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January 24, 2008
By: Kevin Drum

ROGUE TRADING....We learned today that Jerome Kerviel, a "rogue trader" at Societe Generale, was responsible for $7.2 billion in recent trading losses, the largest in banking history. So how'd he do it?

His approach was to balance each real trade with a fictitious one, and his "intimate and perverse" knowledge of the bank's controls allowed him to avoid detection, co-Chief Executive Officer Philippe Citerne told reporters. He rolled over his real trades before they reached maturity.

By the end of December, he was "massively in the money," said [Philippe Collas, the head of asset management at the bank]. Since the beginning of the year his trades became unprofitable.

The trades first came to management's attention on the evening of Jan. 18, when a compliance officer found a trade that exceeded the bank's limits, Mustier said. When Societe Generale called the counterparty, they were told the trade didn't exist.

Naturally, my first question is how Kerviel managed to do this. How did he construct all these fake trades? And shouldn't the sheer volume of trades triggered alarms, regardless of whether they were balanced with other trades?

I suppose eventually someone will tell the whole story and we'll learn what happened. But my second question is this: what if Kerviel's friskiness had been discovered at the end of December, when he was "massively in the money," instead of two weeks later? Would we ever have found out about this? Or would Societe Generale have announced massive fourth quarter trading profits and invented some smooth story about how they had cleverly outsmarted the market?

Common sense suggests that, at least occasionally, these "rogue traders" must make a lot of money. But when was the last time you heard a bank announce such a thing? Does it really never happen? Or does it just get hushed up when it does?

Kevin Drum 5:58 PM Permalink | Trackbacks | Comments (70)

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I suppose eventually someone will tell the whole story and we'll learn what happened. But my second question is this: what if Kerviel's friskiness had been discovered at the end of December, when he was "massively in the money," instead of two weeks later? Would we ever have found out about this? Or would Societe Generale have announced massive fourth quarter trading profits and invented some smooth story about how they had cleverly outsmarted the market?


You know why Goldman Sachs hasn't had to write anything down(unlike say Citigroup) right? They knew they were peddling toxic crap and shorted it, massively. I am sure SG could have made any easy excuse for their massive profits(if they discovered it in Dec.). Who would ever have spilled the beans? No one with any real knowledge.

Posted by: Joe Klein's conscience on January 24, 2008 at 6:04 PM | PERMALINK

Cynically, I suppose a group might keep it quiet, if profitable, but man ... would a company really expose itself to massive criminal liability like this? I would not be surprised to hear about companies that put a toe over the line between law and criminality every once in a while, but this would have been a major risk. One whistle blower and everyone goes to jail.

Posted by: BombIranForChrist on January 24, 2008 at 6:17 PM | PERMALINK

There have been two recent cases of rogue traders in the billions in the past few years. Can't find links at the moment, but I think one was in England.

Posted by: K on January 24, 2008 at 6:20 PM | PERMALINK

I think it's because they don't get discovered until things go bad -- it's when the bills come due and can't be paid that the bank notices.

Posted by: tavella on January 24, 2008 at 6:22 PM | PERMALINK

I don't understand the rationale of these sorts of rogues. Do they think they will win big, and be declared a hero with matching bonuses? Do they think they can siphon off the profits without their bosses finding out? I can just imagine having made a big costly boo-boo, and doubling up the bet to try to cover ones ass.

I vaguely recall a previous one: Bank of Commerce and Industry IIRC. I think they had to be bought out by another bank. A fellow at work has accounts with SG, but he isn't worried, he owes them more than they owe him.

Posted by: bigTom on January 24, 2008 at 6:31 PM | PERMALINK

Nick Leeson was the previous record holder, at a mere $1B, Barings Bank was bought thanks to him. Leeson must be dancing a jig over not being the record holder any longer.

Posted by: michael on January 24, 2008 at 6:32 PM | PERMALINK

So how do you think these trading operations make so much money ?

Of course there are lots of "rogue" traders.

"Remember Mr. Kerviel, should you be caught, the director & the organization will deny any knowledge".

You really think that the good ole U.S.A. is the only entity being run by gangsters wearing $1000 shoes ?

Geez, wake the f*ck up.

“You would label it cynicism - as if that proved it wrong." - Robert A. Heinlein

Posted by: daCascadian on January 24, 2008 at 6:45 PM | PERMALINK

The whole thing is based on trust. It is not like retail accounts where the money has to be in the account before a trade can be made. Institutions don't put money in an account first. Trades are made on faith between the broker and the instituion/customer. And a broker can committ the broker/dealer he is working for to any liability up to his trade limit. It could be 10 mill per trade, 50 mill or whatever. As long as the broker stays under his trading limit no red flags need to be raised.

So a ticket on a real trade with an institution it is indistinguishable from a ticket written on a bogus trade. Until, that is, someone checks.

Posted by: ken on January 24, 2008 at 6:54 PM | PERMALINK

The story of Enron is of people doing just this sort of thing for years, sometimes with the company's knowledge, sometimes covered up after, and always with glowing profit statements issued based on the bullshit. It's true: It can go on for years undetected, because there are often more people interested in hiding it than people aware that something needs to be found.

Posted by: wally on January 24, 2008 at 7:12 PM | PERMALINK

Typically, rogue traders start trying to cheat the system to hide their losses, rather than get around position limits. It is rare when a rogue actually is ahead. So rare that I've never heard of it before.

