91Èȱ¬

How did SocGen get away with not having a Risk Management dpeartment ?

Surely this is simply a ruse to expalin-away huge losses on idiotic investments made by SocGen. Prepare for more 'Fraud' to emerge from the banking sector soon!

The proposed bail-out for the monolines means that an ever-increasing proportion of western finicial institutions are dependent either on state welfare or foreign sovereign funds. It will be very interesting to observe the full political implictions of this, in addition to the changes in global economic power relations.

I'm surely not alone in thinking how could one trade trade that much and nothing in the banks system be able to stop him or her?

No doubt there will be an arrest imminently for fraud if this was indeed a fraud?

How the chief exec can stay god only knows.

Something isn't right here it just doesn't feel or sound at all right.

If one trader was able to get away with it an Soc Gen then not just the Chief Exec but a load of others above the trader must go if anyone is to have any confidence in the bank.

I think the most pertinant question at the moment, and one I've not yet seen answer to anywhere on the 91Èȱ¬ atleast, is just who is proposing to rescue the monolines?... and how?... and with whose cash?

Just who is in a position to shore up and guarantee $2 tillion worth of assets?

Answers on a postcard please!

This beggars belief-I borrow £10 from Petty Cash in the Office and I'm hounded until it is paid back!
When I started my career in the 70's in the dealing room at Couuts and Co in Lombard Street every transaction was signed countersigned and signed again and entered into Ledgers galore.Every night these were checked counterchecked etc and Forex limits with banks could never be exceeded or the 'high jump' would beckon-
Fraud or no fraud this episode is yet another blot on the banking landscape

Very soon after Nick Leeson wreaked havoc at Barings all those years ago, monitoring software was developed to ensure that traders could not exceed predetermined limits.

One would assume that this software would be be a standard bit of kit now at most banks so ... what were the auditors up to?

As they surely should have flagged it up as an unacceptable risk if the monitoring software was not deployed.

There were the Babylonians; the Egyptians; the Greeks; the Incas; the Romans; and to be generous, the Spanish.

So it goes on. Now we can see the beginning of the end of our own civilization.

Those of us in the West must prepare to be counted amongst the poorest nations of the world.

So what will you do when China and India send troops to keep order here?

Makes you think, doesn't it?

Simple problem of non-accountability. Yes Leeson was caught, but architect of LTCM John Merriwether is still operating, while the 7 or 8 employees responsible for UBS's sub-prime losses are still walking the streets. Investment banks are run like marketplaces with each little business unit setting up its own stall virtually independent of management and the other stalls. If it works, great, if it doesn't then they simply move to another marketplace. In the meantime, they bring down financial systems and cost the world economy billions of dollars. And all so they get a good annual bonus! Wouldn't it be cheaper to simply pay every banker a million dollars a year out of the public purse on condition that they stay at home and stop creating 'new and innovative' banking products?

To Bryan: We will see whether there is an individual implicated - if not, it will be noticed and questions will be asked.

Just make the trader pay it back... LOL

This is remeniscent of the scandal carried out by the rogue trader nicknamed Sneaky Hitler

The real cover is the "sub-prime debacle": if one greedy idiot sells debt to someone who cant repay it and takes a fat commission and his boss takes a bonus on that and that is replayed x 1000000s. Nobody has has to bear the consequences except tax payers. The whole thing is fraud as far as I see it. They dont need scape goats, they can essentially tranfer as much wealth out of a nations as the see fit quite legally.

If Robert Peston knew anything about banking, he would know that bankers never let anything as boring as checks and controls get in the way of earning a fast buck. Pass the Port board members haven't got a clue what their underlings are doing.

Well there had been rumours for at least several days on the French market that the Societe Generale was facing problems including a major writedown --- but the bank declined to comment. But it will also probably make M.Sarkozy's reforms more difficult as there will be an outbreak of criticism within France against bankers and capitalism in general.

Incredible! No proper risk management, functioning internal controls, effective compliance testing and control or internal audit!

