Rogue Trader Loses French Bank $7.2 Billion

[3113]

I think there was already a thread on this, but hey, it's worth gawking about all over again....

PARIS -- In what would be the largest fraud of its kind by a rogue trader, a junior employee at French banking giant Societe Generale cost the company $7.2 billion by making disastrous bets on European stock prices through a series of unauthorized and wildly outsized transactions, the bank said Thursday. The alleged fraud by 31-year-old Jerome Kerviel staggered Societe Generale, France's second-largest bank. Its disclosure delivered a new blow to a European banking industry already reeling from losses on American sub-prime mortgage securities -- including a $3-billion write-down announced Thursday by Societe Generale itself.

...Bank officials said during a conference call Thursday in Paris that they had unwound all the transactions from Monday to Wednesday before publicly disclosing the alleged fraud. They added that the bank suffered an "enormous loss" because of unfavorable market conditions but that there was no evidence Kerviel personally profited from the scheme....Societe Generale's loss swamps the previous high water mark for activity by a rogue trader set by Nicholas Leeson, who lost $1.38 billionin Asian futures and other derivatives at Barings Bank in 1995. The damage bankrupted the 233-year-old British bank, which was subsequently taken over by Dutch financial firm ING.

...Kerviel -- whom Societe Generale executives did not name but who was identified in news reports from Europe -- began working at the bank's back office in 2000, assigned to help create the internal programs that placed transaction limits on individual traders. In 2005 he was moved to a trading desk, where bank officials said he was given only limited authority to hedge the bank's trading positions in European stocks with stock index futures. This involves making countervailing bets on stocks' future performance as an insurance policy against adverse moves in the bank's portfolio.

His salary was pegged at 100,000 euros, or about $148,000 a year, including bonus; the bank said his trades were expected to generate a modest $20 million in revenue a year. Instead, Bouton and other bank executives said during their conference call, Kerviel regularly exceeded his trading limits without detection, starting as early as 2006. Using the knowledge he had gained in the back office, Kerviel concealed his actions by fabricating balancing trades, using "extremely sophisticated and varied techniques," Bouton said in his letter to shareholders.

At least for a portion of 2007 his trading was profitable. Just before the start of the new year, however, he undertook a huge bet that European stock markets would rise in January. Instead, they fell sharply, losing nearly 10% through last Friday. The following day, Societe Generale officials confronted Kerviel with evidence of his unauthorized trading. He immediately confessed and was fired but spent the weekend helping managers create a liquidation strategy, the bank said. The bank said it had filed legal charges against him and that "four or five" officers responsible for financial surveillance had also lost their jobs. But executives said they believed they had discovered the full extent of the unauthorized trading.

Bank executives said during the conference call that they could not explain the trader's motivation, beyond the possibility that he was trying to show that the bank's financial control procedures could be defeated. They added that they had not yet determined whether he had accomplices inside or outside the bank. "The reasons are incomprehensible," said Jean-Pierre Mustier, head of Societe Generale's investment bank. Kerviel's lawyer, Elisabeth Meyer, said Thursday that he remained available to law enforcement officials and was "not on the run," according to the Paris daily paper Le Figaro. French labor union officials representing bank employees told the Associated Press in Paris that they understood he had been having unspecified "family problems."

French politicians said the events had no implications beyond the management and regulation of Societe Generale. French Prime Minister Francois Fillon called the alleged fraud a serious matter, but said "it has nothing to do with the current situation on the global financial markets."

Bouton announced Thursday that the bank would show a profit of $875 million to $1.16 billion for 2007, a sharp decline from earnings of $7.6 billion in 2006. He said he had offered to resign after the disclosure of the fraud allegations, but the bank's board rejected the overture. Still, the bank said it would raise $3 billion through an emergency stock sale that was already underwritten by a consortium of other banks. The capital increase was made necessary by the trading loss as well as the write-downs from its exposure to U.S. credit securities, Bouton said.

Although Lea and other analysts speculated that the loss might make Societe Generale more vulnerable to a takeover, Bouton turned away questions about that possibility. In trading Thursday in Paris, shares of Societe Generale sank 4.1% even as the CAC-40 index of French stocks surged 6% amid a broad rally in European equities. Analysts said Thursday that, beyond the financial toll, the most immediate consequences of the huge loss would be directed at Societe Generale's internal surveillance systems, which had plainly broken down. "Where were this young man's bosses?" asked Lea of Arbuthnot. "Who was minding him?"

