Moon of Alabama Brecht quote
January 24, 2008

What is behind the Societe Generale scandal?

by Debs is Dead
lifted from a comment

The news that a 33 year old junior shit kicker in France's Societe Generale Bank 'defrauded that institution for 5 billion euros' strikes as one of these stories which instantly splash around the world overwhelming every other piece of news, yet somehow too much of this tale doesn't add up.

How did he do it? Right towards the end of a rather obscure Reuters article we learn:

Five billion euros of losses is enormous. It represents a position of several dozens of billions of euros, perhaps 30 or 40 billion. How can one person all by themselves do that?

Indeed. How can one "junior trader" "certainly not a star" do this?

This is being compared to the Englishman Nick Leeson's 'one point something billion Euro' fraud on Barings Bank that 'broke' that bank but in the case of Leeson, senior bank executives knew he was their biggest earner. He had kept the bank ahead of the game in a year or more of tough times. When Leeson's luck finally ran out, he had been betting on Japan stock futures and their run finally foundered, the Barings execs ran a million miles from Leeson and had him thrown into jail. Typical capitalist perfidy. But SocGen exec's claim to have known nothing about young Jerome Kerviel's antics has an even fishier smell to it than the Barings bastards.

To have lost as much as he did he would have had to take a position of tens of billions of Euros on one of the most basic derivatives in an extremely complex market, futures contracts on European equity indices. No one noticed for over a year?

As one amerikan derivatives trader said:

Everyone is asking themselves .. how just one trader, all alone in the corner, could have beaten all those whiz kids who throng around in Societe Generale, ...

Of course SocGen has the answer to that, well an excuse they want us to believe anyhow. That is that Kerviel had been working in the back office for several years before he won the front of house gig and during his time down in the engine room he had come to thoroughly understand all SocGen's security measures which he then bypassed. Simple as that. Heh! well isn't it a bit unusual to move someone with that knowledge out the front? I mean to say if that were de rigeur in the banking world to have traders who know the security well enough to subvert it, why bother to have controls at all?

Reuters say it nicer:  

A senior bank board member told Reuters that Kerviel "was not a star", but Bank of France Governor Christian Noyer told reporters that the rogue trader was a "genius of fraud".

Play that again, Sam.

Just by way of a coincidence at the same time that SocGen announced their $7Billion loss, as an afterthought they slipped in that they were down the tubes some 2.05 billion euros with a loss related to the credit crunch, ie. that old sub-prime scam.

Now even though it doesn't normally have a lot of friends and allies in the bitchy world of international wheeler dealing and has been regarded as an ideal takeover target for some time, the banking world has really rallied around SocGen on this. Everyone is sticking together, praising CEO Daniel Bouton who made some sort of token offer to resign which was "of course" refused.

They are sticking to the script because the news of this came less than a day after everyone was making pretend that Bush's lame parish pump prime and Bernacke's interest rate cut had engineered a 'turnaround' on the market.

The cry had been; "There is nothing to see here folks, its all over, y'all can go on home". Then during a pause in the chatter, SocGen dropped a big steaming log on the rug. As fast off as a bride's teddy, everyone went for the most unlikely finance yarn since the South Seas Bubble in their rush to clean the carpet.

The 'rally' story must be sold to the rubes. The new sceptics in Hong Kong, the poor buggers who have spent the last few days trying to explain the exigencies of a bear market to a mob of annoyed and anxious Chinamen, didn't buy the story and will have to be dragged into line.

Although a wise-ass in amerika did put the cat right into pigeon territory when he wondered whether the bank's maneuvers had contributed to Monday's market fall, and to the U.S. Federal Reserve's decision to cut interest rates.

CNBC came to the rescue on that one and reported a Fed source saying the central bank had not been aware of SocGen's problems ahead of the emergency 75 basis point cut.

But that is getting closer to what probably happened, after all according to Reuters again:

One banking insider estimated that the losses were worth "just" one billion euros at the weekend, but these rapidly snowballed when SocGen moved to purge their books on Monday and Tuesday as European stock markets plunged.

Yeah right the bank finds itself long on European equities and just keeps on selling, right into the biggest fall in a couple of decades? I mean we don't know what the exact positions were but apart from the fact that some recovery from Monday's low would likely eventuate didn't it occur to the French Masters of the Universe that selling all those positions in one hit was going to push the market further down?

Disingenuous Bouton turned that around when he told a news conference

These losses could have been gains if the market had climbed on Monday, Tuesday and Wednesday

Hell maybe the market wouldn't have fallen so far if you hadn't unloaded tens of billions of dollars worth of long positions Dan.

