SocGen’s €5bn rogue trader crisis

News ....

“Trust is a two way street”

Rogue trader Jérome Kerviel, a 31-year-old Frenchman, joined SocGen in 2000 and worked on the Delta One trading desk on the bank’s Paris trading floor. The bank said that because of the actions of Mr Kerviel and a €2.05bn writedown linked to subprime loans and bond insurers in the US it would launch an emergency €5.5bn rights issue. The massive trading losses were caused by positions taken in the European stock futures markets that backfired. This kind of activity raises serious questions about banks’ risk-management procedures and their ability to control their own trading positions. One analyst said: "This news will cast a dark cloud over the already troubled European banking sector." SocGen refused to give any details of the trader, who it said had confessed and been suspended pending a dismissal procedure !!!

Carlos Garcia at Fortis in Madrid:
"The most serious thing is that this puts into doubt the risk management systems at some banks. You can't suddenly announce from one day to the next a hit of $7 billion. In the light of this, what we've done is to downgrade banks that are very linked to trading income or whose capital base is weak."

SocGen boss said the rogue trader’s loss had been exaggerated by difficult market conditions this week. But he defended the bank’s risk-management processes. “All our models of stress-testing work perfectly well,”

My question is how can someone within a trading environment by-pass IT security let alone continue to operate fraudalently for a considerable amount of time, and not be noticed, whatever happened to random audit checks and monitoring ! ...

The losses raised eyebrows among other regulators around the world and provoked intense debate in Davos ...

John Gapper commented in the Telegraphy "Jérome Kerviel of Société Générale likeness to Barings is striking"

The comparisons between the trading losses at Société Générale and those which caused the collapse of Barings in 1995 are striking. In both cases, a young man responsible for trading exchange-traded equity futures on behalf of the bank ended up accumulating a big hidden position that the bank did not know about. In the Barings case, the trader was Nick Leeson, who was a trader on the floor of the Simex derivatives exchange in Singapore.

In both cases as well, the trader involved had formerly worked in the back office and was then given a promotion to a trading position. Mr Leeson earned his promotion because he was highly-regarded for his ability to solve clearing and settlement problems that had plagued Barings’ back office.

Jérome Kerviel was one of a few back office people who were promoted to the trading floor as part of the bank’s efforts to offer opportunities to people who worked in the less prestigious back office. He was allowed to trade only under strict limits and he only earned about €100,000 in compensation.

Both traders used their knowledge of back office procedures to conceal the true size of their positions from controllers at their banks. Mr Leeson was in charge of the back office as well as trading in Singapore, while Mr Kerviel logged into computers in the names of other employees to falsify the accounts.

Another similarity is that both deceptions went on for a long time before finally being caught. Mr Leeson’s rogue trading position – in an account numbered 88888 – had been in existence for two years by the time that it escalated into the £860m loss that caused Barings’ collapse in February 1995.

The losses also escalated sharply right at the end of the deception. More than half of Mr Leeson’s losses piled up in January 1995 as the Nikkei index fell. Mr Kerviel built up a large hidden position earlier this month and the bank’s losses rose sharply this week as it struggled to close out that position.

Finally, Mr Leeson and Mr Kerviel appear to have been similar in not making a personal profit from their deceptions, beyond an impact on their annual bonuses from appearing to be successful traders.

Source: FT, Telegraph