Societe Generale (SocGen) just announced they discovered one of their traders somehow lost USD $7.1 billion without the company knowing. This is a staggering amount and an will become an insane story in the next few days and months as more information is released.
Somehow, trading just vanilla European equity index futures, this trader managed to build what must have been a massive position in late 2007. Apparently, he hid the futures in secret accounts or with hidden tickets that SocGen did not notice. According to SocGen’s statement today, the trader used “in-depth knowledge of the control procedures resulting from his former employment in the middle-office” to hide the trades. The trades were discovered finally on January 19th, 2008, although the bank says that no residual exposure remains from these positions. So the bank seems to have hammered out the positions quickly over the past three days.
In comparison, the standard for trading scandals is always Nick Leeson’sloss of roughly $1 billion in 1995 that brought down Barings Bank. Nick Leeson described his loss trading Japanese Nikkei futures in his book “Rogue Trader
The trader has not yet been identified although he has been “Suspended” and a “dismissal procedure has been initiated”. The bank said the trader went beyond permitted limits on futures trading.
It is truly amazing that something of this magnitude could happen in this day and age. Nick Leeson’s scandal forced banks worldwide to implement strict risk management systems, which have only increased in scrutiny as banks and hedge funds have run into leverage problems ever since the Long Term Capital Management crash. Also, when losses mounted, he must have had margin calls that he covered somehow. If not, he put on this position in an extremely short period of time before the margin calls got to him.
SocGen has announced they will seek $8.1 billion in new capital to cover both this trading fraud and a $1 billion subprime write-down. The CEO and Chairman Daniel Bouton has offered to resign, but the board rejected his offer. The stock is currently suspended from trading and they will make another press release again today with further information on the situation.
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i know the guy, who works in my division.
his name is not public even within sg.
I am a trader in this division as well.
The real culprits are the stupid people who can’t hold on to the middle office people for more than 1 year because of bad payroll : you end up with junior people knowing nothing, without motivation who can’t act as a real power.
In an effort to save 1M EUR per year in bonus for the middle office, SG ends up with a loss of 5 BN euros.
And of course, the risk department should be on the first line of being fired.
Conor: It looks like they have announced the name of the trader now, Jérome Kerviel. Here is his resume.
I do not agree with your statement that middle office is at fault for not paying him enough. It should not cost any bank 1m EUR per year for an employee to be ethical.