Do banks never learn anything?

[peterbirks]

Well, let's hear it this mormning for Société Générale, which has managed to allow a single trader to spunk away nearly €5bn.

And if that isn't enough to make you choke on your cornflakes, it gets better. The trader only had "limited authority" and he managed to lose this in plain vanilla futures hedging on European equity market indices.

How?

Well, SocGen employed as a trader someone who had previously worked in the middle office. In other words, he knew how he could hide the mess while he presumably increased his stakes in a hope that he would get out of trouble. The trader created fictitious deals to make it look as if things were fine. And it looks as though he got away with it for quite a while (well, it takes quite a few bum trades to get up to a €5bn loss).

It goes to show one thing. Anyone earning (relative) peanuts in a back-office support job who thinks that he could make bundles as a trader "because it doesn't look that hard" should take note. It isn't as easy as you might think.

SocGen discovered the loss on January 19th and 20th. After that, the additional writedown of just over €2bn because of the subprime crisis seems fairly mild.

Capital raising necessary. Not really the best time to be going about it.

It made my morning, it really did.

Comments

[jaybee66.livejournal.com]

he knew how he could hide the mess while he presumably increased his stakes in a hope that he would get out of trouble. The trader created fictitious deals to make it look as if things were fine

I've never seen that afore. It needs a name so I can remember it. How about...

The Leeson Manoeuvre?

It matters not. It's not as though he was trading with something of value. Just another print run of paper.

[peterbirks.livejournal.com]

Leeson indeed. Hence the title of the piece.

SocGen's safety set-up appears to have relied on two things:

1) that the trader won't lie

but that, if he does,

2) that the middle-office and middle-management are competent.


Since traders often lie, and middle management is rarely competent, that strikes me as one hell of a shitty security system.

PJ

[jaybee66.livejournal.com]

This is a nice little read.

http://www.energybulletin.net/39472.html

[(Anonymous)]

It's rather baffling how someone can still manage to do this. Futures contracts are marked to market every day so real cash will be moving back and forth between the exchange and the bank. As soon as there was a mismatch between the bank's purported positions and the cashflows it should have been detected immediately and investigated. Leeson could manage it by being simultaneously head of trading and of the back office in a branch office. He also managed to persuade to Barings Treasurer to wire him a million every night for no properly explained reason. How a junior trader in the Paris office of Soc Gen can do this is inexplicable.

matt

[(Anonymous)]

by inference it is happening everywhere.