I guess their unwinding of these massive positions (all index futures) caused a lot of the sell-off on Monday and Tuesday throughout the world.
The FED cut because of the drop in the equity markets, and they dropped because SocGen was selling hundreds of thousands of futures in a couple of days, so this guy really triggered the FED cut... :DDD
And in case you missed it on the previous thread, Soc Gen was just named Equity Derivatives House of the Year by Risk Magazine only a month ago. How do you like them risk controls?
"The average global hedge fund lost 3 percent through the end of last week, according to Hedge Fund Research data, and that was before global markets plunged on Monday, when indexes fell 7.2 percent in Germany and 7.4 percent in India. U.S. markets were closed on Monday."
FT Alphaville can reveal that the trader at the centre of the financial scandal engulfing Société Générale is 31-year-old banker Jerome Kerviel. Mr Kerviel, who worked in the banks Delta One products team in Paris, was responsible for what looks set to go on record as the largest financial fraud of all time, masking huge positions hed built in equity derivatives, which resulted in a loss of 5bn announced by SocGen on Thursday morning. SocGens Delta One business includes programme trading, ETFs, swaps, index and quantitative trading. It is thought that Mr Kerviel joined the bank in the summer of 2000. He could not be reached for comment. SocGen declined to comment."
Financial Times: Eric Dinallo, New York insurance superintendent, held a two-hour meeting with bank executives on Wednesday and urged them to provide as much as $5bn in initial capital to support the insurers the largest of which are MBIA and Ambac and ultimately to commit up to $15bn.
what i don't understand is if he was flattening the position with fake trades how did the cash settlement not get totally out of whack on the futures? was he able to fake the entire thing all the way to bank accounts.
Let's see - The French Central bank knew about this over the weekend and never bothered to tell our central bank, which eases 75bp as the positions are liquidated? What kind of world are we living in?
It doesn't smell right. SocGen is a global leader in structured products. For example, they wrap a group of hedge funds together and pay out 75% of the upside while guaranteeing 90% of the principal. For several years, they've been stamping out these products in ungodly amounts.
They lay off the risk of guarantees by using short futures, options and shorts. But in a market this chaotic, where hedge funds are probably imploding all over the place, it's difficult to get the hedges right. It's hard to believe a hedging operation this sophisticated could miss this bad for rogue reasons alone. More likely execution risk.
Insurance companies all over the world are vulnerable to a massive unwind of assets due to their guarantees in structured products and variable accounts. If they also have general account losses in asset-backed obligations, it's that much worse.
Come on, you can do better than this. There was no rogue trader (no name given, a first), but Soc Gen used the excuse to hide the full subprime losses. Looks better that way, hein?
"It will be the best year ever, both in terms of asset gathering and performances," says Seyer. "We are aware that the environment is uncertain and there is a lot of volatility, and we don't pretend some of the hedge funds on our platform won't be hit - some were. But, on average, annual performances remain at a peak and we have been extremely pleased with the resilience of returns this year."
With all the turnover and interdepartmental rivalries at large corporations, internal controls are frequently pretty bad.
One scenario: A 15 year, trusted veteran leaves a company. Internally, this person is required to, and does obtain approvals for transactions. He's replaced by a person who assumes the same title. The new person gets 4 hours of training on the company's internal controls and systems. Others in the company don't notice they don't receive email notices regarding say, new cash account openings, anymore because they receive about 80 emails a day.
Counterparties from banks, etc. usually give the new person all the rights of the old person.
Now, the new person is an island. Suppose that new person is compensated partially on performance. People will go straight to the roulette (little wheel) table with other's money if they get to keep 10% of the profits while not sharing the losses.
As a futures trader for over 20 yrs., I have to question when the risk manager first knew of the mounting losses. Once the trader exceeded his loss limit, if the manager doesn't liquidate the position immediately, the risk manager is in danger of losing his job too. As the loss grows,the incentive increases for the risk manager to bury or hide the loss.
The answer is to have two independent risk managers watching the same accounts.
I'd be curious to hear the thoughts of folks here.
The Business Week article only addresses one dimension of the credit/spending spree, consumers, and estimates the overshoot at $3 trillion.
But there's another side to it:
Government.
By how much did governments (fed, state, local) borrow and overspend in the same era? At least another $3 trillion.
What must come next, if the U.S. economy has a long-term future, is austerity and tax increases.
America will now look for leadership in carrying out an austerity agenda for the next 8 years. On 2/5, I think you will see, for better or worse, that this leader will be Hillary Clinton.
As Americans awake to the depths of the government borrow/spend binge, it can't by definition be a Republican or an Iraq War supporter.
Rebates would go to people earning below a certain income cap, likely individuals earning $75,000 or less and couples with incomes of $150,000 or less.
Why don't they increase the cap based on location like they are planning for FHA?
Let's see. One guy. Criminal level of fraud. Biggest loss ever for a French bank. The guy walked out under his own supervision. But is was just that one guy. And shocked as we are, we're on the case now. We're looking into it.
Does anybody else think it may not be that simple?
Both sides agreed to allow Fannie Mae and Freddie Mac government-sponsored companies that are the two biggest U.S. financers and guarantors of home loans to buy loans much larger than the current $417,000 limit, aides and lobbyists said. Frank said that lending cap might reach as high as $700,000 in areas with the highest home prices.
This explains why the financials have rallied so much the past few days. This leaked out. This is phase I of the banks selling much of their bad debt to the GSE's.
Phase II will be a trillion dollar bailout of the GSE's.
Thanks for the info. Folks made a big deal about the December deals as it quieted the markets and I wanted to see if it was a delaying action or merely a postponement.
