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Nick Leeson - 2 (a trader looses $7.16 billion)

PARIS (Reuters) - French bank Societe Generale (SOGN.PA) disclosed one of the biggest alleged frauds in financial history on Thursday, adding to a wave of gloom surrounding world markets battered by credit market losses.

SocGen, France's second-biggest listed bank, said it had uncovered an "exceptional fraud" by one of its traders.

It said this would cost the group 4.9 billion euros ($7.16 billion) and announced plans to raise 5.5 billion euros through a capital increase to shore up its balance sheet, also reeling from a crisis in global credit markets.

The fraud disclosure brought back memories of Nick Leeson, the British trader who in 1995 brought down blue-blooded merchant bank Barings after racking up huge losses.
SocGen said it was in the process of dismissing the Paris-based trader, who it did not name, and added that the trader's managers would leave the company.
It added that its board had rejected an offer by Chairman and Chief Executive Daniel Bouton to resign.

SocGen shares were suspended.

The Bank of France announced an inquiry by the Banking Commission and said no further comment was necessary after Societe Generale took steps to strengthen its balance sheet.
French Economy Minister Christine Lagarde will make a statement during the day on the issue, her office said.

"The most serious thing is that this puts into doubt the risk management systems at some banks," said Fortis analyst Carlos Garcia.

A source at SocGen said the trader was "not one of its stars" and was relatively young. SocGen said the trader had been handling plain vanilla futures contracts on European stock market indices, betting on broad share market movements.

It was not immediately clear what role French police were taking in the investigation. The French prosecutor's office was not available for comment.
Looks like another Operation Risk event again! This guy came from back office and knows the whole procedure of booking transactions...
A rougue trader dooped company out of $7 billion

Societe Generale Hit
By Fraud, Write-Downs

Bank Sees $7 Billion
In Fraud-Related Loss,
$3 Billion in Write-Downs

January 24, 2008 12:11 p.m.

PARIS -- Massive fraud by a rogue trader at Societe Generale SA has led to a €4.9 billion ($7.16 billion) write-down and is roiling markets as far away as Asia and further shaking investor confidence in Europe's biggest banks.
The bank, France's second largest after BNP Paribas SA, revealed early Thursday that it had detected a case of "exceptional fraud" due to a single trader who had concealed enormous losses through a scheme of "elaborate fictitious transactions."

Jerome Kerviel

The bank identified the trader as Jerome Kerviel. Mr. Kerviel, 31 years old, joined Societe Generale in August 2000 and was working as a trader on the futures desk at the bank's headquarter near Paris. He was in charge of futures hedging on European equity market indices, known as "plain vanilla" futures. The bank said he was able to dupe the bank's own security system because he had inside knowledge of the control procedures gained from previous jobs with the bank.

Though Societe Generale says it first learned of what it termed "massive fraudulent directional positions" on Jan. 19, it waited until it could close out those trades before going public with the problem. Winding down the trades, the bank said, resulted in a €4.9 billion write-down, making it potentially the largest loss ever from an alleged rogue trader.

But that wasn't the only bad news Societe Generale announced Thursday. It also said it was taking additional €2.05 billion write down in assets related to subprime exposure, and it would launch a capital increase of €5.5 billion in the "following weeks." The write-down and losses related to the trading incident will lead the company to post a net profit of €600 million to €800 million for all of 2007.

The disclosure of the write-downs comes a day after another massive sell-off in European markets, as investors reacted to worries about a slowing global economy, the potentially blunted impact of the Federal Reserve's rate cut and whether the subprime woes would continue.

Asian stocks also turned volatile following the news, as early gains in Hong Kong's Hang Seng Index were erased before the market's close, and shares in India traded lower.
Shares of SocGen were recently trading down 6.9% at €73.88 after having been suspended from trading at the market's opening. With a market capitalization around €38 billion, nearly half of its market value has been wiped out since the crisis began six months ago. SocGen is slated to report full-year figures Feb. 21.

At a press conference, Chief Executive Daniel Bouton apologized to shareholders and said the bank wouldn't offer staff stock options or bonuses for 2007. Neither Mr. Bouton nor co-CEO Philippe Citerne will take a fixed salary through June, he said.

The size of the SocGen incident could far surpass one of the most notorious "rogue trader" incidents in global corporate history, the more than $1.3 billion attributed to Nick Leeson in 1995 which bankrupted British bank Barings. Barings collapsed after Mr. Leeson, the bank's Singapore general manager of futures trading, lost £860 million pounds -- then worth $1.38 billion -- on Asian futures markets, wiping out the bank's cash reserves. The company had been in business for more than 230 years.

