across its shares and subsequently had to announce its annual profit briefing a day early.
Going back to 2003, U.S. mortgage provider Fannie Mae released its quarterly earnings report, only to discover it contained errors which understated its stockholders' equity by $1.1 billion.
The cause of the problem: a company accountant using an incorrect formula in an Excel spreadsheet that was used to compute changes in the value of commitments the company had made to purchase mortgages or mortgage-backed securities.
Despite attempting to put a positive spin on the blunder, Fannie Mae's stock price fell nearly 6 percent and they subsequently had to explain themselves to both the congressional oversight committees, and the regulator, the Office of Federal Housing Enterprise Oversight.
Going all the way back to 1994, Fidelity Investments made a “huge clerical error” when they incorrectly estimated that they would make a $4.32/share distribution on their Magellan fund, miscalculating on a capital loss of $1.3 billion in a spreadsheet.
After discovering the dividend estimate was off by $2.6 billion, Fidelity Magellan’s president was forced to explain to shareholders: “the error occurred when the accountant omitted the minus sign on a net capital loss of $1.3 billion and incorrectly treated it as a net capital gain”.
Although these mistakes are rarely reported, the few incidents known to the public do expose the frightening implications of human error that can arise from spreadsheet blunders. And it’s not just about money, all these examples would have caused reputational damage which is even more damaging to a financial brand.
While spreadsheets will always play their part in financial services accounting, when it comes to scaling a business and mitigating risk, automation is the natural alternative to reduce human error.
qashqade provides private market organizations an enterprise product suite for streamlining their calculation, allocation, tracking and reporting processes. Waterfall and carried interest calculations can be automated, replacing manual, error-prone spreadsheets and improving communications between GPs and LPs through enhanced reporting. Built by private markets experts, for private markets experts, the qashqade platform offers a flexible, modular based solution for fund managers, fund administrators and investors alike, and is asset-class agnostic.