A 'Rogue Trader' I don't buy it, not for one second. If this came during normal times, I might not question it, but it does not. Banks are taking exceptional losses and looking to transfer blame.
Most lies are seeded by truth so here is my take. This trader did have some bad and possibly fraudulent positions. But come on $7b, NO WAY! Maybe $7mm even $70mm but not 100times that much. Top management hears of the bad trades and sees an opportunity to pile on. Instead of management making bad bets and losing billions one guy takes the blame.
Nick spent about a year in a Singapore pokey and then emerged to take a position as Commercial Manager of the Galway United Football Club (I kid you not).
Look for M. Kerivel to coach the Chicago Cubs to a pennant in a few years...
"Thanks for the info. Folks made a big deal about the December deals as it quieted the markets and I wanted to see if it was a delaying action or merely a postponement."
It should be noted that securities arbitrage vehicles (most obviously, but not only, SIVs) are still finding it very hard to fund. Things are basically back to normal for multi-seller conduits.
Understatement:
He has not yet received his bonus for 2007, but I dont think he will claim it, Mr Bouton said.
I've also got a picture of the guy here, but Halo won't let me post it. He's also on Facebook if anyone is curious.
More seriously, this doesn't look good for the Fed - cutting 75bp in response to SocGen unwinding fraud trades. I suspect less of a cut than had been expected next week due to disclosure and mkt rally.
When I worked in commercial printing, we invented an employee, complete with his own business cards, phone extension. and voicemail message. We transfered all sales calls to his extension and gave his business cards to every salesperson who walked in the door.
Give it about a week, and we'll find out that their haircut was the 7bn, and this rogue trader doesn't exist, except to blame.
Isn't it rather convenient to play the rouge trader card and at the same time announcing it is taking additional 2.05 EUR billion (3 bil USD) write down on toxic subprime stuff? In raw percentage terms - it sounds almost stupid if you look at the alleged 'super scammer trader' vs the amount they are writing down.
Yes, maybe the chap did have some losing trades - I would find it hard to buy the story that a single individual is able to scam a bank to that magnitude. It is standard in almost all bank trading setup that there are clear demarcation of roles and responsbilities in the front, mid and back office. Now unless this individual has cloned himself (like Dolly the sheep) working for the entire front, mid and back office - the story of a risk control failure does not stick.
IMHO - find a fall guy, stitch him up and conveniently dump losses from other groups on him and downplay the losses that currently reiceves the most limelight (ie, mortgage toxic). No matter how you slice it, a loss is a loss on the books whether it is from the right pocket or left pocket.
If indeed the alleged trader is single handedly responsible for racking such a losses, then Nick Lesson would look like Micky Mouse.
All these "rogue" traders are showing up at places that have somehow managed to skirt any and all internal controls and reported to no one???
I believe that as much as I believe the plane last week that crashed because it didn't respond to a request for more power......that happens when there is NO FUEL left in the tank....
"They lay off the risk of guarantees by using short futures, options and shorts. But in a market this chaotic, where hedge funds are probably imploding all over the place, it's difficult to get the hedges right. It's hard to believe a hedging operation this sophisticated could miss this bad for rogue reasons alone. More likely execution risk."
Rich,
i believe this to be entirely untrue.
my old partner was head of market risk management at one of the largest banks on the planet and he oversaw the books on exactly these product. by far the most usual product was to buy say a five year zero, and then lever what was left over into some hedge fund. the only thing the bank did was to monitor the positions and p&l of the fund in real time. there were liquidation triggers when the funds got near where the trading capital might disappear. there was absolutely no trading in securities of any kind to try and hedge risk.
d
I am with the camp that believe the rogue trader story is bs. we are to believe that somehow with exchange traded products which are marked and cleared every single night and where real cash transfers are made across the clearing house that no one saw billions of dollars in balances just sort of disappear. now way this happened without the full understanding of the desk, accounting and senior management. best guess is that they made a big bet and got hammered and now they would like to keep their jobs and not get sued by shareholders.
vive la france
on the positive side, i can't help but feel that goldman probably was on the other side of the trades and ran them in. probably will make for good quarter.
this is a model of how the US will cover its current account deficit. we will just out trade the rest of the world. kind of cool if you can do it.
From the article:
He was in charge of futures hedging on European equity market indices, known as "plain vanilla" futures. .... Societe Generale says it first learned of what it termed "massive fraudulent directional positions" on Jan. 19[Saturday], it waited until it could close out those trades before going public with the problem. Winding down the trades, the bank said, resulted in a 4.9 billion write-down...
So, the futures were tanking Mon, Tue ( overnight) because they were liquidating long index futures, the Fed thinks this will roil the US stock market permanently as lowers rates .75 %; which we are now stuck with ( and possibly .5 more )....
Jeez, incompetent naive fools.
Oooo I forgot, looking at their statement they couldn't wait a week and made an EMERGENCY cut in rates because...(drum roll):
Extract from the statement:
...action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
"These trades had to be some sort of OTC futures/swaps where the trader could hide his book."
That would be the only out, but i still dont believe it. even if you have an isda agreement there is still back and forth reconciliation between the back offices. The people on the desk have no hooks into the back office systems and are the recipient of reports every day, as is the risk dept. If I am the counterparty to the trade my back office is reconciling with their back office every day. The reconciliation does not go on from trade desk to trade desk.
Oops is vulgar and hardly French. A more appropriate speeling would be "oupes" which would be feminine. although it appears plural (given the "s") there are a few words if borrowed from other languages that can end in "s" but still be singular. This would be one of those
Thus: Une oupes. Plural would be Les oupeuses.
This story is very surreal. Thus, I feel we owe homage to the best surrealist of all time, even though he was Belgian.