This is common human behavior among fiduciaries, such as lawyers or employees: using dishonesty to hide incompetence (or bad luck.) The most classic example might be an institution, rather than an individual. BCCI was started as an idealistic Third World development bank, and turned to fraud when it could not make money.

Posted by: Joe S. on January 24, 2008 at 7:31 PM | PERMALINK

from my days working in the back office of a small firm at the CME, when even a single lot order was without a home, you got out of the trade immediately even if it was a winner. risk is an issue and so are margin calls. if these were trades done through an exchange, then socgen should have had a massive open position. blame the trader all you like, but that back office is pretty suspect.

Posted by: larrybob on January 24, 2008 at 7:32 PM | PERMALINK

When a bank is robbed, let’s say its five thousand dollars, isn’t it interesting that during the interview with the bank president, it is stated as fact that fifty thousand dollars is missing.

How long before the money controllers claim there losses are in the trillions?

When it comes to money, I believe everything is rigged.

Stock market included.

Posted by: diode on January 24, 2008 at 8:25 PM | PERMALINK

Many, many, many years ago I worked as a dealer in a gambling casino at Lake Tahoe called Harrah’s Club. I began as a college student, which was the demographic that Harrah’s liked to hire from for their summer employees. The idea was that newbies didn’t know all the tricks of the trade for stealing.

This seemed to work, as far as I knew, until someone came into the club one night and cleaned out a craps game with loaded dice and got away with $8,000 in five minutes. (That would be about $48,000 in today’s money.) Then the club decided that maybe we needed to learn how people cheated, so we would at least notice if something was going wrong. So, we had some lessons in cheating run by the pit bosses, who all talked like they came from the Lower East side of New York. They showed us how some dealers can roll a deck and deal the cards they just picked up. They added to and subtracted from bets with moves I couldn’t even see, even though they told us to watch for it.

The saddest news was that most stealing in casinos was done by insiders. We had people watching us at all times, pit bosses behind us and people looking down on our tables from one-way mirrors in the ceiling. But, I could always tell when someone cheated on my table, even though I couldn’t prove it. When a chatty table suddenly went quiet, I knew someone had probably added, or subtracted a few chips from their bets, while I was paying off on the other end.

So, it doesn’t surprise me that traders would steal. Anytime there is a lot of money available, someone is going to be tempted.

Posted by: emmarose on January 24, 2008 at 8:29 PM | PERMALINK

Rick Bookstaber's book sheds a bit of light on how these situations develop. It's telling that when he describes the high point of Salomon Brothers' existence, nobody outside the arbitrage group understands where these hundreds of millions of dollars are coming from. Nobody really tried to understand until the profits turned to losses.

HOWEVER: this is supposed to be a different world of risk management. The Leesons and the LTCMs and so forth were supposed to have inspired some pretty tight controls on traders. Someone at SG risk management is either complicit or on their way to the exit. No trader, anywhere, should be able to build billions of dollars in positions without board attention. Doubling the orders, through hedges or fake orders, only compounds the appearance that there was insufficient oversight.

This will, some day, be an interesting story.

Posted by: bobby on January 24, 2008 at 9:14 PM | PERMALINK

When a bank is robbed, let’s say its five thousand dollars, isn’t it interesting that during the interview with the bank president, it is stated as fact that fifty thousand dollars is missing.
-==-==-==-==-==-==-==-==-==-

Not really when you consider fractionalized banking.

Posted by: Ya Know.... on January 24, 2008 at 9:18 PM | PERMALINK

Naturally, my first question is how Kerviel managed to do this. How did he construct all these fake trades? And shouldn't the sheer volume of trades triggered alarms, regardless of whether they were balanced with other trades?

He used to work at the firm's risk mngmt section, so he was intimately familiar with the processes his firm used to prevent just such hanky-panky by its traders, as well as, presumably, the people responsible for preventing it.

Damn... I was going to point you to a hilarious quote by the bank's CEO about how the loss was no big deal for the bank, and that they would cover it by issuing preferred stock (to whom, one wonders), but the NYT has updated their story to exclude it.

Posted by: Disputo on January 24, 2008 at 9:20 PM | PERMALINK

Btw, I hear that Bill Clinton is already blaming this on Obama....

Posted by: Disputo on January 24, 2008 at 9:22 PM | PERMALINK

Do you honestly not recall Nick Leeson, the man who brought down Barings??? I see there's a whole movie about it....

Posted by: Anon on January 24, 2008 at 9:30 PM | PERMALINK

Nick Leeson.... You would have thought that he would still be serving a long prison sentence but no..He is living free in Ireland.

"In early 2005 Nick was appointed General Manager of Galway United FC. June 2005 saw the release of his new book Back from the Brink, Coping with Stress, published by Virgin Books."

He is offering after dinner speaking engagements as well.

The man even has a website:
http://www.nickleeson.com/index.html

His verdict: "The Briton, who spent four years in jail after the mid-1990s Barings scandal and went on to write a best-selling book about it, said it was only a question of time before something similar occurred. "It was always likely to happen," Leeson, who is now the boss of a football club in the west of Ireland said, while declining to make more elaborate comment.

Now if you can conduct a huge fraud and get out of jail after 4 years, what would be the sentence for invading a country and killing a few hundred thousand innocents? Could be zero one suspects.

