Friday, January 25, 2008

Societe General, Old News

A trader has stunned global financial markets by defrauding France's second-largest bank of €4.9 billion (US$8.2 billion) - potentially the largest fraud in financial history. Societe Generale, has announced a loss of €6.9 billion, the largest in European history. Lost in the exceptional loss was an important €2 billion write-down linked to the subprime mortgage crisis in the US.

Putting it in perspective, British trader Nick Leeson, who defrauded Barings bank of £725 million, causing Barings to collapse in 1995. The young Paris trader used his position, plus a knowledge of the bank's security system, to construct "a scheme of elaborate fictitious transactions" on European equity markets. He had been dismissed and legal action will be taken against him, said the bank's chairman, Daniel Bouton - who offered to resign but whose offer was rejected by the board. Also fired were "executives, including leaders, responsible for the supervision and controls on the operation concerned".

With trading in Societe Generale shares down by nearly 50 per cent in the past six months - largely due to concerns over its exposure to the subprime crisis - the bank said it would be forced to raise €5.5 billion in new capital to restore its balance sheet. Calling all Asian sovereign wealth funds, calling all sovereign wealth funds ...

Societe Generale was a leader in derivatives and was considered one of the best risk managers in the world, you would think they know a thing or two about minimising risk. Societe Generale said in a separate statement that its rogue trader had been carrying out what it called "vanilla futures hedging" on European equity markets. It said the trader took out "massive fraudulent directional positions in 2007 and 2008 beyond his limited authority".

In 2003 rogue traders who entered false trades cost NAB's foreign exchange book US$360 million. The traders, who were all jailed, entered false trades to inflate profits, securing annual bonuses worth tens of thousands of dollars. In 2006, a 32-year-old trader named Brian Hunter at Amaranth LLC, a hedge fund, made a series of bad bets on natural-gas futures that led to losses of US$6 billion. Credit Agricole SA, one of SocGen's French competitors, in August 2007 revealed a similar trading incident that wiped €230 million off third-quarter net profit.

Its not a big deal nowadays, now its very difficult to bring down the company, so we must amaze at what Leeson did. These losses wouldn't affect the markets one bit. Gone are the days of Leeson and LTCM... those were the days.


whatthe? said...

I'm an ex-banker (treasury) and I think that guy couldn't do it alone. To lose that amount he had to hold losing positions over a prolonged period of time. There are too many things for him to cover up in the back office such as settlements and confirmations. Surely someone would have spotted something unless he controls every step of the process and stays 24/7 in the bank. I just think there's more to it than what was reported.

bantersy said...


Although the aggressive rate cut wont help the econ in short term, but it appears the financial market has stabilised and in fact, move higher than early this week. indeed spectacular! As you have mentioned, there is not likely to have a rate cut again next week. Wonder why many are expecting a 50bp next week? Are they in for a comfort or disappointment?

" Rate-Cut Odds

Federal funds futures contracts show a 76 percent probability of a half-point reduction in the benchmark lending rate at the conclusion of the policy meeting next week, and a 24 percent chance of a quarter-point cut.

Bernanke has written research papers on how financial- market losses feed back into bank lending and restrict credit. Since early January, he and Fed Governor Frederic Mishkin built a case, through speeches, for faster, ``substantive'' rate cuts.

Their arguments were bolstered by signs that inflation expectations remained stable even as oil prices climbed to $100 a barrel and forecasts for economic growth were trimmed. "

Salvatore_Dali said...


Sometimes its no fun to be a bear, best to keep quiet, but as I have said all along, once I think the clouds have cleared, I will write about it. These rate cuts and all hunky dory feeling are hiccups, the real problems are just unraveling not over. If only problems can be rectified so easily.

rask3 said...

The not so smart Arabs, Singaporeans and Chinese shouldn't have bailed out the bankrupt banks in USA. They should have allowed those banks to sink in their subprime soup.

Now these goons in suits have got a new lease of life which they do not deserve. And the mat sallehs have the gall to ask SWF's to behave.


AQW said...


I believe GIC/Tamasek thought swapping the Chinese for European / US franchises is a far better bank for the buck..I suppose like in ShinTel, if you don't seize the opportunity it may not present itself another time...(unfortunately in that case they are also losing money...)thats why they also took Alliance Bank at 3X book...(inclusive of the losses from kitchen sinking..)

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