Surely the proposal is NOT to let Fan and Fred buy nonperforming loans? I'm just assuming the plan is to let them buy bigger-denomination loans going forward--loans where somebody checked on the borrower's ability to repay.
On Societe Generale--Did this guy pocket the billions? Or was he just a screwup who lost a lot of his employers' money in trades, and then tried to cover it up and lost even more in the process? Or something in between those two?
There is but one other explanation for this scenario. He was instructed by management, at whatever level, to take the positions he did. This could mean they told him to gamble or possibly hedge. It went wrong, again for any reason, and he is the fall guy.
Who knows maybe the bank was trying desperately to hedge losses on exotics, CDOs and ABCP and with vanillas. Think about it, the best way to hedge against toxic ABCP, for which there is currently no market is by shorting those who hold it. Could happen!
Don't forget by Friday of last week the markets had already been significantly down. By then, maybe even much earlier, they knew his positions were bad and started to unwind them. Everyone else was already in the red and panic ensued.
Oh one more thing, $7b wasn't this traders credit line. Those were his loses! That implies trades of much greater size. Prop desk traders don't trade with 1/100th of that.
This thing is fishy, we will never know the truth!
Jerome Kerviel becomes a trader in 2006, current age 30, current salary & bonus = $145,000.
Takes huge positions in the European markets that are up massively at 2007s year end.
But while he was up, no one notices his policy violations.
His trades start to sour in 2008 and, by the time someone noticed (on January 18th, 2008), he was underwater by $7B. The total position has not been disclosed but must have been at least $70B to have such a large and quick loss.
Company decides to unwind his massive position on Monday, January 21st, 2008. US markets are closed. European markets drop 7%. Asia follows.
Emergency Fed meeting reduces fed rate by 0.75% (75bps).
18 months of trading experience. 30 years old. Modest salary. Desk job. Brings world markets and principle policy makers to their knees.
Oh, so that's how these things work! I feel SO much better now.
Re: BusinessWeek. All along, they had taken the Keynesian editorial position that the economy is fundamentally sound etc. Suddenly they discover that the fundamentals were shaky.
Bulls like Sebastian make the same fundamental mistake - disregard balance sheet issues, disregard divergence of key ratios (debt to GDP, consumer spending to GDP, consumer debt to GDP, housing to GDP, stock market capitalization to book value, profits as % GDP, financial profit as % of corporate profits and so on ...). Those ratios collectively added up to the picture of a chronically credit-fueled "binge economy".
Disregard all of those, and yeah, things look good. That was what the mainstream (Businessweek etc) argument came down to. The coming downturn is going to shake the foundations of their models. Japan was the canary, but it was considered an outlier that "cannot happen here".
"Does anybody else think it may not be that simple?"
Sorry to ruin the conspiracy theories, but it was pretty much that simple.
"Seems to me a number of past guys have gone into court and claimed management knew what they were doing."
No chance that management knew what the guy was really doing. Zero. Nada. None. The rules at SG are very strict: lie and lose money and you're fired, lie and earn money and you're still fired. The systems, on the other hand, are obtuse, and there are multiple ways to get around them. And management was in the classic situation of thinking they ruled the world (leading equity derivatives house for upteen years straight), so not even taking seriously the lessons which could have been learned from the Leason scandal. I think people will be amazed how many errors identified as causing the Leason fiasco were repeated at SocGen. The whole thing is being given a hush-hush because everyone will look incompetent once the whole sordid details come out.
"Who knows maybe the bank was trying desperately to hedge losses on exotics, CDOs and ABCP and with vanillas. Think about it, the best way to hedge against toxic ABCP, for which there is currently no market is by shorting those who hold it. Could happen!"
The guy took long equity positions, as far as we can tell. Seems a strange way to hedge structured finance losses.
I don't know enough about internal bank controls to say whether it is possible for Monsieur Kerviel to have done this without anyone knowing. But once discovered, did SG unwind the trades, causing markets to crash all over the world and then only later alert everybody? Did they tell the French authorities first? Did anyone tell ECB and the Fed? I want to know what everyone knew and when they knew it.
By the way, Kerviel does not mean anything in French now, though I suspect it may soon mean be in Larousse as a synonym for idiot, scoundrel, etc.
I can't believe how many people must have been scratching their heads looking at their portfolios. Some might have even questioned what the heck they were thinking investing in the markets.
Well, those of you can now take it on this 'one guy' who made fake trades. Hard to believe one guy can orchestrate such a massive fraud with so much rules and regulations in place
"But once discovered, did SG unwind the trades, causing markets to crash all over the world and then only later alert everybody? Did they tell the French authorities first? Did anyone tell ECB and the Fed? I want to know what everyone knew and when they knew it."
SG alerted the French authorities, in particular the Head of the Bank of France, on I think Saturday, before it began to unwind the trades. The Fed seems to have said it was not aware of the problem when it lowered rates on Tuesday, which of course was after the unwind began. On the other hand, I'm not sure why the Fed should have been told, given that the positions were those of a French bank, taken by a Frenchman while he was working in Paris, and were positions on European underlyings.
And what were SG's legal obligations to inform the world before unwinding those trades at a time when any reasonable person would expect them to roil the markets? There may not be any French avocats here, but can anyone tell me what would a bank's legal obligations be under US law? Can SG be sued by anyone who lost money trading bewteen Monday and when they made this public?
JohnCTD,
Although not a back office person, I have dealings with workers in the back office daily. "Fake futures trades" usually don't clear. The next day the clearing firms on both sides of each "fake" trade probably will be out the trade and should know there is a problem. Likewise, accounts with a high percentage of out trades(ones that didn't clear) should catch someone's attention. Also, I think the balancer who squares the trades with the clearing house should notice discrepancies.