All the executive board members should go, along with all the members of the audit committee and internal audit team. Presumably the external auditors will resign and be liable for negligence too.

The bank should be entirely re-structured and in the meantime, suspended from all markets where the shares are quoted, to protect the public. Who regulated this farce?!

Rather than wait for a statement from SocGen, you have written a "story" and "linked" it to the CDO meltdown.

I think you are losing your touch and to add insult to injury, there is no mention of NR whatsoever.

Thought you might be interested to know that the [FIMAT Group]a unit of French Bank SocGen 'cleared' Barings [Leeson's] "artifical trades" in Singapore. This being the case Leeson was unable to pass a 'book entry' in the back office in the 5/8's account. He had to physically transfer the position to FIMAT as the positions were [ALLSQUARE]. The £700m sent to Singapore was nothing to do with Barings whatsoever.It was a 'massive' money-laundering operation. The same as has happened in this case.

It's beyond belief that the CEO's resignation tender was not accepted by the board.

Barings was exposed to excessive risk by a single trader in the '90's. Apparently all the banks put in place controls to prevent this happening again - but not all have learned the lesson it seems.
At least this is great material for my thesis - the cost of this particular lesson is nearly €5Bn!
Now to wait for the other shoe to fall........ thud! what was that?

Tell you what Robert, soon there will be so many of these stories coming out every day that you'll have to employ extra staff to keep up with the reporting! Can I have a job, please?

Why are we surprised? It did happen, it does happen and it will continue to happen. All bank traders behave like WW11 fighter pilots, they feel immortal. And they are paid massive bonuses to gamble with sombody elses money. Go try yourself to design both a motivation approach and an operations manual guaranteed to lose big money.Strangely they will probably look like a hedge fund, a proprietary trading desk or any other trading room in a financial institution. Nobody takes fraud and risk seriously enough, we treat them as a "cost of doing business".

Some confusion here- Furtures are traded on an exchange (i.e. no idea who the counterparty is). when the trade is executed, you stake some collateral with the exchange, and if the market moves against your position such that your loss is > than you collateral you get a margin call to stump up more collateral. This serves to eliminate counterparty risk, so that the futures trade is pure market risk / interest rate risk etc.

How did the Soc Gen trader meet his margin calls sufficient for the position to remain open and rack up €5bn Euro losses?

Its amazing that the bank hadn't spent what would have only been a few million dollars on reviewing and maintaining proceedures. That sum is small change to most of these banks. Someone in Paris is probably wandering around saying 'boff' quite alot today.

While i'm writing, any chance someone from the 91Èȱ¬'s editorial team could check all the articles on this subject and ensure the losses quoted are consistent within and between articles?!

No financial institution, even one state aided, could possibly be this massively incompetent on straight forward futures trading. Where were all the controls on individual trading? Where were the trade funding liquidity warnings? It's just, and only just, believable that this could happen with some exotic derivatives (LTCM) but futures - not a chance.

It's all about management controls and those at SocGen were obviously seriously lacking. The current board should be sacked en masse and the bank sold off in the market rather than going cap in hand for public money to plug the gap.

Its interesting to mull over how many people would it take to create £5 billion pounds of wealth in a year.

At say £100,000 per person per year, it works out at 50,000 people, the working population of say, Nottingham.

Soc Gen's systems can allow this amount of wealth to be lost be a single man ?

Come to think of it the British public's exposure to Northern Rock is eight times this much, so Nottingham, Leicester, Sheffield, Bristol, Newcastle, Liverpool, Brighton and Edinburgh might all have worked for nothing for a year.

The CFO and the bank's auditors and accountants should also take a seat near the exit. The incompetence of the control, accounting and audit functions here is also staggering.

Very soon after Nick Leeson wreaked havoc at Barings all those years ago, monitoring software was developed to ensure that traders could not exceed predetermined limits.

One would assume that this software would be be a standard bit of kit now at most banks so ... what were the auditors up to?

As they surely should have flagged it up as an unacceptable risk if the monitoring software was not deployed.

SocGen are lying. Why? now that is the real question.