Naturally, the toll caught the attention of Leeson, now a soccer club manager in Ireland. The former Barings trader told British Broadcasting Corp. that the size of the loss left him "shocked."

Hey, it's only money, right?

 

[3113]

And yeah, that BILLION dollars

 

[Liar]

Makes Nick Leeson's imfamous performance seem kinda bleak.

 

[Jenny_Jackson]

Sounds like the perfect nominee to oversee the Bush Defense Budget.

 

[R. Richard]

The guy made a bad bet. Then he kept doubling up, trying to get even. He flim flammed his bosses, to keep them from finding out. Finally, the losses were so large that it became known to the banking community at large.

This is just another example of trying to run a business using a foreign language. They try to use the fancy-schmancy stuff and nobody really understands. Then they get caught. Leave the foreign languge stuff for the tourists and use plain old American.

 

[TheEarl]

This is just another example of trying to run a business using a foreign language. They try to use the fancy-schmancy stuff and nobody really understands. Then they get caught. Leave the foreign languge stuff for the tourists and use plain old American.

Errr... que?

The Earl

 

[Xelebes]

It's quoi.

Que is Spanish.

 

[Topanga_Blue]

Kinda makes the 6 grand I owe on my Visa seem not so bad anymore.

 

[TheEarl]

It's quoi.

Que is Spanish.

English joke. The television show 'Fawlty Towers' had a Spanish waiter, Manuel, who was very slow-witted and his catchphrase to anything above "Fire bad, tree pretty" level was "Que?"

It's shorthand for wtf.

The Earl

 

[Topanga_Blue]

'Fawlty Towers'

"Flowery Twats"

 

[impressive]

I keep reading the thread title as "Rogue Lurker ..."

 

[neonlyte]

I keep reading the thread title as "Rogue Lurker ..."

May be that's why he went

 

[trysail]

Rogue Flight: Societe Generale's Kerviel Tags Leeson
By Peter Robison

Jan. 25 (Bloomberg) -- A rogue trader on the run. A storied bank in turmoil. Shareholders left to ask what happened.

More than a decade after former Barings Plc trader Nick Leeson provoked a worldwide manhunt with $1.4 billion in losses, the script has become familiar at modern financial institutions where traders can make fortunes on complex instruments their bosses may not understand.

Jerome Kerviel, 31, who was blamed by Societe Generale SA yesterday for causing a 4.9 billion-euro ($7.2 billion) trading loss, the largest in banking history, is at least the seventh individual singled out for unauthorized trading since 1994. Some hid, or obstructed investigators. Most were jailed.

``It's yet another argument why you want to have all derivatives trading in standardized instruments that are exchange-traded,'' said Martin Mayer, a guest scholar at the Brookings Institution in Washington who has written more than a dozen books on finance. ``Anything else is asking for a lot of trouble, and it will keep coming back.''

When Leeson, then 28, went missing from Barings's Singapore office in February 1995, the story of how a single trader brought down a 233-year-old British merchant bank caused a sensation. The memoir Leeson wrote while serving 3 1/2 years in jail, ``Rogue Trader,'' was made into a film starring Ewan McGregor.

Since then, financial institutions including Sumitomo Corp., Daiwa Bank and Allied Irish Banks Plc have been burned by unauthorized trading, causing billions of dollars in losses. Trading blowups are so frequent that Leeson, who now lives in Ireland, fields calls through an agent to dissect the latest financial scandals.

Paid to Talk
He will conduct two paid-for interviews on the subject of Societe Generale, a spokesman for Leeson told Agence France Presse yesterday. Leeson also spoke with the British Broadcasting Corp.

``I think rogue trading is probably a daily occurrence amongst the financial markets,'' the BBC quoted Leeson as saying. ``You're still looking at a situation where the systems and controls aren't good enough.''

Paris-based Societe Generale, France's second-largest bank by market value, said Kerviel set up secret positions that went beyond permitted limits on futures linked to European stock indexes. In a letter on the bank's Web site, Societe Generale Chairman Daniel Bouton said the trades were hidden ``through extremely sophisticated and varied techniques.''

Low Profile
Little is known yet about Kerviel. Management des Operations de Marche, a business school in Lyon, lists him as a 2000 graduate. A photo in the bank's staff directory shows him as dark-haired and clean-cut, with a somber expression.

``Very quiet and a loner,'' Yves Messarovitch, a spokesman for Societe Generale at Image 7, said of Kerviel. ``He had made his dream of becoming a trader come true.''