Posted by: anon on January 24, 2008 at 9:56 PM | PERMALINK

Shorter wingnut Capitalism...

Come on people!!! Just spend, spend, spend all you've got! If you save anything it's your fault the economy is fucked up!!!

I'm so sick of this obvious con job I could spit.

Posted by: elmo on January 24, 2008 at 11:04 PM | PERMALINK

Most risk mgmt processes monitor a trader's NET position (or value-at-risk), not necessarily the size of the trades in the book. So if he did offsetting trades it wouldn't be immediately noticed. The other thing is that he was probably trading in derivatives or other non-exchange instrument. Otherwise the exchange's clearing company would have caught the unmatched trade. Finally, he probably knew enough to spread the trades around to different counterparties to avoid maxing out any one counterparty's credit limit. Sounds like that's how he was ultimately caught - he went over some counterparty's limit.

Still...$7.2 billion? That took a ton of obfuscation and probably some inside help.

Posted by: kis on January 24, 2008 at 11:07 PM | PERMALINK

Every bank has a lot of controls in place to prevent a single trader from ammassing a position so large it puts the bank at risk. Unfortunately, this particular trader had been promoted from a position in the middle office where he had been intimately familiar with those controls and had figured out how to get around them. No bank wants a thirty-something trader with two years experience controlling a $7bn book. Even if his trades had been in the money, he would be cleaning out his desk today.

Posted by: Paul Gottlieb on January 24, 2008 at 11:41 PM | PERMALINK

Here's the guy's resume:
http://www.telegraph.co.uk/money/graphics/2008/01/24/bcnjerome125big.gif

Yet another perfect example of why the top %1 should be taxed at 50-70%!

Posted by: Doc at the Radar Station on January 24, 2008 at 11:46 PM | PERMALINK
"Naturally, my first question is how Kerviel managed to do this. How did he construct all these fake trades? And shouldn't the sheer volume of trades triggered alarms, regardless of whether they were balanced with other trades?"
Yup, you guessed it: Frank Stallone. Posted by: Boorring on January 24, 2008 at 11:53 PM | PERMALINK

If an intern stole a laptop computer, would we have heard about it or would you have "kept it hushed up" Kevin?

This is a private company. They don't have any obligation to tell you what they are doing.

Although presumably trading activities are pretty highly regulated and they would have to inform the exchange of any serious violations.

Posted by: Observer on January 24, 2008 at 11:56 PM | PERMALINK

kis >"...Sounds like that's how he was ultimately caught - he went over some counterparty's limit...."

Probably trying to recover from a big loss somewhere else.

"No place is so strongly fortified that money could not capture it." - Marcus Tullius Cicero

Posted by: daCascadian on January 24, 2008 at 11:58 PM | PERMALINK

No bank wants a thirty-something trader with two years experience controlling a $7bn book. Even if his trades had been in the money, he would be cleaning out his desk today.


Would they really have fired him if he closed out his position on Dec. 31? It seems to me he didn't see the market dive at the beginning of the year coming. I think they might have reassigned him, but why would a bank fire someone who made them possibly billions?

Posted by: Joe Klein's conscience on January 25, 2008 at 12:15 AM | PERMALINK

Boy, I know this is hard for those outside the financial world to comprehend, but, really, we all get screwed,

It all started in the early 70s and has been exponential from there.

If you haven't noticed the pay differential accelerate from 1981, you weren't watching. If you didn't see the Wall Street bonuses explode from 1981, the same is true.

If you wan't to explain what is happening today without looking back to the 1980's, you don't understand anything at all that's happened in the mean time.

Greed started right then. And the middle and lower class beame isolated, and wages froze.

Show me any statistics that show this didn't happen.

Posted by: notthere on January 25, 2008 at 12:56 AM | PERMALINK

Société Genérale totally fell down in protecting their business. The guy got away with murder. Like every faux pas it comes down to ignorance, stupidity, lack of awareness, management NOT being dealers, and NOT having proper controls.

That would be like Barings, or any other stupifying loss. And there have been many.

But how, with BG, do share holders sue the company? They approved the managers. They condoned the business guidelines. Last meeting they gave the thumbs up. They are suing their own losses.

It makes no sense!

Posted by: notthere on January 25, 2008 at 1:08 AM | PERMALINK

Joe Klein's conscience:

Because, 20 years ago, most banks would have wanted to evaluate and know their risk, control it, and not be EVER in the position of risking their capital.

Nowadays, the cowboy execs think the opposite is what they should do.

This road leads to where we are now and much, much worse.

But you're probably not old enough to know that.

Posted by: notthere on January 25, 2008 at 1:18 AM | PERMALINK
We learned today that Jerome Kerviel, a "rogue trader" at Societe Generale, was responsible for $7.2 billion in recent trading losses, the largest in banking history.

To me, it sounds like the bank has found a scapegoat for more losses from the subprime crisis...

Posted by: mitch on January 25, 2008 at 5:03 AM | PERMALINK

Observer: This is a private company. They don't have any obligation to tell you what they are doing.

Actually, SG is a public company (Paris-listed), and so they do have an obligation to tell us what they are doing.

It's just a different world for some people...

