Societe Generale today announced a $7.1 billion fraud by a rogue trader.
Stand by for indignantly dull columns calling for tighter bank regulation. Regulation is supposed to stop banks from getting away with things, and if there's one thing banks aren't trying to get away with, it's having rogue traders commit $7.1 billion worth of the bank's capital in a futile attempt to corner the world's fur-bearing trout market.
Meanwhile, what does this say about internal bank checks? That it's impossible to stop all fraud, and also, that people get lazy the longer they go without having a problem. Banks will now tighten up their trading standards for a while, which is no doubt a good thing, though as this Wall Street Journal history illustrates, eventually we'll have another one of these anyway.
If you're wondering why this sort of bad news tends to cluster with other financial crises, it's because a rising tide is a good place to hide bodies. AOL, for example, played games with its expenses to turn a loss into a profit, but got away with it because eventually the profits materialized. MCI Worldcom wasn't so lucky. And big financial bets like this one are most likely to go bad when the financial markets are doing something thoroughly unexpected, like completely melting down.
If you're looking for a sunny side to this, the best I can do is a small laugh:
The trading loss wipes out almost two years of pretax profit at Societe Generale's investment-banking unit, run by Jean-Pierre Mustier. The company said it's suing the trader, who had a salary and bonus of less than 100,000 euros a year and worked at the bank since 2000.
One presumes that Jerome Kerviel is not going to be working in the lucrative derivatives trading field any time soon. At the salaries he will be able to command, and allowing for reasonable living expenses and high French taxation, the SG stockholders should get their money back in a few hundred thousand years.
$7.1 billion worth of the bank's capital in a futile attempt to corner the world's fur-bearing trout market.
How could that be futile? The total market cap for fur-bearing trout has to be a lot lower than that.
Meanwhile, what does this say about internal bank checks?
That they learned nothing from Baring's Singapore debacle, maybe? If you are speaking about banks in general, I don't know. The mortgage-backed securities madness already told us that they bought (and sold) one Hell of a lot of things they obviously didn't understand so why should their internal checks prove any more informed or informative?
Seriously, I think the only thing it does prove is that Societe Generale is a poorly run company, its stockholders are dupes, its creditors very, very nervous, and its domiciled in the right country to avoid any serious ramifications.
Rob Lyman wrote: How could that be futile? The total market cap for fur-bearing trout has to be a lot lower than that.
I own the only breeding pair, and I want not a penny less than $7.5B. Societe Generale just wasn't up for a challenge.
I own the only breeding pair, and I want not a penny less than $7.5B
A box of d-Con would cost a lot less than that, mouse.
Anony-mouse,
Hmmm... where do you keep them?
spontaneous organization, authored by The Free Market. "a more riveting thriller, never penned."
re:F-B TT
From the UK's Daily Mail:
Kerviel, who earned less than £75,000 per year - including bonus - was described as a "technical whizkid" loner who hacked in to the bank's immensely sophisticated trading systems... A SocGen insider said: "That's like hacking in to the Pentagon. And he did it in a way that meant he removed all trace of what he was doing. All the trades were invisible. SocGen could not see anything of what he was doing.
-----------------
That, my friends, is the beginning of a cover-up.
He was a trader. I've known loads throughout my career. While this guy might have been handy with spreadsheets or doing database queries, I'm betting dollars to donuts that he did not have anywhere near the skills needed to "hack" sophisticated, well-designed financial systems.
From everything I'm reading so far, this all spells: piss-poor internal controls.
This looks like a pure Soc Gen problem. I'm giving good odds that, if external auditors come in (like the kinds used by cops, whom Soc Gen avoided contacting for 3 days after this was discovered), the company's internal controls will prove to have been absymal. Or, there is some kind of scrubbing/cover-up to protect executive's rears.
A box of d-Con would cost a lot less than that, mouse.
That stuff is disgusting. Now, if they had figured out a way to make it taste like Edam cheese or havarti, preferably with a suitable cabernet on the side, they might have got me.
Assuming that the mouse has put fur-bearing trout population out of reach, what did this clown do with all that money?
We're not talking about padding the retirement fund here, unless he planned to buy himself a Carribean dictatorship or two.
Heedless,
My understanding was that he lost it trading.
His resume is now posted around the internet. You can see that he was just good with MS Excel Macros and VBA.
As I posted earlier, it's clear that he did not have the skills to "hack" anything.
It was all about the controls at Soc Gen. It's now, officially, a whitewash.
The story I read had him working in the accounting department before moving over to the trading desk, so he had a handle on the internal controls in place which were risk management related. You couldn't make too big of a bet one way without properly hedging a portion of it. The way I understand it, he was faking the hedge in the system so that the risk calculations 'looked' good but did not properly refelct what he was doing.
The fraud wasn't 7.1 billion, the loss to unwind the positions on that day amounted to 7.1 billion. I would guess that the cost basis of the trades were at most half of that*, and the faked hedges 10-20% of the cost basis. So the fraudulent trades amounted to about $350-700 million. If he was using a buy put/sell call hedging strategy he could have offset the cash position to keep the fraud going. But he still needed someone in accounting to wash the trades against each other to make this happen.
*He was making the exact oposite bet of what happened.
I do not remember his name but the rogue trader that drove Barrings under has made a nice living since he got out of jail as a speaker and the author of a fairly successful book about his experience.
i presume the suit is to prevent this type of profiting from the experience.
Hmm, $7.1 billion. Interesting that apparently Soc Gen found out about it and starting unwinding the trades first. Even more interestingly, apparently Soc Gen told the Bank of France on Sunday, and then got permission from the Bank of France to not make the news public so that they could unwind their trades and minimize their losses. The French are upset that they weren't told earlier-- and the Fed and all the other central bankers are upset that the Bank of France didn't tell them.