Bank of France Governor Christian Noyer told reporters at a briefing in Paris that the trader suspected of causing the losses had fled. Elisabeth Meyer, a lawyer for Kerviel, said he didn't report for work after being dismissed by the bank but is available to investigators, AFP reported.

The bank said Kerviel didn't enrich himself from the trades, which began in early 2007. He began working at Societe Generale in 2000 and made a salary and bonus of less than 100,000 euros a year, it said.

By its nature, trading tends to attract competitive people who take risks and push limits, Mayer said.

``I didn't set out to rob a bank,'' former Daiwa trader Toshihide Iguchi told Time magazine in a 1997 interview at a prison in Pennsylvania, where he was serving a four-year sentence for fraud and falsifying documents.

Closings in U.S.
Tokyo-based Daiwa in 1995 was forced to shut its U.S. branches after disclosing a $1.1 billion loss from 11 years of unauthorized trading by Iguchi, its chief New York government bond trader. Iguchi, born in Kobe, Japan, had studied psychology at Southwest Missouri State University in Springfield, Missouri, and earlier worked in Daiwa's back office.

``To me, it was only a violation of internal rules,'' Iguchi told Time. ``I think all traders have a tendency to fall into the same trap. You always have a way of recovering the loss.''

A year later, Sumitomo disclosed a $2.6 billion loss on unauthorized copper trades. The Japanese firm blamed its chief copper trader, Yasuo Hamanaka, who was known as ``Mr. Copper'' in the markets because of his aggressive trading. Hamanaka was sentenced to eight years in prison in 1998. He was released in 2005.

In an interview that year with Bloomberg News at his two- story house in Kawasaki, near Tokyo, Hamanaka said he was ``amazed'' at today's high prices for copper and wanted to go back to work.

Prison Term
John Rusnak, a Baltimore-based trader for Allied Irish Banks, is serving 7 1/2 years in prison for his role in amassing and hiding $691 million of losses over more than five years. Allied Irish Banks discovered the losses in 2002, and sold the Allfirst Financial unit where Rusnak worked to M&T Bank Corp. of Buffalo, New York.

Leeson moved to Galway to live with his Irish wife five years ago, after completing a degree in psychology in London. He is now chief executive officer of Galway United football club, which competes in Ireland's Premier Division.

Leeson supplements his income with dinner speeches and conference appearances. He wrote a commentary for the Irish Independent newspaper yesterday warning that the financial meltdown triggered by the U.S. subprime crisis will spread.

``The really worrying fact is that we probably have not seen the end of the carnage,'' Leeson wrote.

 

[rgraham666]

http://bestsmileys.com/lol/1.gif

I try not to laugh. But damn! Greed will kill you every time.

 

[keeblercrumb]

Well I am safe... I caught wind of this emerging scandal in a coffee house in Amsterdam last month..... coupled with the exploding sub-rime debacle, I decided (after contemplating the frog farm on the back bar for awhile) to move my amassed wealth into a more secure investment.

I put it all into tulips.

One has to be careful these days.

-KC

 

[Liar]

http://bestsmileys.com/lol/1.gif

I try not to laugh. But damn! Greed will kill you every time.

Ya, but what's noteable here, is that it's not greed for money on the trader's behalf. He had a set salary and could not expect to get a direct cut of those massive sums. Pretty much the same with Leeson. It was ambition, or greed for status, combined with a massive dose of denial when things first went south.

 

[oggbashan]

More information is coming through slowly.

The full amount of his bets - over 70 billion dollars - was more than the bank's total assets and it is one of the largest banks in France.

There is speculation over here that the Fed's change of interest rate was sparked by his activities.

Og

 

[Pure]

did the guy gain any money, himself?

 

[R. Richard]

did the guy gain any money, himself?

With the information available at the present time, no. He was a little guy who risked a lot of other people's money and then kept doubling his bets, trying to win back his losses. [After all, it wasn't real money, was it?]

 

[Le Jacquelope]

With the information available at the present time, no. He was a little guy who risked a lot of other people's money and then kept doubling his bets, trying to win back his losses. [After all, it wasn't real money, was it?]

Anyone want to bet on what the movie title will be for this particular fiasco?

"The Parisian Job"?

 

[3113]

With the information available at the present time, no. He was a little guy who risked a lot of other people's money and then kept doubling his bets, trying to win back his losses. [After all, it wasn't real money, was it?]

Couldn't he have just gone to Vegas and played with the plastic chips?