The fraud was not as big as the 1991 scandal that led to the demise of the Bank of Credit and Commerce International. Claims by depositors and creditors there exceeded $10 billion at the time. International bank regulators seized BCCI, which had headquarters in Luxembourg, London and the Cayman Islands, on July 5, 1991. They acted on auditors' reports that described huge losses from illegal loans to corporate insiders and from trading transactions.
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 $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.

Mr. Bouton said SocGen had lodged a legal complaint against the trader who perpetrated the alleged fraud, but the bank was unaware of his whereabouts. The bank said the trader, Mr. Kerviel, had worked at the bank since 2000 and that his salary was €100,000 including bonus.
Mr. Bouton said SocGen had to unwind the positions taken by the trader before they were revealed to the market because of their size. The trader, whose motivation was unclear, helped unwind the positions, he said, adding that Bank of France Governor Christian Noyer and the French market regulator, AMF, were informed Sunday. "Everything happened this weekend, we had zero suspicions before Friday," Mr. Bouton said. He said four or five other staff will leave SocGen, including the line of hierarchy above the trader.

The Bank of France and French Finance Minister Christine Lagarde are planning to issue statements later during the day, spokespeople at both institutions said. The Federation of French banks and AMF declined to comment.

Ratings agency Fitch downgraded Societe Generale's long-term issuer default rating to AA- from AA following the news.

Former Barings futures trader Nick Leeson in November 1995.
Here's a look at stories in the Journal over the past decade on trades gone bad, and an accompanying photo gallery above.
- Behind a $550 Million Bad Bet: A Mystical Man With Ambition(CAO Singapore, 2004)2
- Junior Staffers Cited for Stopping National Australia Bank Scandal(2003)3
- Allied Irish Banks Say a Rogue Trader Lost $750 Million in Unauthorized Deals(2001-2002)4
- Sumitomo Trading Scandal Still Haunts Copper Market(1996)5

- Deal Journal:Who Are You, Jerome Kerviel?6
- Daily Davos: Massive Trading Loss Is Talk of the Town7
Risk Managers,

Watch Out! ;)

His last year's salary including bonus was $144 K, I don't understand how person with a such relatively low pay could put his hands on billions of dollars...
That is my question too. Maybe there is something wrong with European financial world's compensation system. According to the news that guy moved from back office to middle office and then trading desk in SG. That only worth less than 100,000 EURO. BTW, their tax rate is way higher than ours.

That guy, Jerome Kerviel, was able to bypass 5 levels risk control. Mr. Kerviel, are you a Future trader or the Ranbo in SG?

Ironically, in 2007 the Risk Magazine ranked SG the first or second best banks in risk control for past 5 years.
I think salary level won't tell too much about how much the trader can access, most of them are paid by commission/bonus. Five levels of Risk Management system doesn't mean secure, since every level of the risk management looks at numbers and data reported from operation/trading support group. This should be a lesson for Risk Management nowadays...

This guy reported /booked fraud transaction, so the reported Equity Delta couldn't reflect the real exposure. So I think this is more of Operational Risk. Yes, it's impressive a single trader can cause that amount of loss :)
They said that he was taking positions of $73 billion. I don't believe this kind of thing could go unnoticed, especially on European market.

And also their timing to liquidate his positions was perfectly bad: US markets were closed on Monday and Asia/Europe were having a big sell off.
Remember when you were a kid and your parents told you to stop playing with matches.

Derivatives are not toys one can play around with. I don't believe any level of security could have prevented such an event. Sooner or later it would happen and it did.

In my opinion, it is the just way derivatives work that lead to this problem. They are very risky financial instruments.

But what I am puzzled about is the fact that this guy was supposedly not motivated by personal financial gains.
Good question. One of his former professor said that the kid is a genius, very brilliant. To be honest its my first time hearing about a so-called genious losing 7 billion dollar.


Mathematics Student
SG paid him too little. He hates the bank therefore his plan is to bring SG down to ground zero.

Only genius can do that...! I think his trades were small but in mass volume so it was quite difficult to detect. May be...
Good question. One of his former professor said that the kid is a genius, very brilliant. To be honest its my first time hearing about a so-called genious losing 7 billion dollar.
You gotta be really good to either make or lose a lot of money. If you haven't heard about genius losing billions, then maybe Long Term Capital Management (LTCM) would remind you of a recent story ? Maybe they lost less but they are certified geniuses. SG just unwound the trades at the worst possible time so the loss is so huge. Had they unwind it any other time, the loss is much, much less.
SG paid him too little. He hates the bank therefore his plan is to bring SG down to ground zero.
This sounds like the movie script from The Bank - an Australian movie about a mathematician building a model to predict the next market crash. And then it actually crash, but it was according to his evil plan...
Until they find him, everything is just speculation.
7 bln losses by playing deltas on the SPX??

