$7.1B fraud committed by one trader

[Epic Fail]

link

PARIS ? The French bank Société Générale said Thursday that it had uncovered "an exceptional fraud" by a trader that would cost it ?4.9 billion, or about $7.1 billion, and that it would seek new capital of about $8 billion.

The company, the second-largest listed bank in France, said in a statement that the fraud had been committed by a trader in charge of "plain vanilla" hedging on European index futures.

The trader, who was not identified, "had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority," the bank said. "Aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle-office, he managed to conceal these positions through a scheme of elaborate fictitious transactions."

The bank said the fraudulent positions had been closed and the trader suspended. The incident has been thoroughly investigated and found to be a case of "isolated fraud."

The company also said it would write off $3 billion from its exposure to derivatives linked to the U.S. mortgage market, including $1.6 billion related to risks in residential housing and $800 million related to U.S. bond insurance companies. It said it was also setting aside $580 million in provisions against the risk that losses in those two areas would grow.

There was some skepticism in the market about the trading fraud disclosure.

"I am sorry, but I have a hard time buying the fact that a trader was able to set up a 'secret trade' of ?4.9 billion without anybody finding out," Ion-Marc Valahu, head of trading at Amas Bank, Switzerland, told Reuters.

Société Générale said it would still post a profit for 2007 of $880 million to $1.2 billion and would pay out 45 percent of its profit in dividends.

In order to reinforce its capital, the bank said, its board decided to raise $8 billion via a rights issue of preferred shares to investors. The rights issue, the bank said, would bring its tier 1 capital ratio to 8 percent.

The bank said it had rejected an offer of resignation by its chairman, Daniel Bouton, and had given him a renewed vote of confidence.

$7.1B fraud by one person.

They need new capital but is still paying out 45% of its profit as dividend.

 

[imported_Lothar]

I read this about 2hrs ago on Bloomberg and was rolling on the floor laughing.

 

[DangerAardvark]

I read the topic title as "seven dollars and 18 cents fraud committed by one trader".

 

[SunnyD]

Honestly, I think this guy deserves the job. He obviously knows how to make money!

 

[Svnla]

Tst..tst...tst...where are the internal controls/check and balance systems of that bank/brokerage?

<<<------speaking from an Auditor point of view

I wonder if they will pay a high rate of return for savings and CDs since they are desperate for new money.

European ATOTers, do you have FDIC (insured all savings/CDs up to a certain amount) or something like that overthere?

 

[LegendKiller]

Originally posted by: Svnla
Tst..tst...tst...where are the internal controls/check and balance systems of that bank/brokerage?

<<<------speaking from an Auditor point of view

I wonder if they will pay a high rate of return for savings and CDs.

European ATOTers, do you have FDIC (insured all savings/CDs up to a certain amount) or something like that overthere?

Do you think that people can't figure out how to circumvent them?

 

[Svnla]

Originally posted by: LegendKiller

Originally posted by: Svnla
Tst..tst...tst...where are the internal controls/check and balance systems of that bank/brokerage?

<<<------speaking from an Auditor point of view

I wonder if they will pay a high rate of return for savings and CDs.

European ATOTers, do you have FDIC (insured all savings/CDs up to a certain amount) or something like that overthere?

Do you think that people can't figure out how to circumvent them?

I understand about frauds. You can't prevent or stop EVERYTHING little thing but 7.1 BILLIONS is a huge number by ONE trader (if the story is true). This is lowly trader, NOT the CEO/CFO or Enron type.

 

[FoBoT]

is he really a scapegoat? fall guy?

 

[TheAdvocate]

This smells like a cover up. That is a ridiculous sum of money.

By the way, if that bank has to raise capital just to get its Tier 1 Capital ratio to 8% then it was already under-capitalized (per FDIC guidelines). WTF are they doing over there?

 

[FoBoT]

Originally posted by: TheAdvocate
(per FDIC guidelines).

except it isn't a US bank, maybe France has different guidelines

 

[jman19]

Originally posted by: Svnla

Originally posted by: LegendKiller

Originally posted by: Svnla
Tst..tst...tst...where are the internal controls/check and balance systems of that bank/brokerage?

<<<------speaking from an Auditor point of view

I wonder if they will pay a high rate of return for savings and CDs.

European ATOTers, do you have FDIC (insured all savings/CDs up to a certain amount) or something like that overthere?

Do you think that people can't figure out how to circumvent them?

I understand about frauds. You can't prevent or stop EVERYTHING little thing but 7.1 BILLIONS is a huge number by ONE trader (if the story is true). This is lowly trader, NOT the CEO/CFO or Enron type.