Posted by: ajay on January 25, 2008 at 5:35 AM | PERMALINK

Sorry, but this fictitious trade business is a bunch of hogwash. There are controls in place to keep this kind of thing from happening.

Something else is going on.

Carolyn Kay
MakeThemAccountable.com

Posted by: Carolyn Kay on January 25, 2008 at 5:38 AM | PERMALINK

Fictitious trades are anything but "hogwash" - controls are fallible - indeed the attitude that "there are controls in place" helps smart operators get around them.

All human systems are fallible, and even relatively secure business situations, daily operations need flexability for perfectly valid business reasons. Of course the frothing at the mouth banking & finance phobic left will see grim conspiracies (in sort of a queer mirror image of the frothing at the mouth Right in the USofA where unlikely idioticies of gov't conspiracies are seen). Rather more prosaic explanations are all that is needed.

Of course, first, a good understanding of the order system and the manner in which trades are cross checked - as this fellow had - gives on ideas about how to end-run around if one is careful and precise in timing.

As for the rational, I would suggest those actually interested (rather than merely going through you typical Left blithering on) read perhaps Taleb's "Fooled by Randomness."

In many ways, if you're a trader in trouble, and you've already fucked your strategy into a cocked hat, what do you have to lose by doubling up deep and going for it? Either one pulls out of the dive or one crashes and burns, crash and burn at 1 billion euro versus 200 million still means you're canned, but maybe doubling up you get out.

Take it a step further. This fellow likely found himself in a bind in the recent past, and due to his background, was able to game the control system (I will add in passing in the Anglo finance world there's a saying out there, if you want to find a stupid counterparty for a fucked up trade, go to a French bank.... Soc Gen, BNP Paribas...). It pulled him out for a while, and he got greedy, kept doubling it up. But the market turned and boom.

But as for Drum's rather typical question, people get fired all the time for getting caught outside the controls, whether they are net positive or negative. Hushed up? It's not fucking news mate unless there are big losses. Get a fucking grip.

Posted by: The Lounsbury on January 25, 2008 at 5:50 AM | PERMALINK

Yet another perfect example of why the top %1 should be taxed at 50-70%

Because a single fellow fucked around with the system? We'd give the bloody trade unions the heave ho generally if we drew conclusions on this kind of "data"

Posted by: The Lounsbury on January 25, 2008 at 5:54 AM | PERMALINK

Carolyn Kay:

There are controls in place for U.S. banks and brokerages, as a result of the Sarbanes-Oxley of 2002. Clearly, the same internal controls were not in place at Societe Generale, headquartered in France. There are monthly reconciliations of open positions that should have caught it, as well as segregation of duties controls that prevented one individual from initiating, confirming, settling and recording the trades. Further, there are monthly or annual confirmations of trades selected at random, usually using monetary unit sampling (MUS), which would have likely caught the bigger trades. While SOX has issues, it has reduced the number of massive accounting frauds that have occurred in the United States. Notice that this fraud and the Barings Bank debacle both occurred overseas.

TCD

P.S. I really like the website makethemaccountable.com! I have been going there for years....

Posted by: The Conservative Deflator on January 25, 2008 at 6:40 AM | PERMALINK

I've had experience with "rogues" on a smaller scale than the famous ones. By "rogue", I mean people who were making decisions beyond their authority. In some cases they didn't do so for any personal financial gain. In fact, there was no rational reason for them to exceed their authority, since they were apt to be fired when they were caught.

The lack of rationality may be a clue to why few of the rogues seem to make money. If they were smart and sensible, they wouldn't be rogues.

Posted by: ex-liberal on January 25, 2008 at 7:54 AM | PERMALINK

Why the surprise? Bush stole the election and lost a lot more than 7 billion.

Posted by: Bob M on January 25, 2008 at 8:53 AM | PERMALINK

He's nothing but a bucket into which the bank can shovel some of their mortgage bond losses.

Posted by: Neal on January 25, 2008 at 8:54 AM | PERMALINK

I wrote on this yesterday, one reason that you might not see positive results from fraud is that there are ways to extract them from the system even if you cannot transfer the cash directly:

http://dotfuturemanifesto.blogspot.com/2008/01/7bn-societe-general-fraud.html

Another is the casino effect: gamblers continue to gamble till they lose so much they can't place another stake.

The downside is much bigger than the upside. The guy who gets ahead $10 million can think 'hey I have paid for the yatch' and stops. The guy who is $10 million behind has to cover the loss or go to jail. So he doubles down to $20 million and if he loses doubles down again. Leeson doubled down to $800 million.

The bank appears to be peddling the line that this guy was not on a trading commission, he was meant to be making plain vanilla trades so they did not expect a fraud. Its bullshit, they should know that there are ways to cash out these positions.

As it happens I describe them in my book: the dotcrime manifesto (follow link above).

Posted by: PHB on January 25, 2008 at 9:02 AM | PERMALINK

I'd like more info on how the loss was first reported as $7 Million and then ballooned to $7 Billion.

My understanding is the bank lost $7 Million but pundits are trying to blame the entire worldwide economic crisis on that loss and that's how they get the $7 Billion figure.

Posted by: Tripp on January 25, 2008 at 10:08 AM | PERMALINK

If the controls aren't being used, that's the same has having no controls.

I still think there's something else going on here.

