Oh, the humanity!

January 24, 2008 2:57 AM

HorribleEconomicNewsFilter: Rogue trader costs his bank 7 billion dollar. Take that, Nick Leeson!
posted by Skeptic (55 comments total)

It added that the trader had confessed to the fraud and was being dismissed.

Wow. I hope they take away his ice cream and TV privileges too.
posted by crapmatic at 3:09 AM on January 24, 2008 [1 favorite]

That exit interview was probably awesome.

"reason for termination"...
posted by Lord_Pall at 3:14 AM on January 24, 2008 [3 favorites]

One time I messed up and cost my company like $200 for no good reason, so I know how this guy feels.
posted by ibmcginty at 3:16 AM on January 24, 2008 [4 favorites]

Oh, nice use of the WeAreDoomed! tag.

I have a feeling it's about to become a popular one.
posted by louche mustachio at 3:17 AM on January 24, 2008

Gilles Glicenstein, BNP Paribas chief executive, suggested that "there is still some information missing to understand what happened" at Societe Generale.

I feel as if everything about this article is a massive understatement.
posted by Sticherbeast at 3:22 AM on January 24, 2008 [2 favorites]

Oh the poor little diddums, it will only make a profit of 600m to 800m euros for 2007. My heart bleeds, no seriously, it fucking does.
posted by jontyjago at 3:25 AM on January 24, 2008 [2 favorites]

jontyjago, the article also says: The bank, one of France's largest, will need to seek 5.5bn euros in new capital to offset the losses. Good luck with that in the current markets. Northern Rock is going to look like a picnic.
posted by Skeptic at 3:32 AM on January 24, 2008

The chief executive immediately offered to resign, according to the BBC reports on this, but it was rejected by the board.

I’m not sure if this is a commendable example of responsibility at the highest level, or a polite way of saying: “The chief executive darted for the window, but was rugby-tackled by the board and wrestled back into his chair.”
posted by WPW at 3:33 AM on January 24, 2008 [22 favorites]

Does that mean he made other people 7 Billion?
posted by sien at 3:38 AM on January 24, 2008

If they were deriviatives trades, then yes: deriviatives are zero sum, barring counter-party risk.
posted by pharm at 4:10 AM on January 24, 2008

It's very sad that under French law, it's unlikely this will ever come to prosecution. We can't even get the trader's name.
posted by parmanparman at 4:10 AM on January 24, 2008

"The chief executive immediately offered to resign, according to the BBC reports on this, but it was rejected by the board."

So, this guy's name isn't "Holden" by any chance, is it?
posted by HuronBob at 4:12 AM on January 24, 2008 [2 favorites]

Wow, that's pretty scary. I really love this bit:

Richard Fuld, the chairman of Lehman Brothers, told BBC News in Davos that "nothing stuns me, nothing really surprises me these days."
posted by equalpants at 4:13 AM on January 24, 2008

OK--a question for the financial types on the Blue: How does a trader conceal --from everyone employee at his firm-- that he has created a $7 billion dollar fraud? Follow up: in the bigger scheme of things is $7 billion an error that can be easily missed? I mean this in all seriousness because I don't get how this could not be discovered.
posted by zerobyproxy at 4:21 AM on January 24, 2008

So to sum up the article. A massive fraud happened. The bank hasn't explained it and we haven't bothered to investigate but some competitors and industry insiders have self-serving and meaningless things to say about it so that ought to suffice for you now. The new journalism of paraphrasing and transcription in action.

I’m not sure if this is a commendable example of responsibility at the highest level, or a polite way of saying: “The chief executive darted for the window, but was rugby-tackled by the board and wrestled back into his chair.”

More likely, he made a symbolic gesture knowing in advance that he had the support of the board and wouldn't have to follow through.

I love that they have a quote from their own BBC business editor! That's great investigative journalism.
posted by srboisvert at 4:27 AM on January 24, 2008 [2 favorites]

They hide the trades in accounts which don't get audited. See, for example, Nick Leeson.

