Jeepers, what a month January's turned out to be. They say start as you mean to go on - if we have, then surely 2008 is going to be something like the Chinese Year of the Paracetamol. Chatter about the state of the global economy wasn't exactly encouraging in the new year, what with house prices going south on both sides of the Atlantic, the credit crunch and the sub-prime crisis. Then a fortnight ago, the Fed put the wind up us all by announcing an emergency 75 basis point rate cut to 3.5%, and the day after, we woke up to the news that French bank Société Générale's 2007 results would come in at between Eur600-800 M – in banking terms the sort of loose change one finds lying in the street and buys a lottery scratch-card with – because one of its traders had done a Leeson and tried to plug bad betting with money wasn't authorised to play with, resulting in a Eur4.9 bn loss. I can hear the sound of Alka-Seltzer plink-plonk-fizzing into glasses of water across La Defense as we speak.
What is striking is the amount of cash that the bank claims was lost to the actions of a single person acting alone, and the fact that this person could, after all the lessons we've supposedly learned from Barings and Enron, somehow act outside or despite of myriad risk and reporting controls that we're led to believe are standard across the banking industry today. Inevitably, the fingers are pointing in all directions - the trader's lawyers saying that he has done nothing wrong and that the bank has used him as a "smokescreen" for them to bury bad results, while investors and observers are questioning SocGen's risk management controls, and some have suggested that the Fed's shock rate cut was a result of some sort of insider knowledge about the bank's impending fraud announcement and what it would do to already embattled markets. Now French prosecutors are allegedly saying that derivatives exchange Eurex alerted SocGen to some wonky-looking trades from their desks way back in November. Everybody loves a conspiracy theory.
And then, there are the media vultures picking over the possible psychologies of this character. The story goes that this man was merely a plain vanilla futures trader, not a manager of a desk even, on a measly Eur100,000 salary, with reports hinting the guy was not exactly one of SocGen's stars, more of a shy, quiet, introverted person (it's always the quiet ones). His job was to arbitrage European futures indexes. He allegedly confessed to his superiors after a brief internal investigation. What they found was mind-boggling: because the trader had worked in back office previous to moving onto the trading desk, he was still privy to passwords and accounts for accounting systems there. The trader allegedly placed huge, fictitious positions hoping the equity markets would rise, and then logged into the back office accounting system using someone else's password and approved his own trades. The first time he did this, it is said that it worked out and he made a small profit. But trying his luck again in 2008, his bets went sour as equity markets moved south – and to cover those he took further bets, which went sour too. And then he was 'found out'. Twenty-four hours after the news broke, he had been widely named in the press and his photo printed, the Tom Cruise-esque mugshot of a criminal genius. But what does it matter who he is when it seems the crime he committed was seemingly so easily done? It could have been anyone with the brass neck to try their luck and keep it secret. Criminal mastermind he ain't - It was a schoolboy move really, made to prove himself, and the money didn't matter because it was the fame, the reputation, and the acceptance that counted - but he is a cliché, helping journalists to beef up their 'Top Ten Fraudster' lists and comb over juicy quotes from Nick Leeson, who went on to make a name for himself on the after-dinner speaker circuit, which is probably where this guy is headed. In reality, if we are to believe SocGen's story – which some are claiming a little too convenient in light of their losses due to the credit crunch - the bank's potential bringer-downer merely used the knowledge he had of back office to try a little small-time crookery, and when he won once, as any betting man would do, he took a larger bet riding on the confidence of his initial victory, bolstered by the unique ability to push it through undiscovered. The clichéd bit comes in the inevitability of it having gone so badly wrong, if indeed that is the truth. That's the thing about betting (and in particular, derivatives). You could make a fortune, but you could lose a fortune. It seems that only now, as one or two chickens come home to roost, banks, markets and even regulators are beginning to realise just what this means for them – that this form of high-falutin gambling, which is what it is, rather than a game for geniuses, is typically the haunt of your average alpha male with perhaps a coke habit and a cranial chasm where reality should dwell at least some of the time. They tend to live in a world where the goal is money – lots of money, quickly, and they can too often go unchecked in their quest to satisfy this market-wide aim. So it is inevitable that once in a while something like this happens. But when it happens this big, it inevitably affects many more institutions and people than the source.
It seems that SocGen, and most other observers, can't understand why the trader did what he did knowing he wasn't in line for any big bonuses or any other financial gain if his dodgy bets paid off. But there can be other drivers than cash. First, for some, the taking of massive punts by exploiting insider information is something done for the thrill, the tiny chance that you could make it big and show off about how uniquely clever you are. For others who did this and made losses, it's easier to try again and potentially cover those losses up quietly and save your ego, since essentially you've got a 50/50 chance of winning out and no one would ever have to know. Thirdly, there are those of us who just like to secretly feel they're better, smarter, more successful, more in charge than the boss and would take to such a rouse simply to divert oneself from boredom. With those mindsets, money is simply a nice by-product to the perpetrator, and to their boss perhaps, solid proof of competence; what's at stake is ego, a sense of self assurance, a comforting feeling of intelligence having been proven.
As this story unfolds, I keep coming back to the same problem in my head. Yes, perhaps one person could conceivably commit a 'crime' of this magnitude: but if SocGen's risk controls, both for its people, its platforms, its systems, and the market were solid, wouldn't they be able to easily stop the inputting of fictitious trades at the first hurdle? Are risk controls at one of Europe's largest banks that bad that one lone wolf can slip through unnoticed?
I feel an article about trading and risk management technology coming on. Sacre bleu...pass me the Calpol.
Melanie Stern, deputy editor
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