On another point, a friend who owned a clearing firm for many years told me today that he doubted anyone could lose billions without others within the firm knowing about it.
From what I am reading this guy was responsible for delta hedging the groups warrant book. According to SG this was the problem. He did not get the hedges in place and the losses resulted.
"And what were SG's legal obligations to inform the world before unwinding those trades at a time when any reasonable person would expect them to roil the markets? There may not be any French avocats here, but can anyone tell me what would a bank's legal obligations be under US law? Can SG be sued by anyone who lost money trading bewteen Monday and when they made this public?"
Maybe you think US law is the law of the world? These were positions taken by a French bank, in their Paris office, on European underlyings. So how is US law supposed to matter? SG informed their regulators (the Bank of France, etc.); it is up to those regulators to inform others or not
I'll confess to thinking, like you, that he had amassed a large futures position and there were offsetting trades hiding it. As near as I can tell that was not the problem.
Feb 8, 2008 - it's official..today was bonus day and it was a bloodbath. Bonus cuts of 75%...some received $0. And they tell us that we should be happy that we weren't let go like the hundreds of our co-workers in the past days since Jerome-gate.
Socgen is a crap place to work. When we do well, we never see the money. When we do poorly, we get shafted.
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So what's French for fallguy again?
You mean visits the Guillotine.
Kp: bouc émissaire
So I suppose it's safe to say that his year end bonus won't be quite as large this year?
I'm groping the name of the guy who did this in Britain a few years back.
I guess their unwinding of these massive positions (all index futures) caused a lot of the sell-off on Monday and Tuesday throughout the world.
The FED cut because of the drop in the equity markets, and they dropped because SocGen was selling hundreds of thousands of futures in a couple of days, so this guy really triggered the FED cut... :DDD
How do you say Sarbanes-Oxley in French?
... case of "exceptional fraud" due to a single trader who had concealed enormous losses through a scheme of "elaborate fictitious transactions."
Take out the "single trader" part and you have an accurate description of the entire global financial system.
I hope some good things will come out of this in the end.
Like a good book, or movie.
My one rougue teenager has been running a one hundred million dollar drug dealing business out of our home. I am shocked.
Are they really saying anything any different?
MW-
Nick Leeso
Ahh there it is right in the article Leeson at Barings. I guess he must feel like a bit of an under achiever today.
Nick Leeson. He only lost £800m.
The SG guy is called Jerome Kerviel.
What's French for "resumé"?
Bonus time!
And in case you missed it on the previous thread, Soc Gen was just named Equity Derivatives House of the Year by Risk Magazine only a month ago. How do you like them risk controls?
Prominent hedge funds nurse heavy losses in 2008
"The average global hedge fund lost 3 percent through the end of last week, according to Hedge Fund Research data, and that was before global markets plunged on Monday, when indexes fell 7.2 percent in Germany and 7.4 percent in India. U.S. markets were closed on Monday."
Prominent hedge funds nurse heavy losses in 2008
| Reuters
Fraud, fraud, everywhere.
Let them eat cake!
"FT Alphaville exclusive: SocGens fraud trader named...
FT Alphaville can reveal that the trader at the centre of the financial scandal engulfing Société Générale is 31-year-old banker Jerome Kerviel. Mr Kerviel, who worked in the banks Delta One products team in Paris, was responsible for what looks set to go on record as the largest financial fraud of all time, masking huge positions hed built in equity derivatives, which resulted in a loss of 5bn announced by SocGen on Thursday morning. SocGens Delta One business includes programme trading, ETFs, swaps, index and quantitative trading. It is thought that Mr Kerviel joined the bank in the summer of 2000. He could not be reached for comment. SocGen declined to comment."
Never trust a guy who drives a trash truck to work.
Look. Where I worked, traders were using excel speadsheets full of macros to manage their derivatives portfolios.
Guess what happened when IT decided to upgrade the Excel version one weekend?
Sacre bleu!!!!!
Financial Times: Eric Dinallo, New York insurance superintendent, held a two-hour meeting with bank executives on Wednesday and urged them to provide as much as $5bn in initial capital to support the insurers the largest of which are MBIA and Ambac and ultimately to commit up to $15bn.
Why not through in another 7bil for SG.
Guess what happened when IT decided to upgrade the Excel version one weekend?
A $7.16 billion loss?
Spooky!
Nemo,
From what I remember from college french courses, the French don't actually use the word resume I believe they use something from latin.
what i don't understand is if he was flattening the position with fake trades how did the cash settlement not get totally out of whack on the futures? was he able to fake the entire thing all the way to bank accounts.
Let's see - The French Central bank knew about this over the weekend and never bothered to tell our central bank, which eases 75bp as the positions are liquidated? What kind of world are we living in?
Probably curriculum vitae.
I'm groping the name of the guy who did this in Britain a few years back.
Nick Leeson?
My comments as well, how does one employee manage to have access to cause that kind of loss?
It doesn't smell right. SocGen is a global leader in structured products. For example, they wrap a group of hedge funds together and pay out 75% of the upside while guaranteeing 90% of the principal. For several years, they've been stamping out these products in ungodly amounts.
They lay off the risk of guarantees by using short futures, options and shorts. But in a market this chaotic, where hedge funds are probably imploding all over the place, it's difficult to get the hedges right. It's hard to believe a hedging operation this sophisticated could miss this bad for rogue reasons alone. More likely execution risk.
Insurance companies all over the world are vulnerable to a massive unwind of assets due to their guarantees in structured products and variable accounts. If they also have general account losses in asset-backed obligations, it's that much worse.