Did anyone happen to notice that this highly implausible tale was immediately followed by SocGen announcing their relatively respectable 2 bln subprime writeoff?

As a rule, I am not a conspiracy nut but this story smells(like poo)
There are more to this than to meet the eyes. Most people I talk to think SG is using him as a scapegoat to hide their loss in subprime.
In the days to come, we will learn more details about this. NYT runs this latest article which is really interesting

January 26, 2008
‘Rogue Trader’ Is Remembered as Mr. Average

PARIS — Jérôme Kerviel was too middling to be considered a loser. Until he was charged by Société Générale with perpetrating the biggest fraud of its kind in banking history, there was nothing superlative about him.
He failed in a bid for town council in his 20s; he never rose higher than a green belt, a midlevel rank, after years of judo training — because of his bad knees; and he attended an average college where he earned respectable but unremarkable grades.
“People who want to be golden boys or clever in the market don’t come here,” said Valérie Buthion, the director of the University of Lyon’s economic and financial engineering department, where Mr. Kerviel earned a master’s degree in market finance. “The showoffs don’t come.”
As they sought to explain how a low-level trader caused a $7.2 billion loss, Mr. Kerviel’s former bosses at Société Générale, one of France’s oldest and most venerated banks, portrayed him as a “brilliant” trader who eluded sophisticated detection systems.
But the mundane outlines of the life of Mr. Kerviel, 31, betray no flashes of brilliance. Rather, the portrait of him painted by those who knew him shows a reserved man who most often blended into the background.
His less-than-impressive persona has led to doubts that he could be the sole culprit in the bank’s enormous losses. Despite a lack of evidence, some financial experts, especially in France, have suggested that Mr. Kerviel might be a scapegoat for other losses incurred by Société Générale, some perhaps related to subprime mortgages.
Mr. Kerviel’s 100,000-euro salary ($147,000) as a trader was paltry compared with salaries of his colleagues, and in 2006 he received only a 1.5 percent raise.
Traders who worked with Mr. Kerviel said he was quiet and low key — smart, but hardly a computer genius. When the news broke, “I saw his photograph and thought, no, it’s not possible. It couldn’t be him,” said one junior trader who worked with him and did not want to be identified because he was not authorized to speak to the media.
The son of a hairdresser and a vocational school metal shop teacher, who died about two years ago, Mr. Kerviel was born in Pont-l’Abbé, a small town on Brittany’s fog-enveloped coast.
He lived there until going to college, the town’s mayor, Thierry Mavic, told The Telegramme of Brest, in Brittany. “He was a poised, calm, reflective young man. A little reserved,” Mr. Mavic said.
Mr. Kerviel completed his undergraduate studies in Nantes and then attended the University of Lyon for graduate school. The university opened more than 10 years ago backed by major French banks, with the express purpose of training students for the unglamorous middle and back-office functions of processing and monitoring trades.
“He was a student just like the others, a young man, and he didn’t distinguish himself from the others,” said one of his former teachers, Gisele Reynaud, who taught Mr. Kerviel how to track and monitor trades.
Like many of his classmates, Mr. Kerviel got his professional start with a paid internship at Banque Nationale de Paris. He joined Société Générale in 2000.
Pont-l’Abbé’s mayor, Mr. Mavic, thought so much of Mr. Kerviel that he invited him to join him on his list of candidates to run in municipal elections in 2001. (You do not have to live in a town in France to be on its city council, or even to be its mayor.)
Mr. Mavic told The Telegramme that Mr. Kerviel did not get enough votes to win a seat.
Mr. Kerviel’s former judo teacher, Philippe Orhant, said he taught him judo for more than six years and that Mr. Kerviel later taught martial arts to children. “He worked well with people,” recalled Mr. Orhant, who said that he ultimately dropped out of the sport with a green belt because of medical problems with his knees.
With publicity intensifying about the reclusive former trader, grim family members in Pont-l’Abbé were in no mood to talk about him.
“Sorry,” said his aunt, Raymonde Kerviel, before briskly slamming down the telephone receiver. “I have no interest in talking about this.”
In the French media, former colleagues and even agents in a neighborhood real estate office near his apartment remembered him for his understated sartorial elegance and a boyish resemblance to Tom Cruise.
André Tiran, the dean of the faculty at the University of Lyon, theorized that Mr. Kerviel’s training in risk control management might have given him some critical advantages in any financial scheming.
“It’s a little bit like becoming a thief with training in locksmithing,” Mr. Tiran said. “If you’re good at being a locksmith, then to steal is easier.”
Bank officials said Mr. Kerviel did not profit personally from his scheme. But at a news conference Thursday, they called him a “fragile being” and said he had had “family problems.”
French financial experts, both here and in Davos, Switzerland, for the World Economic Forum, voiced skepticism that one unremarkable low-level trader could have carried out the most expensive fraud by a rogue trader ever.
Both the governor of the French central bank, Christian Noyer, and the French prime minister, François Fillon, insisted that the Kerviel case had nothing to do with the volatile stock markets around the world, or with the subprime mess. “You can’t throw everything together,” said Mr. Noyer.
But Friday, Mr. Fillon seemed to criticize the central bank governor. While speaking to reporters in Luxembourg, Mr. Fillon said Mr. Noyer should have alerted him sooner to Société Générale’s huge trading loss. He only learned on Wednesday, though central bank authorities had known since the weekend. Mr. Fillon ordered the French finance minister to complete an investigation into the case in the next eight days.
Mr. Kerviel remained hidden from public view Friday. A handwritten note posted in his apartment building in the wealthy suburb of Neuilly-sur-Seine urged swarms of journalists to leave residents alone because the former trader had taken shelter elsewhere.
“Kerviel,” the note read. “Is not known in the building.”
Later in the day, plainclothes policemen arrived to search the apartment.
Mr. Kerviel’s lawyer, Elisabeth Meyer, who said Thursday that Mr. Kerviel was available to meet with authorities, was not answering questions about her client Friday.
The only place Mr. Kerviel could be heard was on his answering machine. Some news organizations posted the softly spoken message on their Web sites.
“Bonjour,” the voice says. “You’ve reached the mobile telephone of Jérôme. I’m not available for the moment, so please leave a message, and I’ll contact you as soon as possible.”
His CV is posted online