Traders have lost billions before and it will happen again. Audit controls aren't perfect and most traders can find a way to defraud the systems in place, sadly.

 

[TheAdvocate]

Originally posted by: FoBoT

Originally posted by: TheAdvocate
(per FDIC guidelines).

except it isn't a US bank, maybe France has different guidelines

Doesn't matter, the computation is still the same. My point is that the bank is under-capitalized. The FDIC guidelines aren't binding on a foreign bank, but they are still a very smart rule of thumb.

Now, if we were discussing the huge insurance premiums they'd have to pay to do business here (FDIC insured) with that crappy of a capital ratio, the guidelines would have tangible effects on that bank.

Under capitalization of businesses is borderline fraud & negligence and legal systems around the world have been put in place to prevent it, or seek remedies at the backer/guarantor/principals level, despite the corporate shield.

 

[Goosemaster]

Originally posted by: FoBoT
is he really a scapegoat? fall guy?

it would be funny if French were actually trying to pin 7 FRIGGEN BILLION DOLLARS OF FINANCIAL LOSSES on one single guy

"Jacque...a word in me office pliz..."


The guy probably did it. No bank could be that stupid...


oh wait...

 

[crystal]

So what did he do exactly? And I agree, seem a little bit fishy to me.

 

[Svnla]

Originally posted by: jman19
Traders have lost billions before and it will happen again. Audit controls aren't perfect and most traders can find a way to defraud the systems in place, sadly.

I think you and LegendKiller misunderstood me. I know that anyone inside/heck even outside the company can do bad deeds and no amount of audit/control/check and balance/etc. can stop eveything. The AMOUNT, the POSITION of the bad guy, and HOW he was able to squeeze by are what I am talking about. Traders lost money (bad trades/bad luck/fraud/greed/etc.) all the time but 7.1 billions by just one person and no one knows about it until now?

What I am saying is this is a lowly trader and he is responsible for 7.1 billions. Now if he is the CEO or some bigshots in the company, then I can understand that but if this story is true, then this institution is in bad shape (regulators will be on their tails and slam down the hammer) even if they survive this mess. Look at Arthur Anderson (out of business) and Enron (gone and upper managements are in prison)

 

[LegendKiller]

Originally posted by: Svnla

Originally posted by: LegendKiller

Originally posted by: Svnla
Tst..tst...tst...where are the internal controls/check and balance systems of that bank/brokerage?

<<<------speaking from an Auditor point of view

I wonder if they will pay a high rate of return for savings and CDs.

European ATOTers, do you have FDIC (insured all savings/CDs up to a certain amount) or something like that overthere?

Do you think that people can't figure out how to circumvent them?

I understand about frauds. You can't prevent or stop EVERYTHING little thing but 7.1 BILLIONS is a huge number by ONE trader (if the story is true). This is lowly trader, NOT the CEO/CFO or Enron type.

A "lowly trader"? Please. Many of these guys make millions per year because they are good, there's nothing "lowly" about a guy that can somehow use his knowledge of back and middle offices to lay on tens of billions of futures contracts, which moved against him.

It wouldn't be difficult to do if you knew the BO/MO guys and could manipulate procedures, signatures...etc.

 

[jman19]

Originally posted by: Svnla

Originally posted by: jman19
Traders have lost billions before and it will happen again. Audit controls aren't perfect and most traders can find a way to defraud the systems in place, sadly.

I think you and LegendKiller misunderstood me. I know that anyone inside/heck even outside the company can do bad deeds and no amount of audit/control/check and balance/etc. can stop eveything. The AMOUNT, the POSITION of the bad guy, and HOW he was able to squeeze by are what I am talking about. Traders lost money (bad trades/bad luck/fraud/greed/etc.) all the time but 7.1 billions by just one person and no one knows about it until now?

What I am saying is this is a lowly trader and he is responsible for 7.1 billions. Now if he is the CEO or some bigshots in the company, then I can understand that but if this story is true, then this institution is in bad shape (regulators will be on their tails and slam down the hammer) even if they survive this mess. Look at Arthur Anderson (out of business) and Enron (gone and upper managements are in prison)

Like I said before, traders have found ways to lose billions before and it will happen again. If he knew how to hide his losses, which it sounds like he did, he would have plenty of time to get himself in a big hole. No doubt he was essentially upping his bets to try to recoup his losses before anyone found out. I'm sure the bank is in pretty big trouble regarding this, though, and confidence in the bank to regulate it's own business will be in doubt.