C'est la guerre
A bunch of ABCP that had been rolled over was set to expire around Jan. 20, yet there's been no news of any re-rolling this week.
Question:
Could last week's sell off have been related to raise assets for this ABCP?
Maybe that's why froggy went a courtin.
CR (and others),
This Business Week article (titled "How Real Was The Prosperity?") asks a number of provocative questions:
How Real Was the Prosperity?
I'd be curious to hear the thoughts of folks here.
Marcus Aurelius you made my day!(You guys do have the best humour in the world). I think I have tears in my eyes.
The guy was actually a worker. He actually knew how the systems worked.
He was paid less then 100k euro.
This is a truly impressive loss.
Great news for the risk management folks. Expect a booming business.
Come on, you can do better than this. There was no rogue trader (no name given, a first), but Soc Gen used the excuse to hide the full subprime losses. Looks better that way, hein?
From the L.A. Times:
"Homeowners deluged mortgage brokers with calls Wednesday, hoping to take advantage of sharply lower interest rates to refinance into cheaper loans."
Tough remedies stay on shelf amid refinancing fever - Los Angeles Times
Does this mean a 75bp cut might actually have some impact on the housing situation?
Oops, spoke too soon:
"It will be the best year ever, both in terms of asset gathering and performances," says Seyer. "We are aware that the environment is uncertain and there is a lot of volatility, and we don't pretend some of the hedge funds on our platform won't be hit - some were. But, on average, annual performances remain at a peak and we have been extremely pleased with the resilience of returns this year."
Equity Derivatives House of the Year - Société Générale - Risk.net
With all the turnover and interdepartmental rivalries at large corporations, internal controls are frequently pretty bad.
One scenario: A 15 year, trusted veteran leaves a company. Internally, this person is required to, and does obtain approvals for transactions. He's replaced by a person who assumes the same title. The new person gets 4 hours of training on the company's internal controls and systems. Others in the company don't notice they don't receive email notices regarding say, new cash account openings, anymore because they receive about 80 emails a day.
Counterparties from banks, etc. usually give the new person all the rights of the old person.
Now, the new person is an island. Suppose that new person is compensated partially on performance. People will go straight to the roulette (little wheel) table with other's money if they get to keep 10% of the profits while not sharing the losses.
Hay guys, we all get $300 as a reward for buying houses we can't afford.
I would rather have had the $800.
Receding tide reveals all sorts of stuff... dogs bark, caravan goes on.
As a futures trader for over 20 yrs., I have to question when the risk manager first knew of the mounting losses. Once the trader exceeded his loss limit, if the manager doesn't liquidate the position immediately, the risk manager is in danger of losing his job too. As the loss grows,the incentive increases for the risk manager to bury or hide the loss.
The answer is to have two independent risk managers watching the same accounts.
" A bunch of ABCP that had been rolled over was set to expire around Jan. 20, yet there's been no news of any re-rolling this week."
That's not what I hear. I've been told by investors that the majority of maturing ABCP was rolled and that many vehicles are funding at or near Libor.
Curriculum Vitae
so is $300 a person going to bring us out of a severe recession? I don't think so, ... it might cover gas for a family for one month.
Stimulus Package has been agreed upon
Hay guys, we all get $300 as a reward for buying houses we can't afford.
I would rather have had the $800.
Three hundred not enough to buy my pony. I want my pony!
They'll have to change its name to Societe Speciale.
I wrote the post about risk managers above. I'm trader Walt and the post is labeled "Anonymous"
Wow, how appropriate that the stimulus package and the title for the new James Bond flick were announced on the same day...
"Quantum of Solace"
(meaning, not very much solace!)
The Business Week article only addresses one dimension of the credit/spending spree, consumers, and estimates the overshoot at $3 trillion.
But there's another side to it:
Government.
By how much did governments (fed, state, local) borrow and overspend in the same era? At least another $3 trillion.
What must come next, if the U.S. economy has a long-term future, is austerity and tax increases.
America will now look for leadership in carrying out an austerity agenda for the next 8 years. On 2/5, I think you will see, for better or worse, that this leader will be Hillary Clinton.
As Americans awake to the depths of the government borrow/spend binge, it can't by definition be a Republican or an Iraq War supporter.
Rebates would go to people earning below a certain income cap, likely individuals earning $75,000 or less and couples with incomes of $150,000 or less.
Why don't they increase the cap based on location like they are planning for FHA?
Let's see. One guy. Criminal level of fraud. Biggest loss ever for a French bank. The guy walked out under his own supervision. But is was just that one guy. And shocked as we are, we're on the case now. We're looking into it.
Does anybody else think it may not be that simple?
I guess it's "official" that the median house price declined last year:
Expired
Who coodanode it would be this bad?
Both sides agreed to allow Fannie Mae and Freddie Mac government-sponsored companies that are the two biggest U.S. financers and guarantors of home loans to buy loans much larger than the current $417,000 limit, aides and lobbyists said. Frank said that lending cap might reach as high as $700,000 in areas with the highest home prices.
This explains why the financials have rallied so much the past few days. This leaked out. This is phase I of the banks selling much of their bad debt to the GSE's.
Phase II will be a trillion dollar bailout of the GSE's.
Why don't they increase the cap based on location like they are planning for FHA?
like every one in Chelsea or the castro?
How ironic. A bank did it to themselves this time.
Why doesn't Societe Generale just make a donation to Dodd's campaign fund and get a bailout?
trader walt, it looks like some of the risk managers knew (or in the exercise of reasonable care should have known) of the trading losses:
"He (the CEO) said four or five other staff will leave SocGen, including the line of hierarchy above the trader."
