Kerviel’s bank-busting bets
I have discovered more about the extraordinary risks being run by Jerome Kerviel, the rogue trader at whose transactions cost the bank €4.9bn.
According to official investigators, in the last few weeks his bets on stock markets were so big that every 1 per cent swing in the value of European shares resulted in either a profit or a loss for the bank of €500m (£370m) depending on whether the swing was positive or negative.
In other words, his bet was big enough to bankrupt SocGen on the basis of any sustained fall in stock markets.
What’s more, bankers have confirmed that at the end of last year, Jerome Kerviel had generated a colossal hidden profit for the bank of €1.4bn.
Among the great mysteries of the Kerviel affair is how the French bank could have failed to notice a profit of that size.
That €1.4bn profit had become a loss of €4.9bn by January 23, when M. Kerviel’s position had been unwound.
Or to put it another way, the deficit on Kerviel’s bet in the opening weeks of this year was €6.3bn, or £4.6bn.
Bankers have also disclosed that in 2006 Kerviel’s open positions in stock-market index futures – largely bets on the direction of the DAX, FTSE and Eurostoxx indexes – reached a colossal nominal amount of €30bn.
This was closed out at the end of 2007. But Kerviel then went on a gambling spree and increased his position to a mind-boggling €50bn earlier in January.
According to a banker close to the investigation, Kerviel’s first fraudulent positions were taken out in January of last year – although he apparently took steps to conceal a small loss at the end of 2006.
What is also shocking is that as long ago as March and April of last year, Societe Generale’s back office, or administrative operation, queried phoney transactions being carried out by Kerviel to disguise his massive stock-market bets.
At the time he was covering up his massive speculative activity by pretending to enter into “pending” futures transactions, whose economic effect would have been to negate the real trades.
These pending futures deals were identified by SocGen’s back office 10 months ago, but Kerviel’s explanations of them were regarded at the time as plausible.
The use of the “pending” futures transactions was one of five different methods employed by Kerviel to hide the extent of his real trading.
The other techniques for creating phoney trades included entering transaction dates for deals that fell after the normal settlement cycle, doing forward deals with other parts of SocGen, and creating fictitious issues of warrants.
Bankers say that he must have been frenetically busy covering his tracks by concocting these illusory transactions.
I'm 
dzԳٲ Post your comment
You have some marvellous contacts Robert! - The French bankers will be spitting feathers that their carefully managed releases to the press have been pre-empted. I only hope that your source is not identifiable from your article.
The question that arises of course is who allowed the situation to continue after the back office brought it to the management notice - presumably the relevant person was driven by personal avarice rather than risk management procedures if the profit was a notional £1 billion? The question also arises as to why he didn't close out his position when that far to the good? Was he encouraged to keep going?
Another cover up
============================
Go onto Youtube and type in Zeitgeist.
Then watch the movies on the Federal Reserve.
You will then truly understand what the central banks (eg BOE) are all about.
So what are you saying, that you believe the explanation or not? Did the Bank already know what was going on or were they totally in the dark?
I am afraid that it all sounds a little far fetched to me, systems that allow transaction dates after settlement dates (isn't that IT level 1?) Deals with other parts of the bank (who didn't notice), issuing fictious warrents (to who, so no reconcilliation?)
Sounds like the Bank knew, thought they were $1 billion up, suddenly it all went wrong and they had to pull the plug.
Sorry guys you need a new board.
What surely is important is that depositors understand that there are different levels of risk. If all banks have access to a bail out, there's nothing but "branding" to do for the banks. Why not otherwise just choose the highest return and go for it?
The 10 most frightening words in our language: "I am from the Government and I am here to help." Reagan.
With France our ancient rival overtaking the British Economy in the world economic rankings, I applaud you Robert for hopefully starting a further media frenzy against SocGen!
You seem to have single handily shown that both the worlds 5th and 6th largest economic powers can't put the regulatory structure in place to manage the financial institutions.
Considering both France and the Britain inherited our banking concepts from the Netherlands, and then exported to the rest of their respective Empires. Can I ask do you have anything to report on ABN?
The Fed has just cut rates from 3.5 to 3% to fend off recession, but as Kerviel is behind bars, they can't pin this on him!
Now, it looks like the monolines are going belly up for USD70bn
and they can't pin that on him either!
However the whole Kerviel has Leeson written all over it - no supervision, no checking and a massive betting exposure. I sit here reading the UK Securities & Inv Institute course on Operational risk and there is Leeson et al. as examples - but I wonder which UK bank is as negligent as SG?