So why? Well the answer is in the question really. Undoubtedly the fool Kerviel did take some shortcuts to try and force his luck on the dealing desk. In doing so he provided slugs like Daniel Bouton an excellent get out of jail free card if their over-confidence ever caught up with them. Maybe they only found out about Kerviel's stupidity recently, maybe they have been saving it up for a rainy day but one thing is for sure, virtually every other bank which has lost billions on the sub-prime stupidity has had their CEO fall on his sword. Bouton didn't need to because at the same time he announced a loss of a couple billion in the sub prime saga he let slip about Kerviel's $7 billion fuck up. A fuck up that was only $1 billion before SocGen liquidated their position on Monday.

Kerviel is out there somewhere, he won't be dragged before a magistrate until the media have the public screaming for his head. That should prevent any 'underdog' blow back that could happen if he were dragged in front of a beak right now and had a laywer 'straightening a few facts out' to the worlds' cameras.

Bouton is fine, the world is fine, apart from the poor fuckers whose pension fund and life insurance is in the SocGen, and of course France's taxpayers all of whom have to ante up another $5 billion euros. That is straight after being told there is no dividend this year.

Say what you like about centralized demand economies, but the Russians would have put a bullet to the brain pan of everyone involved; from Politburo member Bouton, on down.

Posted by b on January 24, 2008 at 22:56 UTC | Permalink

Comments

no, it doesn't add up - it doesn't add up at all

Posted by: remembereringgiap | Jan 24 2008 23:29 utc | 1

Actually, they said the guy had apparently taken up to 50 bio Euros to gamble the bank on some shit.
Of course this is so big it just smells of a cover-up of another massive bank f-ck-up in the subprimes. Actually, any bank that acknowledges losses underevaluates them, and any bank that blatantly denies having been involved in any subprime is lying like mad.

Posted by: CluelessJoe | Jan 24 2008 23:58 utc | 2

That was a great commentary. I enjoyed it thoroughly.

Posted by: Splotto | Jan 25 2008 0:44 utc | 3

Ah, the sweet smell of scapegoat, barbecueing in the evening air.

Posted by: mikefromtexas | Jan 25 2008 0:46 utc | 4

Those American CEO's all walked their planks for the same, simple reason--signing off on risks to be run by their super-complex, insanely profitable funds, the levels of risk being calculated by quants who couldn't imagine that they'd be placing identical bets as their funds began to sink--a game of musical chairs where the chairs all vanished at once. Only Goldman Sachs, it seems, refused to play the game (maybe because it didn't need those profits in the first place).

There's no way in hell that this didn't happen to SG, and it will surely happen to Credit Agricole and Credit Lyonnais as well. If those guys are right to believe that they can get off by scapegoating the kid who placed those trades, then it only tells us how under-regulated the French banks really are.

I can't imagine that the French will discipline those banks: it's not a part of their culture.

Posted by: alabama | Jan 25 2008 1:07 utc | 5

Good take on SoGen.

The guy got punked by management. Its always that way, the little people are the ones that screw up, not the great CEO. I am amazed at the pure near hatred of the lower classes in the US by the Bush admin and his republican cronies in congress when talking about the stimulus package. It looks like France is the same because this fellow "was not a star." So, he likely didn't come from the right class or the right schools or the right political background. Its another Abu Ghrab only in the financial industry. No accountability at the top.

In the Bible they had a ritual where they would take a goat and it was deemed the scapegoat or Azazel. The scapegoat would carry the sins of the nation to the desert. Poor guy will be a nomad for life carrying the sins of management with him.

Posted by: jdp | Jan 25 2008 1:10 utc | 6

Unf the Soviet gang didn't always shoot the people who screwed up; often as not they shot the people who were doing a good job or trying to tell the truth. That's the real problem with management by XPD... they don't always shoot the right people :-(

Posted by: DeAnander | Jan 25 2008 1:48 utc | 7

@ mikefromtexas "Ah, the sweet smell of scapegoat, barbecueing in the evening air".

Have you ever noticed the similarity between the rich sweet smell of scapegoat roasting and the rich sweet smell of cattle droppings AKA bullshit?
I wonder if perchance the two are related?

Posted by: Debs is dead | Jan 25 2008 1:53 utc | 8

They may trick people with SG, but if the other main French banks go down with billions lost, they won't be able to pull the same trick "an underling did it". It can work once, but three times?

Posted by: CluelessJoe | Jan 25 2008 1:54 utc | 9

A Bloomberg exclusive story has this

Bank of France Governor Christian Noyer said he learned at least four days ago that Societe Generale SA had identified a rogue trader whose positions led to 4.9 billion euros ($7.2 billion) of losses, the largest in banking history.