OBJECTIVE Reach a position as a retail listed derivative products trader, managing a volatility and Delta One book

MASTERS in Finance (Organisation and Control of financial makets)
University of Lyon, September 2000

Bachelor Degree in Finance
University of Nantes, 1996 1999


  • Societe Generale S.A., Paris, France
Trader and Market Maker for Delta One Products
March 2004 - Today
Trading : Market making of Listed Delta One products
Including open end and closed end Turbos (Single Stocks, Index, Forex and Rate Futures), ETFs and secondary market for Certificates
ETFs structuration - Management of the collateral with Lyxor Asset Management
Development of managing tools (Excel VBA macro)
New Underlyings Study to develop the product range
Participation to the specification for the implementation of turbos to the Clickoptions platform
  • Societe Generale S.A., Paris, France
Trader Assistant - Basket Trading and Delta One Products
August 2002 - February 2004
Valuation and Risk Analysis explanation for Basket Trading (Single
Arbitrage book) and Delta One Products
Strategies Backtestings
Short positions hedge
Process automation and managing tools development
  • Societe Generale S.A., Paris, France
Middle Office - Referential Team
August 2000 - July 2002
Products modeling
Process automation
Excel macro Development for the exotic Desk
Participation to the single referential project

Judo - 8 years practice - Trainer for children

English : working language
Microsoft Office Packge - Visual Basic
I feel the same as Max, in order to loss 7.2 billions, the total position will be something 70 billions or even more. Wait, that almost 1/3 of the entire SG's asset. If he was doing that for a few months, then there gotta be someone was putting up collateral for his position from time to time. And no one ever noticed it? That is hard to believe.

If so, I wonder how much SG paid the Risk Magazine to earn the name :"one of the best house for risk control"? :)

It is the same old story: it is about human beings not computers. Often risk managers look at the screens to review data, all they based on is what they see on screen or from the computer print out. In this case, that guy was able to get into the system (I think it gotta be a very core system for the entire SG's computer network) and change the data. So the risk guys will never be able to find anything by sitting behind the screen. Lucky enough, a compliance officer spotted the problem this time.

There is another simple question: what the hell is their Chief Info. Security Officer doing?
According to the news, Jerome Kerviel, remains befriend with people from his old offices.
It pretty much tells the old security problem: social engineering! It may not 100% fit the definition of "social engineering" where we use in computer securityworld, but I think that guy knows how to use social engineering technique.
He knew the risk controls so thats how he could manipulate order entry by entering real and fake trades this is how he created 70billion exposure.

Trading is such that traders inherently have incentive to take huge risks because they are playing with house money not their own(traders at I-banks, hedge funds).

I guess the lesson is dont hire traders from back-office but I guess we learned nothing from Nic Leeson busting up Barings