In the case of the guy from SocGen, the word is that he'd worked in the back office (the bit of the bank which actually handles all the paperwork and executes the trades) before moving to the trading desk, so presumably he knew what was required to hide the trades from any internal audit procedures.

(I'm not a banker, in any way shape or form; just an interested observer btw.)
posted by pharm at 4:32 AM on January 24, 2008

zerobyproxy: it seems that he used his knowledge of internal controls from a previous role in the bank to conceal the position.

The kind of trade he made doesn't require an initial financial outlay from the trader. It's kind of like a bet, but they only make a promise to pay out should they make a loss.
posted by colin folds five at 4:35 AM on January 24, 2008

srboisvert: You're not the only one to harbour suspicions about this SocGen loss.
posted by pharm at 4:35 AM on January 24, 2008

The NYTimes:

There was some skepticism in the market about the trading fraud disclosure.

"I am sorry, but I have a hard time buying the fact that a trader was able to set up a 'secret trade' of €4.9 billion without anybody finding out," Ion-Marc Valahu, head of trading at Amas Bank, Switzerland, told Reuters.

Totally.
posted by The Straightener at 4:57 AM on January 24, 2008

That's nothing: America's own little rogue trader has cost the Federal Reserve 488 billion and counting.
posted by Blazecock Pileon at 5:12 AM on January 24, 2008 [4 favorites]

You know, I can't help wondering what the mindset of this sort of thing is. What's he looking to make happen? It doesn't say anything about him withdrawing funds from the account, and I'm pretty sure had that happened, it would have set off warning lights.

"Uh, why do we have a wire request from our error account, Jean-Pierre?"

Was it a Nick Gleeson "paralysis of stupidity" sort of situation? I just don't understand how traders get themselves into this situation.
posted by mckenney at 5:18 AM on January 24, 2008

I enjoyed the "9.05 update" on the blog of BBC's business editor Peter "arse-face" Peston when it turned out he'd got the story totally wrong.
posted by patricio at 5:26 AM on January 24, 2008

The chief executive immediately offered to resign, according to the BBC reports on this, but it was rejected by the board.

Well, that's a bit better ethically than Holden Karnofsky.
posted by fourcheesemac at 5:40 AM on January 24, 2008

Oh jeez, Huron Bob beat me to it. <>
posted by fourcheesemac at 5:41 AM on January 24, 2008

It looks as though it was just basic futures trading.
posted by triggerfinger at 5:45 AM on January 24, 2008

...that caused the losses
posted by triggerfinger at 5:46 AM on January 24, 2008

Itchy trigger finger, triggerfinger?
posted by Skeptic at 5:50 AM on January 24, 2008

Can't SG just ask for the 7 billion euros back? I'm sure if people just hear the circumstances they'll understand.
posted by Flashman at 6:01 AM on January 24, 2008 [1 favorite]

Several banks in the states have announced mutli-million dollar write-downs, 98% of last quarter profits wiped out, etc. When will the bleeding stop?
I'm a layman, but it seems the downside of Bernake's preemptive easing strategy is potentially
running out of rate cuts, no? Links are to Krugman, NYT. Related, previous: Implode-o-meter.
posted by AppleSeed at 6:01 AM on January 24, 2008

according to the bank's statement (pdf): "one trader, responsible for plain vanilla futures hedging on European equity market indices, had taken massive fraudulent directional positions in 2007 and 2008 beyond his limited authority."

Does anyone actually understand exactly what went on? if so can it be translated into plain English?
posted by bap98189 at 6:05 AM on January 24, 2008

Does anyone actually understand exactly what went on? if so can it be translated into plain English?

"He was a really lousy trader, but, boy, was he good at covering up!"
posted by Skeptic at 6:31 AM on January 24, 2008 [1 favorite]

Dang, I thought this was going to be a Warhammer 40k post.

