Posts Tagged ‘rogue’

Sacre Bleu – those SocGen bank auditors with guaranteed lifetime jobs were definitely asleep at this meltdown

January 24, 2008

Forbes.com Faces In The News
Portrait Of The Fraudster As A Young Man
Lionel Laurent, 01.24.08, 3:45 PM ET LONDON – Not much is known about the alleged rogue trader at French bank Societe Generale, who has apparently left the firm after building up over $7.2 billion in losses over the past year. But if past precedent is anything to go by, his ego and his wallet were the two main factors pushing him to try and beat the market.

Societe Generale offered scant detail on Thursday as to the identity of the futures trader, who could be responsible for one of history’s biggest banking frauds. The bank’s chairman, Daniel Bouton, told the press that the Paris-based trader was “in his 30,” and Societe Generale confirmed that he earned less than 100,000 euros ($147,164) a year and had been with the company since 2000.

The bank declined to comment on press reports that named the trader as 31-year-old banker Jerome Kerviel.

Another revelation from the press conference was that Jean-Pierre Mustier, head of Societe Generale’s investment banking operations, did not think the trader sought personal gain from the fraud.

But according to Axel Pierron, a Paris-based analyst with Celent, the idea that there was no personal gain involved is hard to believe. He told Forbes.com that the promise of a good bonus, rather than simply stealing gains directly from the bank, is what may have driven the trader to take such massive risks.

“This is someone who would have delivered quite good results in 2006,” said Pierron. The combination of a good performance and a strong ego would have completed the picture, with the trader now convinced that he could beat the market and defy the constraints his own firm placed on his activities.

Societe Generale said the trader was responsible for “plain-vanilla” futures hedging on stock market indexes in Europe, and that he was able to conceal “massive” fraudulent positions thanks to inside knowledge of back-office control procedures. The trader’s move from back-office management to front-desk trading harks back to the infamous Nick Leeson, whose position as both general manager and speculative trader for Barings Bank in Singapore helped him hide losses of over £827 million ($1.6 billion).

“It’s Nick Leeson, the story is exactly the same,” said Celent’s Pierron. “We have a trader who trades futures, or derivatives, who hides his losses by using weaknesses in the risk-management system.” He said that as long as traders had knowledge of back-office operations, the risks of abuse would always be there.

A spokesperson for Societe Generale said that there would be thorough reviews of internal controls, but noted that this particular case of fraud was “very, very sophisticated.”

With financial markets on a downward trajectory in 2007, Pierron believed there was no way back for the rogue trader unless he continued to bet against the slide. “The market tumbled, and evidently the situation only got worse,” he said. “He had to make a bigger bet to cover himself, his losses worsened, and at the end we get to 4.9 billion euros ($7.2 billion).”

A London-based fund manager, who did not wish to be named, said that the positions themselves must have been “enormous”– on the order of 40 billion euros ($58.9 billion)–to lead to losses of that magnitude.

The fraud was reportedly uncovered Monday, and Societe Generale confirmed that since then it had unwound all of the trader’s allegedly fraudulent positions. But the scale of the losses involved has surpassed even Nick Leeson’s misadventures.

This is not the first time a French bank has revealed rogue trading in the midst of a market melt-down. In September, Credit Agricole warned that it would take a 250 million-euro ($368.0 million) hit to its bottom line after unnamed individuals took an “unauthorized” position on credit market indices. (See “Credit Agricole Hit By Rogue Trading Woes”)

Given that market turbulence is often responsible for exposing significant cases of fraud, expect more horror stories to emerge in the near-term. Whether banks are able to do anything about the rogue traders in their midst, however, is another matter entirely.

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