 

[Svnla]

Legend - What I mean "lowly" is the "power position" of that trader in the company. I am sure he is making good money. As a mater of fact, he made about $145K (salary and bonus) and been with the company since 2000. Like you said, he could manipulate procedures, signatures..etc ...but what bothers me is how he was able to do those things without any uppper management oversight until now.

Jman - I read another article about this problem and look like he did not do it for personal gains. Probably he did do it to hide his bad trades?


Here is another article:

http://biz.yahoo.com/ap/080124...te_generale_fraud.html

 

[ElFenix]

i seem to remember a trader in hong kong costing a bank somewhere in the neighborhood of a billion dollars about 8 or 9 years ago.

 

[jman19]

Originally posted by: ElFenix
i seem to remember a trader in hong kong costing a bank somewhere in the neighborhood of a billion dollars about 8 or 9 years ago.

Barings, it is mentioned in the article. He managed to tank a 200+ yr old bank.

 

[LegendKiller]

Originally posted by: TheAdvocate

Originally posted by: FoBoT

Originally posted by: TheAdvocate
(per FDIC guidelines).

except it isn't a US bank, maybe France has different guidelines

Doesn't matter, the computation is still the same. My point is that the bank is under-capitalized. The FDIC guidelines aren't binding on a foreign bank, but they are still a very smart rule of thumb.

Now, if we were discussing the huge insurance premiums they'd have to pay to do business here (FDIC insured) with that crappy of a capital ratio, the guidelines would have tangible effects on that bank.

Under capitalization of businesses is borderline fraud & negligence and legal systems around the world have been put in place to prevent it, or seek remedies at the backer/guarantor/principals level, despite the corporate shield.

First off, capital positions are a lot more complicated than just taking FDIC, especially since SocGen is a european bank and operates under BASEL II, which has risk weighted asset positions which require different capital treatment. I only know the securitization part of that, which is already pretty fricking difficult to master. Each risk weight is judged based upon the capital target, the risk weighting for each asset position rating (AAA -> unrated), taking into account various asset and liability positions.

The capital ratio itself isn't that horrible, SocGen is a decently capitalized and well run bank.

 

[Epic Fail]

Originally posted by: crystal
So what did he do exactly? And I agree, seem a little bit fishy to me.

He used the Martingale scheme and failed.

 

[LegendKiller]

Originally posted by: Svnla
Legend - What I mean "lowly" is the "power position" of that trader in the company. I am sure he is making good money. As a mater of fact, he made about $145K (salary and bonus) and been with the company since 2000. Like you said, he could manipulate procedures, signatures..etc ...but what bothers me is how he was able to do those things without any uppper management oversight until now.

Jman - I read another article about this problem and look like he did not do it for personal gains. Probably he did do it to hide his bad trades?


Here is another article:

http://biz.yahoo.com/ap/080124...te_generale_fraud.html

How hard is it to imagine that somebody who knows everything about the way MO/BO work can manipulate things through false orders/trades, forged signatures...etc.

All of the controls only make it harder to do something. It's akin to picking all of the low hanging fruit. However, those truly skilled and those that know the loopholes, can do it quite easily, but they can rarely contain it.

 

[crystal]

Originally posted by: yamadakun

Originally posted by: crystal
So what did he do exactly? And I agree, seem a little bit fishy to me.

He used the Martingale scheme and failed.

Haha... I have to google "Martingale" to know what you talking about.

 

[Koing]

Originally posted by: LegendKiller

Originally posted by: Svnla

Originally posted by: LegendKiller

Originally posted by: Svnla
Tst..tst...tst...where are the internal controls/check and balance systems of that bank/brokerage?

<<<------speaking from an Auditor point of view

I wonder if they will pay a high rate of return for savings and CDs.

European ATOTers, do you have FDIC (insured all savings/CDs up to a certain amount) or something like that overthere?

Do you think that people can't figure out how to circumvent them?

I understand about frauds. You can't prevent or stop EVERYTHING little thing but 7.1 BILLIONS is a huge number by ONE trader (if the story is true). This is lowly trader, NOT the CEO/CFO or Enron type.

A "lowly trader"? Please. Many of these guys make millions per year because they are good, there's nothing "lowly" about a guy that can somehow use his knowledge of back and middle offices to lay on tens of billions of futures contracts, which moved against him.

It wouldn't be difficult to do if you knew the BO/MO guys and could manipulate procedures, signatures...etc.

The guy wasn't that good of a trader.

He was in Back Office for 7yrs and and then moved to be a trader. He has been a trader for the past 3yrs and with his salary and bonuses only made £75k. That isn't that much for a futures trader. So relatively speaking, he wasn't that good at his job at all...

But yeah they should have some consideration limits on the books he was trading on.

Koing