Udnoubtedly M. Kerivel had an English mother,or at least an English Nanny.
Ginger Yellow,
Thanks for the info. Folks made a big deal about the December deals as it quieted the markets and I wanted to see if it was a delaying action or merely a postponement.
No news is good news in this regard.
Evel Knievel est mort.
Vive Evel M. Kerivel!
so it is SG and not DB ?
I think Nick Leeson is feeling kind of depressed today.
Here's what I don't understand. Someone explain it to me.
WHO is going to wind up owning all the debt? I mean, WHO is going to be sending around the collection goons in the end?
China? The Saudis? A particular bank left standing?
Evel Kerivel - what you'd get if Evel Knievel and D.B. Cooper mated!
sportsfan,
I think the bigger question is Tanta's original one:
"What kind of controls can allow a trader to lose $7 billion?"
Answer: inadequate controls.
Trader Walt
A 'Rogue Trader' I don't buy it, not for one second. If this came during normal times, I might not question it, but it does not. Banks are taking exceptional losses and looking to transfer blame.
Most lies are seeded by truth so here is my take. This trader did have some bad and possibly fraudulent positions. But come on $7b, NO WAY! Maybe $7mm even $70mm but not 100times that much. Top management hears of the bad trades and sees an opportunity to pile on. Instead of management making bad bets and losing billions one guy takes the blame.
Nick spent about a year in a Singapore pokey and then emerged to take a position as Commercial Manager of the Galway United Football Club (I kid you not).
Look for M. Kerivel to coach the Chicago Cubs to a pennant in a few years...
Tabarnac!
Evel J. Kerviel!
"Thanks for the info. Folks made a big deal about the December deals as it quieted the markets and I wanted to see if it was a delaying action or merely a postponement."
It should be noted that securities arbitrage vehicles (most obviously, but not only, SIVs) are still finding it very hard to fund. Things are basically back to normal for multi-seller conduits.
Understatement:
He has not yet received his bonus for 2007, but I dont think he will claim it, Mr Bouton said.
I've also got a picture of the guy here, but Halo won't let me post it. He's also on Facebook if anyone is curious.
More seriously, this doesn't look good for the Fed - cutting 75bp in response to SocGen unwinding fraud trades. I suspect less of a cut than had been expected next week due to disclosure and mkt rally.
From letter to employees:
Le trader responsable de la fraude a immédiatement été mis à pied. Il quittera le Groupe ainsi que les personnes en charge de sa supervision.
Mis a pied is one way to put it.
Galway is a lovely city and all, but GUFC ain't exactly the Cubs...
Le ooops!!!
Paging Inspector Clouseau, paging Inspector Clouseau....
Oh, all right -
Look for M. Kerivel to coach the Winston-Salem Warthogs to a pennant in a few years...
When I worked in commercial printing, we invented an employee, complete with his own business cards, phone extension. and voicemail message. We transfered all sales calls to his extension and gave his business cards to every salesperson who walked in the door.
Give it about a week, and we'll find out that their haircut was the 7bn, and this rogue trader doesn't exist, except to blame.
JS - I concur.
Isn't it rather convenient to play the rouge trader card and at the same time announcing it is taking additional 2.05 EUR billion (3 bil USD) write down on toxic subprime stuff? In raw percentage terms - it sounds almost stupid if you look at the alleged 'super scammer trader' vs the amount they are writing down.
Yes, maybe the chap did have some losing trades - I would find it hard to buy the story that a single individual is able to scam a bank to that magnitude. It is standard in almost all bank trading setup that there are clear demarcation of roles and responsbilities in the front, mid and back office. Now unless this individual has cloned himself (like Dolly the sheep) working for the entire front, mid and back office - the story of a risk control failure does not stick.
IMHO - find a fall guy, stitch him up and conveniently dump losses from other groups on him and downplay the losses that currently reiceves the most limelight (ie, mortgage toxic). No matter how you slice it, a loss is a loss on the books whether it is from the right pocket or left pocket.
If indeed the alleged trader is single handedly responsible for racking such a losses, then Nick Lesson would look like Micky Mouse.
Wiki is fast. Here is a honours list:
List of trading losses - Wikipedia, the free encyclopedia
All these "rogue" traders are showing up at places that have somehow managed to skirt any and all internal controls and reported to no one???
I believe that as much as I believe the plane last week that crashed because it didn't respond to a request for more power......that happens when there is NO FUEL left in the tank....
M
Le ooops!!!
Isn't that "les ooops"?
"They lay off the risk of guarantees by using short futures, options and shorts. But in a market this chaotic, where hedge funds are probably imploding all over the place, it's difficult to get the hedges right. It's hard to believe a hedging operation this sophisticated could miss this bad for rogue reasons alone. More likely execution risk."
Rich,
i believe this to be entirely untrue.
my old partner was head of market risk management at one of the largest banks on the planet and he oversaw the books on exactly these product. by far the most usual product was to buy say a five year zero, and then lever what was left over into some hedge fund. the only thing the bank did was to monitor the positions and p&l of the fund in real time. there were liquidation triggers when the funds got near where the trading capital might disappear. there was absolutely no trading in securities of any kind to try and hedge risk.
d
JamesRaven - the name of that trader does exist - wiki already have it on their site.
But then again ... a name is just another name .... a loss is STILL a loss, call it any name you want.
L'oops? Are exclamatory words singular or plural?
I know the Fed board should be refered to as les salauds from now on.
