John

IHT provides some details of the Soc Gen debacle

In News on January 28, 2008 at 3:42 am
socgen
For those who still haven’t heard about this, Jérôme Kerviel, an (ex) employee of French (vive la france, etc etc) bank, Societe General managed to make trades on on European stock indexes using the bank’s money, costing the bank 7.2 BILLION USDs in losses. Details on the actual dealings are very sketchy but IHT has a pretty good article that gives us an idea of what happened:

Kerviel’s fraud, according to the bank, consisted of placing sizeable, real purchases in one portfolio but creating fictitious sales transactions in the second, off-setting portfolio. This gave the impression to risk managers that the risks in the first portfolio were hedged, when in fact they were not. As a result, the bank wound up exposed to massive, one-way bets, or “long” positions. Instead of hedging, which was his job, Kerviel was effectively speculating with the bank’s money.

“Our controls identified from time to time problems with this trader’s portfolio,” Mustier (Jean-Pierre Mustier, chief executive of the bank’s corporate and investment banking arm) said, although he declined to say when the first questions were raised by risk managers, saying that the bank’s auditors were still investigating.

Each time one of Kerviel’s trades was questioned, Mustier said, Kerviel would describe it as a “mistake” and cancel the trade.

“But in fact, he then replaced that trade with another transaction using a different instrument” to avoid detection, Mustier said.

This guy makes Nick Leeson’s 1.4 billion investment adventure (which brought down Barings) look like an expensive Paris Hilton shopping spree. There certainly are many parallels. Apparently nothing has been learnt. This despite the fact of all the banking and various regulatory requirements put into place such as Basel II (you gotta love the Swiss for selling services we never thought we’d ever need) that was supposed to prevent this sort of thing after Barings. Has any of that money spent on audit and controls etc actually changed anything? If you’re one of the good ol’ boys, you still can get away with anything as always.

In Singapore, Nick Leeson got 6 years in prison for his activity. It wouldn’t surprise me if this guy, in Paris gets something similar. For some reason what these guys do isn’t considered theft. Wow. Steal 100 dollars you get caned. Steal 7.2 billion, and you get a web page and a book deal. I bet if his longs actually turned out to be profitable, he would’ve got promoted even – assuming of course that he channeled some of the profits bank into the bank.  Greed and hypocrisy knows no bounds.

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