Kerviel, hero(€1.4bn up) to zero (€5.9bn down) in less than 1 month.
I agree with @3 Andy Wright that all SocGen's explanations are rather farfetched.
€1.4bn up and no one noticed? Do they have a bunch of incompetents or cowboys running the bank?
It's like me getting an extra £1000 in my December paycheck and not noticing.
'L'affaire SG' is shaping up like Robert Maxwell's biography by his widow. Everything is false and an insult to your intelligence.
Jerome Kerviel is described as a 'junior trader'. At his age of 31 in the City he would be a senior trader close to burn out, if not already long gone to retirement in the Bahamas. Earning ten times the paltry €100,000 SG reportedly paid him.
He could also NOT have been making trades totalling billions of centimes! for almost a year without complicit oversight.
Le fisc fancais will also be wondering what other 'hidden profits' have been disseminated in the chaotic accounting and auditing proceedures and slipped by untaxed.
There will be criminal charges, law suits, tears and suicides from top to bottom of this thoroughly rotten institution.
I don't know why we should be surprised by Kerviel's gambles when an august institution like the Bank of England has gambled 55bn on Northern Rock. I bet that the losses to the taxpayer are at least 4bn when the whole thing unwinds.
There is nothing so pathetic as capitalism unwillingness to face the consequences of its own logic.
All of this frenzy over losses is masked by a simple fact. Profit and Loss. There are winners and losers, but being overly simplistic, World plc has a balance sheet that is a cash book. Basically, the winners should equal the losers. So who are the winners?
I am sure our BRIC friends can tell us aided by their OPEC chums. Trouble is, the winners have stack loads of US$ denominated winning chips. Will they realise value, or cannily invest in businesses that make things or supply materials to make things. That, my friends, is where the long term value is today!
The next few years are going to be very interestnig. The Anglo-Saxon economic domination is about to be eclipsed. What is being played out today is part of this generational economic realignment.
Interesting that he "covered" his tracks by false transactions and positions. Any first year student of auditing will tell you that you should contact the third party to confirm the transaction and obtain their understanding of the terms and conditions of that transaction. Usually works, unless they are in on the "fraud" as well.
So, where were the backroom and management? Another case of the powers giving him more rope because he was making huge profits and deep filing the backroom reports; does the bank have any whistle blowing procedures such that if the management did nothing with the backroom reports, the backroom could report their concerns to the appropriate non-exec directors; did the backroom pretend to understand what he was doing, when they did not really have a clue; or perhaps the complexity of it all lost him and he was just hoping to somehow find his way back?
As to fraud, if he was doing unauthorised trades to earn a bigger bonus for himself, then that is fraud. Full stop.
On the question of how you can hide such things on the balance sheet. One reason is that the transactions in this case is an exchange of contracts, with no payment until the maturity date (unless there are margin calls). The monitoring system therefore relies on contracts being entered properly into the banks systems, and this is often a manual process for certain products. And one that Kiervel was responsible for in his previous role, it appears.
The bank won't notice the massive actual profit because it's offset on the system by a massive ficticious loss.
The truth slowly but surely creeps out.
The entire management in control positions should be fired. SocGen at the moment is a joke amongst their peers. Their initial release of information raised far too many questions for people who work in the business.
Where I work, we tried to think of the ways it would be possible to do such a thing - each time it came down to massive failures on behalf of management. Anyone who works closely with traders know that they push the limits of what they are allowed to do. A strong back and middle office WITH management support is required to monitor and control them.
In SocGen's case it appears that the management were non existant.
The really sad thing is that there are a few more banks I know with abysmal management who lack the knowledge, skills and backbone to do the jobs they are supposed to. Hopefully this will be a wake up call for them to do the jobs they are paid to do.
Robert - you state 'the rogue trader at Societe Generale whose transactions cost the bank €4.9bn'
What puzzles me is where is where is the 4.9 billion now - I have not heard any mention in your articles - or any where else in the news - as to which lucky bank, traders, gamblers, or other con men have this money now. Please can you explain
It is the same as it always wasand always will be . Everybody loves you when you are making a profit but you have no friends when you start making a loss.
If you make money you can break any rules you want but watch out when you start losing money.
A new Board indeed is needed. They can't sack Bouton - they would all have to go.
President S has a problem. SocGen cannot continue on this course. A really interesting study on Corp Governance in France.
We wait.....