Carolyn Kay
MakeThemAccountable.com

Posted by: Carolyn Kay on January 25, 2008 at 10:26 AM | PERMALINK

TCD

SOX is 2003. Barings was 1995. A big difference.

SOX would not have prevented Barings, even had Barings been an American bank (it was actually a family-owned British private bank).

SocGen actually had all those checks that you describe.

Bankers Trust and P&G, Merrill Lynch and Orange County. These were all *American* scandals.

Anon. Nick Leeson served time in a Singaporean prison, and was released after he developed kidney cancer. Singaporean prisons are no country club, by the way-- a touch of SuperMax in them, if you've ever seen Changai.

He is banned (for life) from all financial dealings, but has rebuilt himself as a risk advisor and self help speaker.

Think G. Gordon Liddy, the Watergate Conspirator.

Except Leeson has apologised for his crimes, which Liddy never did.

The biggest fraud up until this one was a copper trader at Sumitomo Copper, known in the market as 'Mr. Copper'. He cost the bank $2.5bn.

Posted by: Valuethinker on January 25, 2008 at 10:35 AM | PERMALINK

There are controls mandated by Banque de France, my dear provincial, and Soc. Gen certainly has internal controls, and uses them. There is no report that the controls were not functional.

However, no bloody system of controls is infallible, and when one knows the system, one can game it. Spread trades, chop up the trading to avoid thresholds by time and amount - if one knows precisely what such thresholds are (which he did), very possible and even easy to imagine if not pull off.

Of course French banks have a poor rep in this area, but that's France's problem, not America's, nor are your local issues theirs. The explanation or discussion by PHB makes amply clear; of course typical Lefty git, you will prefer some silly conspiracy theory to the mundane of simple human greed and fallible systems.

Posted by: The Lounsbury on January 25, 2008 at 10:42 AM | PERMALINK

I'd like more info on how the loss was first reported as $7 Million and then ballooned to $7 Billion. My understanding is the bank lost $7 Million but pundits are trying to blame the entire worldwide economic crisis on that loss and that's how they get the $7 Billion figure.

No, that's simply illiterate of you. The loss broke as est. 5 billion Euro>/b>. Perhaps some American reporter mistakenly reported 7bn USD as 7 million USD, but 7 billion USD is hardly the costs of a world wide economic crisis - which would certainly be trillions.

Posted by: The Lounsbury on January 25, 2008 at 10:45 AM | PERMALINK

It is worth noting that The Financial Times reports that Mr Kerviel appears to have built up his losses over a short period using accounts and passwords belonging to colleagues. SocGen was first alerted to the fraud late last Friday, following a tip from another trader. - as it appears that he hacked into others accounts, the ability to hide the network of trades becomes clearer.

Posted by: The Lounsbury on January 25, 2008 at 10:50 AM | PERMALINK

The Lousbury,

No, that's simply illiterate of you.

No, the mistake happened when I heard an American reporter state "Seven Million."

I think that was simply presumptuous of you.

Assuming the report from the Financial Times is correct about using colleague's passwords one has to wonder how Kerviel acquired them? Was it a keylogger or something as simple as watching over a colleague's shoulder?

I suppose those details we will never know.

Posted by: Tripp on January 25, 2008 at 11:06 AM | PERMALINK

Finally the American law, Sarbennes Oxley is irrelevant to Societe Generale, which files with the AMF, the French securities market authority, not the SEC (*).

Relevant to bank risk management and controls is rather ECB and BdF regulatory rules. In short, this is a French crisis, not an American one.


(*: although it does appear there is an ADR for SocGen for NYS, I don't believe they are listed program)

Posted by: The Lounsbury on January 25, 2008 at 11:08 AM | PERMALINK

Most of the time banks will never admit publicly how a fraud occurred because they don't want anyone knowing how to do it. A friend of mine works at a large bank and they had a huge fraud committed by a co-worker involving ATM settlement - they wouldn't even press charges because then it becomes public record. She said most of the time they don't press charges if the person who committed the crime agrees to tell them exactly how it was done, so they can create safeguards against it in the future.

Posted by: Julene on January 25, 2008 at 11:39 AM | PERMALINK

"When it comes to money, I believe everything is rigged."
_______________

One of the differences between a market-driven system and a government-driven economy is that in the market system one occasionally finds a "rogue" actor who is subsequently punished. In a government-driven economy, any rogue action is simply called a "policy shift" or, at most, a miscalculation and no one is held accountable.

Posted by: Trashhauler on January 25, 2008 at 12:20 PM | PERMALINK

Quite correct, often describing / reporting a fraud (which may or may not be strictly criminal...) spreads knowledge of how to do it.

Another item, from supra, He's nothing but a bucket into which the bank can shovel some of their mortgage bond losses. is a silly and stupid statement as Soc. Gen. has already announced provisioning on mortgage losses, and there is no way for them to shovel entirely unrelated Euronext derivatives trades into an entirely different pot, above all under the now up close eye of Banque de France.

Posted by: The Lounsbury on January 25, 2008 at 12:31 PM | PERMALINK

Trashhauler,

One of the differences . . .

BWAHAHAHAHAHAHAHAHAHAHA.

Oh man that is a good one. Now pull the other leg.

Then read up on golden parachutes, insider trading, and the Rockefellers.

I mean didn't even Adam Smith talk about Fraud?