I am with the camp that believe the rogue trader story is bs. we are to believe that somehow with exchange traded products which are marked and cleared every single night and where real cash transfers are made across the clearing house that no one saw billions of dollars in balances just sort of disappear. now way this happened without the full understanding of the desk, accounting and senior management. best guess is that they made a big bet and got hammered and now they would like to keep their jobs and not get sued by shareholders.
vive la france
on the positive side, i can't help but feel that goldman probably was on the other side of the trades and ran them in. probably will make for good quarter.
this is a model of how the US will cover its current account deficit. we will just out trade the rest of the world. kind of cool if you can do it.
Nous sommes "Les Cochons Mortgageois".
FF
Fruit L'oops
Are exclamatory words singular or plural?
If we are to accept the "une pomme mauvaise" theory of the problem, then I think we assume that "ooops" is partitive.
de l'ooops?
From the article:
He was in charge of futures hedging on European equity market indices, known as "plain vanilla" futures. .... Societe Generale says it first learned of what it termed "massive fraudulent directional positions" on Jan. 19[Saturday], it waited until it could close out those trades before going public with the problem. Winding down the trades, the bank said, resulted in a 4.9 billion write-down...
So, the futures were tanking Mon, Tue ( overnight) because they were liquidating long index futures, the Fed thinks this will roil the US stock market permanently as lowers rates .75 %; which we are now stuck with ( and possibly .5 more )....
Jeez, incompetent naive fools.
Oooo I forgot, looking at their statement they couldn't wait a week and made an EMERGENCY cut in rates because...(drum roll):
Extract from the statement:
...action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
Crazy.
-K
Exchange traded futures are marked to market, with cash settlement daily. No way to bury billion dollar losses in this scenario.
These trades had to be some sort of OTC futures/swaps where the trader could hide his book.
JamesRaven - the name of that trader does exist - wiki already have it on their site.
Anybody's French good enough to tell whether his name isn't just the French equivalent of Haywood Jablowmi?
"These trades had to be some sort of OTC futures/swaps where the trader could hide his book."
That would be the only out, but i still dont believe it. even if you have an isda agreement there is still back and forth reconciliation between the back offices. The people on the desk have no hooks into the back office systems and are the recipient of reports every day, as is the risk dept. If I am the counterparty to the trade my back office is reconciling with their back office every day. The reconciliation does not go on from trade desk to trade desk.
actually, it's just "oups!"
oops - WordReference Forums
This just keeps getting weirder and weirder. Jerome is missing:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/24/bcnsocgen924.xml
Also, Bloomberg is blaming the stock market moves and even the 75 bp Fed cut on the French bank reacting to the discovery of the funny trades.
Oops! (saying that a lot today) it was MW not BL
http://www.marketwatch.com/news/story/socgen-probably-black-monday-culprit/story.aspx?guid=%7B9A84342A-D679-45B6-8C93-8804A898FE4E%7D
Apparently from french press, he used other employees' ids to access the back office where he used to work a couple of years before.
Oops is vulgar and hardly French. A more appropriate speeling would be "oupes" which would be feminine. although it appears plural (given the "s") there are a few words if borrowed from other languages that can end in "s" but still be singular. This would be one of those
Thus: Une oupes. Plural would be Les oupeuses.
This story is very surreal. Thus, I feel we owe homage to the best surrealist of all time, even though he was Belgian.
"Ceci n'est pas une oupes."
René Magritte - Wikipedia, the free encyclopedia
speeling, would of course be spelling.
Single rogue trader? Why not,..As the White Queen said,"I can believe three impossible things before breakfast."
Merci, bacon rêves!
Do you have a license for that Mortgage Pig??
merde!
On the GSEs:
Surely the proposal is NOT to let Fan and Fred buy nonperforming loans? I'm just assuming the plan is to let them buy bigger-denomination loans going forward--loans where somebody checked on the borrower's ability to repay.
On Societe Generale--Did this guy pocket the billions? Or was he just a screwup who lost a lot of his employers' money in trades, and then tried to cover it up and lost even more in the process? Or something in between those two?
"This just keeps getting weirder and weirder. Jerome is missing..."
Wouldn't it be even more weird if he were not missing? I would be missing. Very, very missing.
There is but one other explanation for this scenario. He was instructed by management, at whatever level, to take the positions he did. This could mean they told him to gamble or possibly hedge. It went wrong, again for any reason, and he is the fall guy.
Who knows maybe the bank was trying desperately to hedge losses on exotics, CDOs and ABCP and with vanillas. Think about it, the best way to hedge against toxic ABCP, for which there is currently no market is by shorting those who hold it. Could happen!
Don't forget by Friday of last week the markets had already been significantly down. By then, maybe even much earlier, they knew his positions were bad and started to unwind them. Everyone else was already in the red and panic ensued.
Be friends with Jerome Kerviel, the guy in question. Here´s his Facebook entry:
Login | Facebook
Login | Facebook
Oh one more thing, $7b wasn't this traders credit line. Those were his loses! That implies trades of much greater size. Prop desk traders don't trade with 1/100th of that.
This thing is fishy, we will never know the truth!
Seems to me a number of past guys have gone into court and claimed management knew what they were doing.
The wikipedia table of "rogue traders" is amusing, but don't you have to convert everything into 2008 dollars?
So, to summarize:
Jerome Kerviel becomes a trader in 2006, current age 30, current salary & bonus = $145,000.
Takes huge positions in the European markets that are up massively at 2007s year end.
But while he was up, no one notices his policy violations.
His trades start to sour in 2008 and, by the time someone noticed (on January 18th, 2008), he was underwater by $7B. The total position has not been disclosed but must have been at least $70B to have such a large and quick loss.
Company decides to unwind his massive position on Monday, January 21st, 2008. US markets are closed. European markets drop 7%. Asia follows.
Emergency Fed meeting reduces fed rate by 0.75% (75bps).