The bank disclosed the losses today after the trades were liquidated. The Bank of France, the banking regulator, also said today it was opening an investigation.

``We were immediately informed,'' Noyer told reporters in Paris. ``That means in real time.'' He said he kept abreast ``throughout the weekend,'' which began on Saturday, Jan. 19.
...
Societe Generale had been planning a press conference Monday where it was going to say it would report profit of about 5.5 billion euros in 2007, even after taking a further 2 billion euros in writedowns linked to the U.S. subprime crisis, according to Bouton.

Those plans were shelved and Societe Generale started unwinding the positions linked to European stock index futures on Jan. 21, a day when equity markets in France, Germany and the U.K. fell more than 5 percent. The next day the Fed announced its decision to cut rates by the most in 23 years as ``financial market conditions continued to deteriorate.''

Societe Generale's Philippe Collas, the head of asset management, said ``it's not possible that our covering operations contributed to the market's fall.''

``There was never any question of holding on to the positions, hoping markets would go our way,'' Bouton said. ``And if we'd told the world about our positions, we'd have had the whole market against us and we'd have had losses 10 times as large.''

Lots of stuff in there.

If Noyer did know, Trichet (ECB) and the Fed did know too. But the ECB did nothing (right thing to do) while Bernanke paniced.

---

SocGen planed to announce €5.5b as profits. They say they lost €5.0b in the alleged rude trade. Additionally they lost €2b in CDO speculations.

5.5b profits minus 7b losses ends up as a total loss of 1.5b.

Why then does SocGen need €5.5b in fresh capital?????

---
Societe Generale's Philippe Collas, the head of asset management, said ``it's not possible that our covering operations contributed to the market's fall.''

If the people betting long in the market cover their positions, that is the equivalent of selling stocks. If big positions are sold, the markets must go down. The guy is lying.

Posted by: b | Jan 25 2008 1:56 utc | 10

"The dog ate my homework/lost our money"..........Great post Debs!

Posted by: R.L. | Jan 25 2008 2:19 utc | 11

Is it purely coincidental that this came out during Davos meeting? Does someone want to push consolidation/takeover/re-organization, or....???

Anyone have any good sources of info. on Davos?

Posted by: jj | Jan 25 2008 3:02 utc | 12

COMRADE UNCLE

It's seems like everywhere you go these days, you bump into Russians.
Like, yesterday, I'd jumped out at lunch to grab a hot pastrami, and
the guy behind the counter took my order with a thick Russian accent.

So I'm sitting by the window, and he brings over my sandwich:

"Here you are, comrade. We need to meet later, to explain your bank debit."

Then he was gone, looking for all the world like an ordinary deli waiter.

I didn't think anything about it, biting into that thick stack of juicy
pastrami, slathered with hot mustard in warm, custom heirloom rye bread.
Damn, those Rushkies sure know how to make pastrami sandwiches, I mused.

Then, hey, let's check the old bank account. Blackberry out, look around,
cover the keyboard, hmmm, nothing. My bank balance was same as yesterday.
On my way out the door, I tipped my head to the Rushkie, over towards the
folding green tip I left by my plate.

"Good lunch, thanks, dude!"

He quickly untied his apron, and cut me off at the door.

"My name is Fyodor. We must speak about your bank debit," as he pushed
me through the door, and we stood together on the anonymous sidewalk.

I frowned, "What are you talking about! I just checked my bank balance."

He smiled a rueful smile. "Your government has just withdrawn $189,000
from your bank account 'for other national security purposes'."

"I told you, I just..." He cut me off.

"Of course, they said it was an emergency funding bill, but the effect is
the same. The annual budget is already set, the tax tables already printed,
that $189,000 is coming out of your account debit, one way or the other!"

"Who the hell are you!" I stabbed a finger in his chest. "Fuck off!"

He grabbed my arm as I tried to walk away.

"Comrade, they will be taking another $154,000 from your account soon!"

I spat at him, "Look, I don't know who the hell you are, but get lost!"

Fyodor took up the pace beside me, as I walked away in a huff.

"I understand, you don't wish to speak of this abomination. Of course,
the funds in your bank account show no change, but surely, you understand,
there is no money in the bank vault, it's just phosphor dots and fiat paper!"

"Are you one of those Paulian kooks?" I tried to walk faster, veering away.

"My friend ... comrade ... brother. Your government has stolen the
$189,000 from you for their own use. They have advanced a credit line
against your future taxes, against your future social security. They
have stolen those so-called emergency funds from your children!!"

Fyodor's hand were shaking and his narrow lips were pinched white with rage.

