Thursday, January 24, 2008

The Société Générale Fraud

I haven't written yet about the Société Générale fraud, astounding as it is, because the details are sketchy and I have no idea what actually happened. But here are some reports from Bloomberg, Kevin Drum, FT, and more FT. And economist Élie Cohen. I'd be glad to hear from anyone who knows more about banking than I do and who might be able to explain how a 31-yr-old trader, "computer genius" though he may have been, could have established an options position of 40 to 50 billion euros without anyone above him noticing. And if his bet had turned out well, would he have profited himself, or was he taking this enormous risk solely on behalf of the bank?

Curiously enough, it seems that Nick Leeson, the trader who similarly bankrupted Barings Bank a few years back, has been paid $700,000 for the rights to his story, which has been made into a film. Who said crime doesn't pay?

Business Week has picked up this article. Readers coming from there should see this later note as well.

4 comments:

TexExile said...

I don't know much about investment banking, but I do know that Risk magazine's "Equity Derivatives House of the Year" for 2007 is -- yes, you guessed it -- Société Générale.

Here's an extract from the news report on this SocGen triumph:

"Awarded just this month by Risk magazine, SocGen bagged the gong for equity derivatives house of the year. While credit made headlines, said the mag, equity markets also had a rough ride, with the rise in correlation and volatility causing pain for some dealers.

"With one of the largest exotics books on the Street, one would imagine that Société Générale Corporate and Investment Banking (SG CIB) would be licking its wounds and coping with hundreds of millions of euros in losses. There was some impact, but the losses have been relatively minor and entirely manageable, says Christophe Mianne, SG CIB’s head of market activities, covering equity, derivatives, fixed income, currency and commodities in Paris.

" 'We managed the existing book very well because we decided some time before the crisis to be long volatility and be less sensitive to correlation, so the losses were minimal. We suffered on our statistical arbitrage trading activity, but that was just for one month, and minimal compared to some hedge funds or other banks. Overall, our trading activities will be approximately flat compared to last year, which is a good performance,' remarks Mianne."

Go figure...

Unknown said...

Thanks, William. It does make you wonder ... Long on volatility, eh? Seems more like long on imbecility to me. But only the day before yesterday, imbecility was hailed as genius, so, as you say, go figure ...

Anonymous said...

I can't help comparing Jerome Kerviel's background with Nick Leeson. It might be a coincidence, but I find it interesting to note that both came by back-doors into a work environment full of co-workers coming from elite-schools. Were they taking risks to impress with their results? Did they try to hide their losses because they felt their errors wouldn't be forgiven as easily?

Anyway, I still wonder how the CRO of SG retained his job after such a failure of the control system...

Unknown said...

Very interesting point, Passerby, about the interloper among elite graduates. Indeed, comments by SG insiders seem to make a point of Kerviel's "difference" and "humble status," as if to say, "We would never have been so stupid." Yet for a year he got away with it, despite all the "excellent brains" (NY Times quoting a French finance professor) at SG, some of whom were supposed to be watching out for such things. And remember, Leeson was off in Singapore, not at Barings headquarters, whereas Kerviel was working under the noses of the top brass. It simply defies credulity to think that his trading went unnoticed for a year, while he built up a position of 40 to 50 billion in options. We have not heard the last of this.