Gypped.
posted by Pecinpah at 6:49 AM on January 24, 2008 [1 favorite]

Is there any way this guy could have arranged a kickback from those who profited off Societe Generale's losses
posted by anthill at 6:56 AM on January 24, 2008

The Reuters article has a lot more detail, including the fact that the trader "now faces legal action":

The bank accused the trader of taking "massive fraudulent" positions in 2007 and 2008 on European equity market indexes, meaning he was gambling on broad movements in share prices.When the bank discovered the concealed trades on January 19 and 20, it decided to close the positions in the market as quickly as possible, but this coincided with a sharp market sell-off, and the bank's losses on the deals spiraled to 4.9 billion euros...

It said he had used a "scheme of elaborate fictitious transactions" to try to cover up his mistakes, but did not accuse him of profiting personally from his actions.

"He was not one of our stars," said a senior board member who declined to be named.

He is now.
posted by mediareport at 6:58 AM on January 24, 2008

So if I understand this correctly, this could have gone two ways:

1) The trades work, he makes the bank eleventybrazilian Euros, is now an untouchable superstar

2) The trades don't work, he loses the bank eleventybrazilian Euros, is now an untouchable leper

Is that correct?
posted by dirtynumbangelboy at 7:23 AM on January 24, 2008 [1 favorite]

To clear things up a bit, a future is a way of betting on an underlying stock or index (or something else).

When you buy a futures contract, you don't pay any money up front, but you lock into a starting price.

Say the index then moves 10 points in your favor (and 10 points out of favor for the guy who sold it to you). At the end of the day, you balance out your two accounts, and he hands you 10 points worth of money. So you are +10, he is -10.

These are typically leveraged way beyond what you can buy with your cash on hand. That is how a trader can buy enough to get 7 billion in losses, even with a (relatively) small initial balance. The big problem is that if it keeps moving against you, you get hosed, and stay hosed.
posted by cschneid at 8:01 AM on January 24, 2008

This is how I imagine the conversation between this guy's manager and the bank's chief executive the weekend the concealed trades were uncovered:

CEO: We have to shut this down immediately.
Manager: Close these out?
C: Yes, as soon as the market opens.
M: Uh... You don't want to do that. You saw the market last week. We have to wait for it to turn up. It'll be catastrophic.
C: You want to leave them open? For how long? No, you do that and this is now a conspiracy. We're all going to jail.
M: (Pause.) So I'll just go... put through a billion-loser transaction, then?
C: (Nods.) First thing.
(Long awkward silence.)

Man, it's gotta suck to make that call.
posted by sdodd at 8:08 AM on January 24, 2008 [1 favorite]

heh. At first glance I thought the guys name was Jerome Knievel.
posted by doublesix at 8:22 AM on January 24, 2008

Jerome Kerviel's photo, and his email address at SG. Apparently his birthday was just two weeks ago. He worked at SG since August of 2000.

This "rogue trader responsible for loss" nonsense is just as plausible as the CEOs who claim to not know about the massive fraud in their companies.
posted by Nelson at 8:33 AM on January 24, 2008

Hey, it's happened before.

And in this case, they're like "he lost us x billion, and we lost another x billion on other stuff". So they are using it to mask their other losses.
posted by smackfu at 9:03 AM on January 24, 2008

I'm sure this would have been much bigger news if so many banks hadn't been hemhorraging money to subprime already.
posted by Slothrup at 9:19 AM on January 24, 2008

ok, i'm gonna confess, because it's about to come to light anyway. i made some unauthorized trades which cost metafilter seven billion dollars. i pledge to maintain good humor about this and trust you to do the same. now, would you like to hear excerpts from my vast repertoire of animal noises?
posted by bruce at 9:22 AM on January 24, 2008 [1 favorite]

> preemptive easing strategy is potentially running out of rate cuts, no?