I am afraid that it all sounds a little far fetched to me, systems that allow transaction dates after settlement dates (isn't that IT level 1?) Deals with other parts of the bank (who didn't notice), issuing fictious warrents (to who, so no reconcilliation?)
----------------------
Actually, its common.
1. You need to back value a deal if it isn't entered on the trade date. A failure of trade entry in the first place.
2. Plenty of transactions such as swaps can be arranged with a start date in the past. A fee is then agreed for the mark to market difference in value. Here you want the transaction to match an existing transaction.
However, what went on at SocGen is clearly something else.
Why weren't the positions reconciled on both systems with their prime broker?
#10 Mike
"The next few years are going to be very interestnig. The Anglo-Saxon economic domination is about to be eclipsed."
It's amusing that you would call this "Anglo-Saxon", as if Britain was a special member of this club. I think what you perhaps mean is either specifically, "American" or perhaps more generally, "Western" or "Developed world".
Can You Say Enron! For anyone intrigued by just how "complexicated (ha ha)" this financial stuff can get, then rent the documentary film "Enron." While, as yet, SocGen does not appear to be as big as Enron or Parmalat, it is up there in the Premier League of debacles and at least a runner up for the Homer Simpson "Doh!" Award. The Enron film certainly gives great insight into how to set up offshore dummy corporations and the legal loopholes required for any budding kleptocrat. Who will make the SocGen movie and will it win at Cannes or Sundance. Thunar, Seattle
Due to the nature of these dealings and the prvailing culture (greed is good) that exists within these banks one strongly suspects that this problem is not confined to Societe Generale.
That is why those managers responsible failed to take the necessary actions until it was too late. These people were either asleep or not competent enough to understand what was going on. I as suggested this trader was frenetically covering his tracks then surely someone should have noticed that the number of transactions he was carrying out was higher than would normally be expected of someone in his position. The more likely explanation is they were too dazzled by the huge bonus payments they thought were coming their way.
It is now evident that the nature of these dealings makes it difficult for anyone else to pick up any phoney transactions or if the bank is becoming over exposed. If that is true then tighter limits on the banks levels of exposure, from such dealings, should be imposed and these need to be monitored more closely, especially when the markets become more volatile.
Actually I think Kerviel didn't do all that badly. He reportedly only lost 7 billion dollars on 70 billion bet. That's just a 10% loss, not bad in these times. It's a lot better than the sub prime guys who lost nearly 100% but they will not only get paid, they might even see bonuses. Since he didn't profit from it personally and wouldn't have had he won except for whatever bonus he'd have gotten (believe me they'd have overlooked his transgressions had he gotten them a 7 billion profit instead of a loss) his only real offenses were administrative. Usually, most corporations can only fire you for that but SocGen would do far better to keep him on as a consultant to improve their security process to prevent others from working around the system also. That's what a lot of companies do, hire the guys who robbed them by beating their systems as consultants.
John Law,
You ask where the money is now. That's simple. The trader was buying "futures." That means that he was promising to purchase something (stocks in this case) for a set price at some time in the future. The time and the price are in the contract.
If the price of the stock goes up, then he pays the contracted price, sells the stock, and makes a profit. If the price goes down, he pays the contracted price, sells the stock, and takes a loss.
The money in this case now belongs to the people who sold him those futures. They will have bought the stock at the going rate and sold it to the bank at a profit.
It is a remarkable contrast in the figures quoted by different people- the ý news puts the figure aroung 3,9 billion- this blog says 4.9 billion and the american networks(CNN ) say its 7.2 billion- who is to be believed- let alone the whole crooked french bank managements involvement.
The whole SOC.GEN. saga ppears typical of very sophisticated financial manoeuvring.( Pour quoi pas?) After discovereing lapses in the system adopted by an employee (a "rogue"trader) is not possible that on being discovered the circumstances were allowed to develope until they could be camouflaged sufficiently to warranr exposure? Thereafter allowing predators (most with prior knowlege) to buy the latest bank shares at bargain prices? Presumably- and easily -be party to this the banking coup of the century! By continuing in office the heirarchy would be able to further manipulate their gross private takings.Surely a total enquiry is necessary to examine all the finances of those persons directly involved. Watch the share prices rise drastically and guess whose buying? Une grand Blague cest sur?
A quick clarification:
3.9 billion pounds
4.9 billion euros
7.2 billion dollars
Don't they use trailing stops at SG?
He could of got out start of the year for a billion surely?