Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Fri, 25 Jan 2008

How to lose $7.1 billion

The announcement by Societe Generale that a rogue trader had caused losses of $7.1 billion was cryptic and baffling. The press release says that the bank:

has uncovered a fraud, exceptional in its size and nature: one trader, responsible for plain vanilla futures hedging on European equity market indices, had taken massive fraudulent directional positions in 2007 and 2008 beyond his limited authority. Aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle-office, he managed to conceal these positions through a scheme of elaborate fictitious transactions.

Assuming that the indices in question have fallen by about 20% in line with the broad European equity index, the notional value of the plain vanilla futures position must have been over $35 billion. That a trade of this size could be concealed by an isolated individual appears difficult to believe since most large banks have internalized the lessons from Leeson’s fraudulent trades at Barings more than a decade ago. I have a sense that there is more to this than meets the eye.

Posted at 13:41 on Fri, 25 Jan 2008     View/Post Comments (2)     permanent link