Where is it written that zero is the lowest possible interest rate? Show some creative thinking, Ben.
posted by jfuller at 10:00 AM on January 24, 2008 [2 favorites]

Honestly this makes perfect sense to me. Anybody who's done time at a trading desk knows that traders regularly do some very shady stuff. It's a completely results-oriented business -- what you do to make money is irrelevant, you just need to make money. And the entire scene is do-or-die where there's always somebody waiting to take your place. And you definitely can't audit every account (in real time) so it becomes a matter of picking and choosing which accounts get watched and then having the accountants go over everything at the end of the month and forcing the numbers to make sense. There's probably no cure for this kind of "rogue trader" action except a culture of transparency and accountability. Unfortunately transparency and accountability and accountability don't exactly lend themselves to great trading.
posted by nixerman at 10:22 AM on January 24, 2008

Kerviel also has a a Facebook page (via Kedrosky). Apparently all his "friends" are removing their names.

Any trading floor without appropriate oversight of its traders has a problem. Yeah, maybe the guy was clever hiding his tracks. Who cares? The oversight people are supposed to see through stuff like that. If they fail, it's a failure of the whole bank, not one individual.
posted by Nelson at 10:32 AM on January 24, 2008

Well, he's made it to the top of the (known) trading losses list, although the magnitude will be highly impacted by the current exchange rate.

From the Time interview of Toshihide Iguchi (which I find very interesting - who was 'responsible' [I share smackfu's cynicism] for a loss of $1.1B):

TIME: Was your specialty moving too quickly to control?

Iguchi: No. I traded the same bonds for 12 years. It was pretty simple for management to understand. I had several managers over me who should have understood. But the New York branch depended on me so heavily for profits--we were producing more than half their profits--they wanted to keep their eyes closed and they didn't want to know anything.

posted by rider at 12:14 PM on January 24, 2008

cschneid: When you buy a futures contract, you don't pay any money up front, but you lock into a starting price.

Okay, but futures are marked to market daily, or so I understand. You make money and it appears in your account. You lose it and it disappears that day.

So how long does a $7 billion loss remain unnoticed? It should show up really fast.
posted by A-Train at 3:51 PM on January 24, 2008

Associated Press: How much is $7.14 billion?

"The $7.14 billion that French bank Societe Generale says it was swindled out of by a rogue trader ranks as one of the largest amounts ever lost through fraud. Here’s a look at what it could pay for:

— 110 F-35 Joint Strike Fighter jets
— 8 Queen Mary 2 luxury cruise liners
— 1 week’s worth of U.S. oil imports
— 2 Freedom Towers at Ground Zero
— 17 million Apple iPhones
— Nearly double Bolivia’s foreign debt
— But only 4.76 percent of President Bush’s economic stimulus plan"

posted by ericb at 5:29 PM on January 24, 2008 [1 favorite]

related

My French trader acquaintance says at the French bank he works for the gossip is there is something fishy in the SocGen supposedly not knowing about this going down for so long.
posted by nickyskye at 7:16 PM on January 24, 2008

Ever notice how whenever Bank of America, or Citibank, or Merrill, or Wachovia, and now even Societe Generale announce that they're forced to take a huge cost for some reason, it's always just enough to eat up all of their profit but not more? Why the desperate need to raise more capital if they're already making money?
posted by ceribus peribus at 7:37 PM on January 24, 2008

If he didn't end up with the money I don't think he "swindled" them out of it.
posted by fshgrl at 8:19 PM on January 24, 2008

So media reports have identified this guy, eh? Even though the bank hasn't actually released the name. What happens if it turns out to be the wrong guy?
posted by davejay at 1:18 AM on January 25, 2008

Right Nicky, he's said to be some sort of Dreyfus Rogue Trader now...
posted by nicolin at 10:55 AM on January 25, 2008

What was the role of this loss in precipitating the enormous market drops of early this week and the subsequent panic to cut rates by 75 basis points and hand out free money out like candy? How much did these losses, before their fraudelent nature was known, falsely contribute to the sense of doom that led to those panic-driven decisions?

Are we about to flush away 150 billion dollars to fix an imaginary problem?
posted by NortonDC at 3:36 PM on January 25, 2008

NortonDC -- apparently SocGen unwinding his futures positions caused the market to plummet, hence the Fed's reaction... SocGen told the Bank of France but not anyone else.
posted by patricio at 7:35 PM on January 25, 2008