BELIEVE IT OR NOT
By now people are familiar with the broad outlines of the staggering story of a low-level, rogue trader being able to create losses of around $7.2 billion at Societe Generale, France's second largest bank.
If not, the Wall Street Journal has a good account of what's known so far about this extraordinary story:
"The rogues' gallery of banking has a new candidate for membership: 31-year-old trader Jérôme Kerviel.
In one of the banking world's most unsettling recent disclosures, France's Société Générale SA said Mr. Kerviel had cost the bank €4.9 billion, equal to $7.2 billion, by making huge unauthorized trades that he hid for months by hacking into computers.
The combined trading positions he built up over recent months, say people close to the situation, totaled some €50 billion, or $73 billion..."
But here's the part of the story that is the most astounding from my perspective:
"Société Générale Chairman Daniel Bouton declined to provide details about the exact positions the trader built up over the past months. But he warned: "Had we not acted swiftly, the loss could have been 10 times worse."
Ten times worse, i.e., over $70 billion dollars. That's billion with a "B".
And it looks like the fraud may have been at least an indirect factor in the Fed taking the unusual step of cutting the discount rate by 75 basis points last Monday.
The New York Times article on this sheds more light on the story, and also explains why it was so unusual that this happen at Societe Generale of all places. The firm had a major reputation as being a powerhouse in derivatives:
"It is a remarkable turn of events for Société Générale, which since the mid-1980s has built itself into a global powerhouse in trading derivatives like futures and options..."
"Until now Société Générale, unlike many Wall Street banks, had seemingly sailed through the turmoil in the financial markets with its reputation intact. The January issue of Risk, a monthly magazine about risk management and derivatives, named the bank its “Equity Derivatives House of the Year.”
It goes to show that no financial institution anywhere, large or small, is immune from random catastrophic risk.
When all is said and done, there'll be a lot more to learn from this story, in terms of how and why this happened. There's likely much more here than meets the eye.
This is a story we're going to see more of, in both book and movie form soon enough. Maybe even a TV mini-series.