Geez, I thought, how do I dial 911 with my cell in my pocket, and would
they be able to find me walking down the street with this insane kook!

Fyodor shouted suddenly. "You don't believe me, or you don't want to!"
He hung his head, "It was the same in the Soviet Union, nobody wanted
to think where our nation's resources were being mis-appropriated to.
They were happy to have a scrap of bread, and a roof over their head."

I stared at him, hoping he would go away, frantically pocket-dialing 911.

Fyodor's eyes were burning like coals, and his forehead was dewy with sweat.

"Now your government is lending your own money back to you, at interest,
and calling it a 'stimulus program'. Can you see the irony, my friend?
Next they will loan your savings to themselves to bail out their credit losses.
They will have stolen those funds from your grandchildren!!"

Just then a black-and-white turned the corner, growling slowly towards us.

Fyodor began to move away, then shouted back over his shoulder.

"Do you remember that Rod Serling Twilight Zone show, "To Serve Man"?"

I laughed with relief as the patrol car glided to a stop beside me.

Fyodor shouted one last time, "It's a COOK BOOK!", then the two police
officers grabbed me by the arms, and stuffed me into their patrol car.

I've been here in this gulag ever since. They say I know too much now.

Have a nice warm bowl of cabbage soup tonight, comrade, and pray for me.

Posted by: Peris Troika | Jan 25 2008 4:58 utc | 13

Mr. Chambers!..'It's a COOK BOOK'!...

Yes, I'll have half a turnip in my soup please...thank you, tovarich.

Posted by: Uncle $cam | Jan 25 2008 6:18 utc | 14

Faith In The Fed: The Last Bubble To Pop

A mad rush by Congress, Bush, the Treasury department and even foreign central banks to "Do Something" is now underway.

If the Fed, Congress, and Central Banks would just stop and think, they would realize they already "did" something. They created the biggest credit bubble in history and we are on the backside of the credit bubble bust right now. It's too late to do anything about that now.

Posted by: Uncle $cam | Jan 25 2008 7:06 utc | 15

"Bread and circuses" boy and girls, bread and circuses..

Better get a move on...

Posted by: Uncle $cam | Jan 25 2008 7:26 utc | 16

Settin' the LOL, COL, LOL down groove mood PT & Uncle - for a http://www.cca.kiev.ua/exhib/museum/museum19.html>Leap Into the Void? I can dig it. & could ya'spare a joint.

Posted by: anna missed | Jan 25 2008 8:00 utc | 17

Financial Times:

SocGen, the world’s leading equity derivative trading house – it claims to have invented the instruments – quickly unwound the positions he had amassed, estimated at €40bn-€50bn. SocGen’s fire sale contributed to the heavy stock market falls on Monday that provoked the US Federal Reserve’s dramatic interest rate cut the following day. The Fed was informed of the SocGen problem on Wednesday by the Banque de France.

SocGen denied that its operations had caused the market fall because it kept them to about 10 per cent of trading volumes. Analysts pointed out that markets began to fall before the sell-off.
...
SocGen will raise €5.5bn through an emergency rights issue, underwritten by JPMorgan and Morgan Stanley, that will leave its Tier One capital ratio higher than before at 8 per cent. The price of the issue will be formally set after SocGen reports its results for 2007 next month.

But the crisis has revived speculation that SocGen will become a takeover target.

Posted by: b | Jan 25 2008 8:41 utc | 18

Anna missed, I must be stoned because when I first read you post, I thought it said, Brother, can you spare a dime?...

Posted by: | Jan 25 2008 8:51 utc | 19

One trait of managers and politicians that always amazes me: they have the drive and cognitive capacity to run a multi-billion dollar enterprise, but when when you try to ask one about specific details, they act as if they have spent their entire tenure in office with their heads in a fuzzy pink cloud, sort of like how I spent my junior year in high school...

Posted by: ralphieboy | Jan 25 2008 9:12 utc | 20

Krugman: Stimulus Gone Bad

As I said above, "Bread and circuses" people, bread and circuses...Predictably, the Democratic Leadership caved on everything. Fuck the people on food stamps or unemployment...

Thanks, Nancy...

Posted by: Uncle $cam | Jan 25 2008 10:21 utc | 21

Speaker of the US House of Representatives or the Queen of Capitol Hill?

Speaker Botox Buys $16K Worth of Flowers

House Speaker Nancy Pelosi has spent $16,000 on flowers since taking office.

Pelosi (D-CA) spent a little more than $3 million in the first nine months of 2007, records show, compared to the $1.8 million Rep. Dennis Hastert (R-IL) spent during the same period in 2006.