"All men, even the most stupid and unthinking, abhor fraud, perfidy, and injustice, and delight to see them punished. But few men have reflected upon the necessity of justice to the existence of society, how obvious whatsoever that necessity may appear to be." The Theory of Moral Sentiments

Posted by: Tripp on January 25, 2008 at 12:33 PM | PERMALINK

How do you stop rogue traders who manipulate transactions on computers? I don’t know. All I know is that the long-time casino dealers at Lake Tahoe used to tell us newbies that in the old days crooked dealers who stole from the house were taken out into the desert where the club enforcers broke their hands. Their dealing days were over.


Posted by: emmarose on January 25, 2008 at 1:19 PM | PERMALINK

Today's WSJ has a front page story that answers most of the questions and speculations raised here.

He circumvented controls via a combo of hacking and social engineering, and was only caught due to a margin call flag. His total positions were $73B, which were unwound earlier this week by the bank and all that selling almost certainly contributed to the index crashes in Europe on Monday (stock index futures were precisely what this guy was trading). And his motives are still uncertain: he apparently didn't make a dime for himself, and he claimed when initially caught that he was employing a new trading strategy that he had discovered.

Posted by: Disputo on January 25, 2008 at 1:32 PM | PERMALINK

It is common for banks to have a mandatory vacation policy. A lot of embezzlement schemes come unraveled when the perpetrator isn’t around to juggle the accounts.

As to whether we would have heard about it if the rogue trader had been ahead when caught, I remember during the Clinton impeachment when the conservatives were asking what would happen if a CEO got caught with an intern. From personal experience I know this actually happens reasonably frequently. What happens? The CEO writes a check, everybody keeps their mouth shut, and business as usual goes on.

Posted by: fafner1 on January 25, 2008 at 1:51 PM | PERMALINK

"Oh man that is a good one. Now pull the other leg."
________________

You've obviously never worked in government. What might be called fraud outside of government is usually called innovation inside of government.

By the way, golden parachutes aren't even remotely illegal.

Posted by: Trashhauler on January 25, 2008 at 2:59 PM | PERMALINK

No mate (Tripp I think), it was not simply presumptuous to call your idiot speculation re the million vs billion illiteracy. Neither mere billions nor millions make a global financial / economic crisis, ergo your speculation was illiteracy.

And Trashhauler is quite right, mixing things one disapproves of (subjectively) such as Golden Parachutes (which may be damaging to shareholder value) with fraud is simply showing Left illiteracy. Different issues. Certainly as an investor I am all for the market pushing to reduce management comfort - based on long term and not quarterly or even perhaps yearly objectives unless they are benchmarked against the larger market of peers. But that has fuck all to do with either this crisis, American SOX issues, or even some obscure conspiracy mongering by American provincials from "Hold Them Accountable".

Of course since this is a boring business issue - no real policy per se, although it does reflect on the fine social-democratic French policy world's implementation perhaps of oversight (at least given the general poor reputation of French banks with respect to risk management practices, in the market among various operators), but to be fair it really says fuck all about anything. But if the Left illiterates want to make noises about golden parachutes, etc, it is would be best to ground their comments in some smattering of knowledge of French labour practices and incentives.... indeed the fact that for middle-Left (that is far Left that has decided to pretend to be market friendly, but in fact fears and hates the markets) the scandal came about in their near ideal market (France).

Posted by: The Lounsbury on January 25, 2008 at 4:03 PM | PERMALINK

...Quite correct, often describing / reporting a fraud (which may or may not be strictly criminal...) spreads knowledge of how to do it.
...Posted by: The Lounsbury on January 25, 2008 at 12:31 PM | PERMALINK

This is known as "Security through obscurity" - it is an entirely wrong-headed attitude, and simply leads to more fraud.

The impetus for this methodology is really just a rationalization to save embarrassment. There is nothing more to it than that.

The real answer is; and most serious computer security professionals know this: OPEN REPORTING.

When an exploit is discovered, it is widely and openly reported. It is the vendor's responsibility and duty to close the loophole as soon as possible. (not as soon as convenient). Period. The real embarrassment comes when these things are kept quiet, and swept under the rug, until other smart fraudsters figure out the same exploit, the knowledge spreads on the "black market" - and it becomes widespread and systemic, and then accepted as "common practice" - and therefore, "normal" and even "moral, you're an outsider, how can you possibly understand?".

Yes: It is irresponsible when Security Researchers report highly detailed methods of exploits in the wild, to the public, without first privately giving a vendor a reasonable amount of time to quietly fix the problem.

But when a vendor does not show a good faith effort - as has often been the case in the field of computer security (it was an epidemic in the 1990's - but has gotten much better in recent years) - it is the researcher's obligation to "light a fire" under the vendor, warn the vendor's customer, of the VERY REAL PUBLIC SAFETY THREAT posed by the exploit.

In the case of computer security; it could be something like a vulnerability that could lead to a regional denial of service of the public internet, or data theft, or just about anything.

In the case of GS; as it turned out, it wasn't just $7 Billion; It was these massive index fund sell-offs, it was the faith in our whole financial system, it was what triggered the Fed to do an emergency .75% rate cut, and it may even result in this incredibly irresponsible "tax rebate" crap going through! The consequences of this exploit of our financial system are incredibly dire; and had there been an opportunity to stop this prior to this week, and had someone kept the information quiet out of embarrassment labeled: "security threat" - that someone is RESPONSIBLE for this, and every future instance of this exploit until the system is fixed such that this kind of thing can never happen again. Has GS made any changes in their procedures to safeguard against future occurrances, other than "we don't think anyone would have the balls to try to get away with this again, and we'll be watching closely. . " ?!

