London investment banks face the likelihood of closer regulation of derivatives trading in the wake of the rogue trader debacle that cost French bank Société Générale an estimated €4.9bn ($7.2bn). Bosses at the Financial Services Authority (FSA) including chief exec Hector Sants called senior execs at London banks on Thursday …
Famous last words
"Must have tighter controls", my a*s! They always say that after a problem.
Systems won't help - you must have people, sitting in the middle office, who understand what they are supposed to watch for, know the tricks, are empowered and have balls to actually challenge the front office.
It is that stupid hope of the geriatric CEOs that if they spend a few million on a system it will protect them all by itself which invariably causes the downfall of the institutions.
I am 100% sure that in SocGen's case it was the complacency and not a failure of the trading system, that caused the problem. You must be an idiot not to spot an outright position EUR 50 billion in size. Even if the kid created a spoof customer account you must be an idiot not to spot tens of million margin calls paid to the market on behalf of a client - that's simple credit control.
And it's the management of the bank are those who are responsible for hiring these idiots.
A lack of internal control
says the EAfH
Outright position ?
I understand it was not an "outright position" of 50 gigaEuro, but a set of positions, which bet on movements, so it may have been harder to spot.
"Equity Funding". It has happened before, it will happen again. Get used to it. Equity funding was done back in the late 60's/early 70's. Today we have larger computers, and even larger frauds.
Remember: Ethics is what you do when nobody is looking!
That is ridiculous...
... of course you can fix this through software, and everything needn't be restrutured or whatever. Just add one stinking line of code:
if(JuniorTrader.TotalTrades.Value >= €4,000,000,000) return Trade.Abort();
Seriously, how hard can that be?
And what if...
... his deals hadn't gone tits-up?
It's only because he got it wrong that we're hearing about him and his dodgy deals.
I have little doubt that if he'd *made* billions in profit he'd have simply been promoted and got a massive bonus!
On Second Thoughts
On second thoughts it is obvious SG dropped an even bigger bundle on the US mortgage market then they would have us believe and even far bigger then the gnomes of Zurich big hit as well !
But the French have always had a certain way of selecting innocent parties as the fall guys since the dawn of the 1st Republic way back when !
I blame the parents
Yay. More rules. I expect that these are special ones that won't be broken.
re Graham - if he'd been caught after making massive profits, he'd have been sacked sure as eggs is eggs. Despite the impression you may gain from the media, banks aren't interested in gambling their entire future on the markets and having nutters like Kerviel around isn't good for one's long term survival.
Making a bazillion bucks one minute and then going bankrupt the next isn't a solid business plan and it certainly hasn't been good for Bouton or the board's reputation. They'll be spending most of the next few years fending off lawsuits from the shareholders and the French regulator. Fun fun fun for them !
The idea that this is some sort of way of covering up their sub prime losses is laughable too. Pretty much every bank in world has taken a hit of some sort from the sub prime debacle. Covering it up with a massive c*ckup like this is akin to shooting yourself in the foot when you've got a veruca. And so has everyone else.
That's the top catchphrase in the wife's office (software development), always said in a nervously chipper fashion. Usually the answer turns out to be "Ooo. It's a bit more complicated than we thought".
@Dominic (The Pimp) Connor
"I understand it was not an "outright position" of 50 gigaEuro, but a set of positions, which bet on movements, so it may have been harder to spot."
It must have been an outright - you just cannot lose 4.7 bln on a 50 bln position of spreads. On options you can also lose a lot in one go but the bank clearly said "futures".
"Outright" in futures means a net position (you've either bought or sold futures) in one instrument. Anything else will be a "spread" where you buy one instrument and sell another. Spreads can be calendar (sell March futures, buy April for example) or between underlying prtoducts (buy crude oil futures, sell oil products futures) etc.
What he appears to have done is he bought shares with delivery sometime in the future (went "long"). As the market goes down the long positions lose money. To hide the loss he must have invented a non-existing customer account and done an internal offsetting trade with that fictitious account. So, his book became balanced but the fake customer account must have began accumulating a huge loss.
Sounds like this case is the least sophisticated it can ever be (I may be wrong of course but that what the information so far suggests).
Not to spot this you need to totally lack the basic of controls, and I mean BASIC! Anyone diligent with a spreadsheet would have been able to catch the guy before he's done too much damage.
There is the size of position, there is the credit exposure to a customer (even if you don't realise he is a fiction). And front office personnel just must never be allowed to open customer accounts.
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