FYI | Jan 25 2008
By Greg Peel
Some people say “We learn from our mistakes”. Others say “History never repeats”. Sane people, however, know full well this is all a lot of rubbish. If it weren’t then financial markets would cease moving through boom-bust cycles.
But you’d think that experience might provide one with a few little pointers to lock away as time progresses. For example, European banks might have learnt after 1995 that it’s a good idea to introduce a bit of double-entry accounting and independent double cross-checking of exposures in those confusing things called futures contracts, after the world’s most famous “rogue” trader – Nick Leeson – spectacularly brought down Barings Bank with US$1.4bn of hidden losses. But no – last night French banking giant Societe Generale announced US$7.2bn in losses in stock index futures. It wasn’t the bank’s fault – it had been the work of a “rogue”.
This is the biggest loss in SocGen’s long history, and now the bank must turn to shareholders in an attempt to raise US$5.5bn of new capital to cover the “fraud” and to cover subprime write-downs.
SocGen chairman Daniel Bouton has offered to resign over the incident, but his resignation has been refused. The bank does expect however, as Bloomberg reports, that “four or five” heads will ultimately roll. “The transactions that were built on the fraud were simple positions linked to rising stock markets, but they were hidden through extremely sophisticated and varied techniques,” said Bouton, on the bank’s website. Apparently Jerome Kerviel’s (the 31-year old rogue in question) knowledge of SocGen’s systems was “intimate and perverse”. He is a “computer genius” who managed to slip under the radar of several levels of control.
Funnily enough, Kerviel did not personally gain anything from this so-called “fraud”. Nor did Leeson. Leeson attempted to cover up one little trading error (which was made by his junior) hoping the market would bounce back. The market kept falling and Leeson kept covering it up until finally it all got too out of hand and he fled. Kerviel was showing a massive profit on his long index futures in December. But we all know what’s happened in January. Kerviel has also fled.
SocGen intends to sue Kerviel. Yeah that’ll work. The guy was on less than 100,000 euros a year.
Given the extent of losses across the globe in the great credit crisis debacle, it is unlikely Kerviel’s name will be remembered in history as clearly as Leeson’s has. But investment bank risk managers be warned – Kerviel had been promoted to the trading desk from the back office.