18 months of trading experience. 30 years old. Modest salary. Desk job. Brings world markets and principle policy makers to their knees.
Oh, so that's how these things work! I feel SO much better now.
Re: BusinessWeek. All along, they had taken the Keynesian editorial position that the economy is fundamentally sound etc. Suddenly they discover that the fundamentals were shaky.
Bulls like Sebastian make the same fundamental mistake - disregard balance sheet issues, disregard divergence of key ratios (debt to GDP, consumer spending to GDP, consumer debt to GDP, housing to GDP, stock market capitalization to book value, profits as % GDP, financial profit as % of corporate profits and so on ...). Those ratios collectively added up to the picture of a chronically credit-fueled "binge economy".
Disregard all of those, and yeah, things look good. That was what the mainstream (Businessweek etc) argument came down to. The coming downturn is going to shake the foundations of their models. Japan was the canary, but it was considered an outlier that "cannot happen here".
Is this Jerome?
Jerome Kerviel - LinkedIn
"Does anybody else think it may not be that simple?"
Sorry to ruin the conspiracy theories, but it was pretty much that simple.
"Seems to me a number of past guys have gone into court and claimed management knew what they were doing."
No chance that management knew what the guy was really doing. Zero. Nada. None. The rules at SG are very strict: lie and lose money and you're fired, lie and earn money and you're still fired. The systems, on the other hand, are obtuse, and there are multiple ways to get around them. And management was in the classic situation of thinking they ruled the world (leading equity derivatives house for upteen years straight), so not even taking seriously the lessons which could have been learned from the Leason scandal. I think people will be amazed how many errors identified as causing the Leason fiasco were repeated at SocGen. The whole thing is being given a hush-hush because everyone will look incompetent once the whole sordid details come out.
"Who knows maybe the bank was trying desperately to hedge losses on exotics, CDOs and ABCP and with vanillas. Think about it, the best way to hedge against toxic ABCP, for which there is currently no market is by shorting those who hold it. Could happen!"
The guy took long equity positions, as far as we can tell. Seems a strange way to hedge structured finance losses.
I don't know enough about internal bank controls to say whether it is possible for Monsieur Kerviel to have done this without anyone knowing. But once discovered, did SG unwind the trades, causing markets to crash all over the world and then only later alert everybody? Did they tell the French authorities first? Did anyone tell ECB and the Fed? I want to know what everyone knew and when they knew it.
By the way, Kerviel does not mean anything in French now, though I suspect it may soon mean be in Larousse as a synonym for idiot, scoundrel, etc.
I can't believe how many people must have been scratching their heads looking at their portfolios. Some might have even questioned what the heck they were thinking investing in the markets.
Well, those of you can now take it on this 'one guy' who made fake trades. Hard to believe one guy can orchestrate such a massive fraud with so much rules and regulations in place
"But once discovered, did SG unwind the trades, causing markets to crash all over the world and then only later alert everybody? Did they tell the French authorities first? Did anyone tell ECB and the Fed? I want to know what everyone knew and when they knew it."
SG alerted the French authorities, in particular the Head of the Bank of France, on I think Saturday, before it began to unwind the trades. The Fed seems to have said it was not aware of the problem when it lowered rates on Tuesday, which of course was after the unwind began. On the other hand, I'm not sure why the Fed should have been told, given that the positions were those of a French bank, taken by a Frenchman while he was working in Paris, and were positions on European underlyings.
And what were SG's legal obligations to inform the world before unwinding those trades at a time when any reasonable person would expect them to roil the markets? There may not be any French avocats here, but can anyone tell me what would a bank's legal obligations be under US law? Can SG be sued by anyone who lost money trading bewteen Monday and when they made this public?
JohnCTD,
Although not a back office person, I have dealings with workers in the back office daily. "Fake futures trades" usually don't clear. The next day the clearing firms on both sides of each "fake" trade probably will be out the trade and should know there is a problem. Likewise, accounts with a high percentage of out trades(ones that didn't clear) should catch someone's attention. Also, I think the balancer who squares the trades with the clearing house should notice discrepancies.
On another point, a friend who owned a clearing firm for many years told me today that he doubted anyone could lose billions without others within the firm knowing about it.
trader walt
" it can't by definition be a Republican or an Iraq War supporter."
It can't be Hillary then.
From what I am reading this guy was responsible for delta hedging the groups warrant book. According to SG this was the problem. He did not get the hedges in place and the losses resulted.
Additionally, and official said the FOMC was not aware of the losses at SG when it cut Tuesday!
I can hardly believe this story.
This one guy caused a deluge of sell offs around the world which was a factor in the largest Fed emergency rate cut in history?
If true, this is the most chilling of all stories so far.
"And what were SG's legal obligations to inform the world before unwinding those trades at a time when any reasonable person would expect them to roil the markets? There may not be any French avocats here, but can anyone tell me what would a bank's legal obligations be under US law? Can SG be sued by anyone who lost money trading bewteen Monday and when they made this public?"
Maybe you think US law is the law of the world? These were positions taken by a French bank, in their Paris office, on European underlyings. So how is US law supposed to matter? SG informed their regulators (the Bank of France, etc.); it is up to those regulators to inform others or not
""Fake futures trades" usually don't clear."
I'll confess to thinking, like you, that he had amassed a large futures position and there were offsetting trades hiding it. As near as I can tell that was not the problem.
Feb 8, 2008 - it's official..today was bonus day and it was a bloodbath. Bonus cuts of 75%...some received $0. And they tell us that we should be happy that we weren't let go like the hundreds of our co-workers in the past days since Jerome-gate.
Socgen is a crap place to work. When we do well, we never see the money. When we do poorly, we get shafted.
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