Posted by: osama_been_forgotten on January 25, 2008 at 4:35 PM | PERMALINK

Lousbury,

First off, watch your mouth. There are ladies present.

Second, the 'common thread' you fail to see is my main complaint about modern Libertarian faith in "The Free Market(tm)." It completely ignores human nature, something the Sainted Adam Smith himself took into account.

When there is money involved some people are greedy, sneaky, and dishonest. They will try to maximize their winnings at the expense of everyone else's.

The current business climate you spout about is nothing but an exclusive club run for the benefit of the ultra-rich. It is a VERY tough club to break into but once you are in you are in for good.

Failing CEOs are rewarded because they are paid by a circle of friends and are not accountable to the shareholders. Complicated schemes are devised for enrichment and when they fail they are hidden until they grow so big and so diseased that they bring down huge institutions.

Yet somehow the common cry seems to be for less accountability and less oversight and more market "freedom" which seems to mean the freedom to enrich the rich and fleece everyone else.

That is the common thread behind the latest French Bank fraud, the Enron failure, the sub-prime debacle, and golden parachutes.

Posted by: Tripp on January 25, 2008 at 4:38 PM | PERMALINK

Primo, Ladies in Finance are adult enough to handle a bloody fuck or two, unlike, it would appear among the wilting whatever in 'middle America.' The rest of the whinging cunts should fuck off.

As you are footnotes ex mortgage markets, fuck off.

As for both Osama and Tripp, it is all about cost-benefit analysis.

Transparency is not an abolsolute good - neither is non-transparency. I rather think of the self defeating attempts to cast light on, what is the phrase, 'cigar filled rooms"? In any case, as in any effort, there is a trade off, with diminishing returns.

For politics, well, the US seems to suggests where the limits are but that's your business.

For finance, leaving aside the illiteracy of golden parachutes being all of a piece of fraud, evidently business contracts are not the same bloody thing as programs (although it is nice to see the intellectual background...), indeed they are entirely different. There are rather fundamental reasons for which only a tiny minority of global firms have opted for listing - tiny minority even restricted to

Posted by: The Lounsbury on January 25, 2008 at 5:31 PM | PERMALINK

As for both Osama and Tripp, it is all about cost-benefit analysis.. . . .
Posted by: The Lounsbury on January 25, 2008 at 5:31 PM | PERMALINK

That's bullshit.

Because no cost-benefit analysis was ever done on the wrongly-triple-A-rated SIVs of bundled-mortgages that took into account the impact to markets that would occur when people found out that an unknown percentage were worthless.

No cost-benefit analysis takes into account that when you cut workers' pay, even though the individual corporation may profit short term, they end up sabotaging their own market because nobody can freaking afford to buy the products anymore.

No cost-benefit analysis accurately measures how much it costs our economy when manufacturing shuts down entire industries, because they can't afford to pay the health insurance of their workers anymore, because nobody enforces the completely fraudulent billing practices coming out of hospitals; in defense against reimbursement cutbacks by an insurance industry that colludes, and acts as a monopoly; because there is no portability of coverage.

Bollocks to cost-benefit analysis.

It's a convenient way to con people into believing one has one's bases covered, by only looking at the conveniently rosy parts of the picture.

Posted by: osama_been_forgotten on January 25, 2008 at 5:42 PM | PERMALINK

The rest of the whinging cunts should fuck off.

At least the level of Loonsbury's intellect is quite transparent....

Posted by: Disputo on January 25, 2008 at 9:10 PM | PERMALINK

He worked in back office operations and knew the user names and passwords of those who worked on the second and third shifts responsible for tracking this stuff. He took advantage of people being out on vacation between Christmas and New Years to enter into the system pretending to be them.

To prevent this problem, Societe Generale should have had a policy that whenever an employee comes or goes in the operations area, every single employee in the area has to change his password. Having multiple passwords, and requiring all of them to be changed would also help.

Very few firms change user names because of the additional expense involved. This fraud makes a good case for changing user names, as well as passwords.

When he stayed after hours, he went into the system with the names and passwords of people who would normally be working after hours. He then created fictitious counter positions so that the risks he took were netted out. Say he was long 50 million futures contracts on CAC40 (France's DJIA). He created a fictitious short position of 49.75 million futures contracts, so that it looked like he was only going overnight with 250,000 -- not 50,000,000 -- contracts. He made it look like he was being responsible.

When someone in ops (operations) checked with the counter party -- the person listed as providing the loan of future's contracts sold short -- the ops guy discovered the lender did not exist and the short position did not exist.

To prevent this type of thing, the internal controls would have to have seen that OPS people were entering into the system from a trading desk and that the OPS person using the system at night was listed on the personnel file as being on vacation.

Pretending to be a co-worker in a different business area is not how people normally behave. That's what he was doing when he entered into the system using the user names and passwords of people in operations. The guy was able to engage in this massive fraud and create tremendous losses because some internal controls were weak because what he did is just not expected at all.