Republicans say Pelosi’s office spending undercuts her message that Democrats are restoring fiscal responsibility to the halls of Congress.

Most of the $16,058 that Pelosi charged taxpayers for flowers, according to her reps, was for the visits of foreign dignitaries, such as Israeli Prime Minister Ehud Olmert, French President Nicolas Sarkozy and Jordan’s King Abdullah.

not to mention, Madame speakers, "Green the Capitol" initiative...

Let em' [you know, the little people...] eat cake each other...

Posted by: Uncle $cam | Jan 25 2008 10:32 utc | 22

So, apparently just one guy not even able to take down its own bank can make a global near-crash and force the Fed to cut 3/4? Well, if this is the main reason behind the market falls, what will happen when Bernanke and markets will have to face the real cost of the bubble?
To say this is worrying is an understatement on par with saying we deal with incompetent people.

Posted by: CluelessJoe | Jan 25 2008 11:23 utc | 23

This little thief: is his last name Bush?

Posted by: Diogenes | Jan 25 2008 13:03 utc | 24

I don’t know about this Jerome chap, but Nick Leeson was, indeed, at first a top trader at Barings. His plunge started, and continued, because he quickly got in too deep, and had to go on, both lying and covering up. One thing, as they say, lead to another. I don’t believe his bosses knew. He knew he would end up being caught, and in fact expected it far sooner, was resigned to it, hoped for it even. But no. His motive seems to have been simply to remain trusted, respected, a ‘star’, keep his position, go on, stay in his present situation.

He couldn’t confess, and couldn’t leave or disapear. He simply kept up his ‘double’ accounts.

Leeson was from a very poor background, the first in his family to climb anywhere; and he had a lovely, admiring and trusting wife. He did not enrich himself. My reading, anyway.

Banks are odd institutions - very compartementalized, very Taylorish, and most of the ppl who work at the higher levels are also servants in the machine, they are extremely stupid (really stupendously dumb - many can’t even use a computer or read a time table, for ex.), have no training in anything ‘real’ like math or industry or.. - they are hired because of past success, which is a no-brainer thing, luck.

They really don’t see beyond their nose. In a way, that is actually how they are supposed to be. Looking too closely and understanding too deeply is not what is desired. Scams by lower level employees - they are young and some are brilliant - are incredibly common, and even, I’d say, ‘accepted’ as part of the business. (Their problem is to hold off stay small and discrete and that is hard to do.) Mostly, the banks cover it up. So, although I often see cover ups and conspiracies where others see none, in this case, I’d be willing to take SG’s description as believable.

I mean, look: some banks were conned by the sub-prime movers, and there is no way one can make that into a sneaky self-interest program. The rot of the financial system is so horrendous that this kind of thing is to be expected. That is impossible to imagine, so ppl look for hidden motives, manipulations, clever greed, false scape-goating, etc. Nope. It really is that crazy.


Posted by: Tangerine | Jan 25 2008 17:11 utc | 25

I'm still waiting for someone to be charged under Sarbanes-Oxley. As weak as the law is, it is still enough to put most of these US CEOs in jail. Under a decent justice department the docket would be full. I'm sure under Hillary/Obama it will not change, but the laws are there to be applied. That's why you hear about the 'high costs and burdons' of SOX compliance and the need for 'reform.'

Posted by: biklett | Jan 25 2008 18:04 utc | 26

Hmmm... seems Jérôme Kerviel's job position was posted on jan 15.

Posted by: jdmckay | Jan 25 2008 21:03 utc | 27

I read in the paper (Le Temps, CH) that not one pension fund in Switzerland bought that subprime paper. No subsequent news revealed any such buys.

My own pension fund, about 10 years ago, sold all its UBS shares to great fracas - top *** rated, Swiss bank, and a major Swiss pension fund dumped it! The press went batshit, the markets were affected. At the same time, they sold all their (then) Swissair stock. I think they later extended the ban to Credit Suisse, but am not sure how that worked out.

This was over unethical behavior, not fraud, not losses. My pension fund is run by its members, with money managers advising and of course running the whole thing.

That Swissair was going to tank was painfully obvious. That the UBS is run by greedy idiots, as well. So, it is not rocket science, a small collective of elected representatives -some of them are secretaries, others are doctors, my own representative was a speech therapist, etc. - managed to understand that and take action. (Merci, internet.)

People have to grasp they need to take things into their own hands, and that ethical criteria, or any other criteria beyond the ‘gains’ that are advertised, are worthy ones. Even if you loose.

Posted by: Tangerine | Jan 26 2008 17:35 utc | 28

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