There's also the possibility that all the controls WERE in place, and that the perpetrator entered into the system from the PC's in the OPS area, not at his trading desk. Picture that he went to his former colleagues in operations and offered to to do their work for them while they went out on vacation. "Look, I'm a single guy, you've got a wife and kids you want to show off to the grandparents during the holidays. I've got the time and know how to do your job at the end of the day. This way I can help you out and someday, you may be able to help me out."

Would someone in OPS have pictured that the trader was planning to engage in a massive fraud? Or would OPS have thought the trader was just being a nice guy for a future favor?

Posted by: Boleslaw on January 25, 2008 at 11:08 PM | PERMALINK

The NYT has a rather strange article up which paints a portrait of the rogue trader as being a middling, average, mediocre sort who could not possibly be the brilliant hacker as portrayed by the bank. They even pass along anonymous speculations from "some financial experts" that Kervial is being used as a scapegoat by the bank to cover up subprime loses, as Carolyn Kay suggests above.

Posted by: Disputo on January 26, 2008 at 2:12 AM | PERMALINK

Well, Osama Forgotten, your shrieking merely indicates that you don't like the cost-benefit analysis, and your emotional whinging on really doesn't say much beyond the typical emotive reaction of the Left to the hard choices in economics.

Uninteresting in the end.

As for NY Times arty, first, don't lap up the elitism of Paris circles uncritically as the author did. The anti-merit snobbism of the French grands ecoles circles is really quite insidious. Of course that's why so much talent that did not happen to go to the "right" Paris school goes to London....

And the scapegoat argument (in re hiding unrelated losses, not that he may have been playing for someone else) makes no sense, none at all.

First, given the markets, it would make far more sense for Soc Gen - reputation and otherwise - to sweep losses into credit markets accounts than the reverse (not that one could willy nilly given bank accounting under Banque de France / Euro Cen. Bank regs). Losses in the Sub Prime market say simply one got snookered like every other bank. Having bad internal controls to the point of losing billions of Euros, that calls into question the very competence of the bank.

What kind of moron would opt for "covering up" losses in a way that (i) attracts more not less attention, (ii) changes your losses from being part of an overall bad market to fundamental operational incompetence or dangerously poor internal control practice?

The Left here may fear and hate finance, irrationally so, but Soc Gen management were and are not complete morons.

On the other hand, the poor practice of changing an internal control manager forward to a trading position without changing passwords, etc., well, that rings a bell - I've seen the same idiocy with BNP Paribas actually.

Second, the losses registered were on equity derivatives - not credit - another line of business. One would do better to follow the profesional reporting of The Financial Times rather than NYT gossip.

Posted by: The Lounsbury on January 26, 2008 at 8:51 AM | PERMALINK

Now I'm hearing that this didn't happen over a long period of time, and may even have been one big trade.

If so, it's what the traders here in Chicago call the O'Hare trade--you put everything you can get away with on a position and then head for O'Hare Airport. If you end up in the money, you head back downtown and collect. Otherwise, you get on a plane to a country that has no extradition with the U.S.

Only this guy forgot to go to the airport.

Carolyn Kay
MakeThemAccountable.com

Posted by: Carolyn Kay on January 26, 2008 at 3:15 PM | PERMALINK

From The Times of London:

The bank alleges that he hacked into other traders' systems and set up deals using their accounts; that he created a fictitious client so that he could trade as if setting up deals on its behalf; that he circumvented limits to the size of trades; and that he defeated credit control checks that should have picked up rogue trades, especially those that put the bank's own money at risk.

Kerviel was apparently able to unpick or switch off all these checks. In addition, he master-minded a way of covering his trading. He apparently created fictitious trades designed to neutralise the big bets he was making so that the bank's systems appeared to show that everything was in balance. In banking-speak, his positions were outwardly "hedged".

I'm still suspicious.

Carolyn Kay
MakeThemAccountable.com

Posted by: Carolyn Kay on January 27, 2008 at 8:40 AM | PERMALINK

There is no reason to be suspicious if one reads reports from Financial Times where at least reporters have some basic banking literacy and do not repeat rubbish.

As today, 28 Jan reporting indicates? Soc Gen had sloppy controls - see my comments supra re Frenchbank reps in market - and traders other than this fellow routinely exceeded thresholds.

But continue your American obessions. And your hearing is the exact fucking opposite of what the financial press is indicating, rather the operations were over a longer rather than shorter period.

Story then is sloppy Soc Gen controls and poor Socialist France banking controls.

Posted by: The Lounsbury on January 28, 2008 at 4:53 PM | PERMALINK

REALLY bad controls. REALLY, REALLY, REALLY, bad awful controls.

Obsession? I don't think so.

Carolyn Kay
MakeThemAccountable.com

Posted by: Carolyn Kay on January 29, 2008 at 12:49 PM | PERMALINK

Now, THIS I believe.

Senior Societe Generale officials "closed their eyes" to a culture of cheating on the trading floor, so long as it generated profits, the alleged "rogue trader", Jerome Kerviel, told investigators.

In verbatim extracts from his questioning at the weekend, seen by The Independent, M. Kerviel says that the ruling maxim of SocGen was: "Not seen, not caught. If you are caught, you are hanged."

Carolyn Kay
MakeThemAccountable.com

Posted by: Carolyn Kay on January 30, 2008 at 3:24 AM | PERMALINK




 

 

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