Looks like the Risk & Compliances teams in Soc Gen droped the ball on this ones. Al Murray is obviously right when he says 'Where would we be if we didn't have any rules?... FRANCE'

I bet any one a £1 to a penny that this loss was set up to hide their sub-prime mortgage book. The "rogue" trader was probably paid a million euros to dabble a bit in the wrong way for "vanilla futures". And I will have to say what would you do with 4.9 billion euros worth of vanilla?

Something really stinks with this story. SocGen have apparently "dismissed the trader, with his managers following him in leaving the bank". What?? A trader exceeds his authority & loses £3.7bn and simply leaves the bank? Nick Leeson lost £500m - £800m by exceeding his authority & went to jail for several years.

Something really stinks.

" Apparently all the banks put in place controls to prevent this happening again - but not all have learned the lesson it seems."

I've just finished a contract working in IT for a major broker who has recently appeared on the front page of this site.

Basic compliancy requirements are frequently circumvented and account security is near non-existent.

Of course, since IT is frequently out-sourced in these environments, contractors are actively discouraged from raising any concerns about security.

A lot of brokers know their manager's passwords, which tend to be the same for every secure system they access, which makes any concept of oversight a joke.

Something really stinks with this story. SocGen have apparently "dismissed the trader, with his managers following him in leaving the bank". What?? A trader exceeds his authority & loses £3.7bn and simply leaves the bank? Nick Leeson lost £500m - £800m by exceeding his authority & went to jail for several years.

Something really stinks.

A supposed "fraud" of this scale calls into question not just the competence of SocGen's management, but the robustness of the entire banking system.

Does SocGen have a Compliance or Audit Department? If so what have they been doing over the last year while these positions and losses have been building up? It is incredible, but not too surprising, that any Financial Institution, particularly one the size of SocGen does not have adequate controls in place to highlight such things. Their Audit, Compliance and the trader's Management should all be removed from office and replaced with competent people.

Ok, so Soc Gen are down, who is up?

This just feels and smells like an 'upscale' techno variety of what went on in the mid to late 1980's on Wall Street. (Read author James B. Stewart's "Den Of Thieves".)

I say Amen to Mr. Harris' response, someone has to take responsibity for the lack of oversight. And, we have to be better proceedures in place to control this sort of unmitigated avarice.

Could this pernicious fraud be occurring at another major institution this very moment?

How can the chairman have the audacity to remain in his post? What were the Auditors doing over the past two years?
Soc Gen obviously do not have control over their books, if they insist that they could not identify these positions over such a significant period. The bank's credibility within the industry is ruined.

You can put all the checks and controls in that you want; corporate governance systems cannot be blamed for this incident. Governance relies on the honesty and morals of the staff working within it, and you'll never reach a position where 100% of the staff are 100% honest because morals and ethics are subjective and therefore unique to each individual.

For all we know, Mr. R. Trader may live their life according to a completely separate set of principles that no amount of systems, processes and controls can govern if he/she chooses to ignore them.

I'm also curious - what would SocGen's approach be to distributing the news that the same trader had made them a seven billion GAIN; can we assume the Directors would be shouting it from the rooftops and taking large bonuses home? The 'one rule for one, another for me' has to stop; if it does, maybe R. Trader won't feel so much like asserting his moral code above that of the company.

I wonder if the Soc Gen board found out about it Sunday night/Monday morning.

Somebody came in at and sold thousands of futures on the German DAX index and Eurostoxx 50 index on Monday at 7am-8am. Was it Soc Gen unwinding their position?

If so, to what extent are Soc Gen responsible for the sharp equity selloff on Monday, which prompted the Fed to make their emergency rate cut? If the Federal Reserve cut rates because of a rogue trader, the joke is on them.

i think this is only a cover up. there is more to this. this smell like a synidate operations caught with its pants down. where are the banke internal control? there are serious higher ups involved in this fraud and i think some very,very, very serious internal investigation is indeed, needed needed to weed the bank of this kind of scam or else who knows....

"It’s eerily reminiscent of the Barings disaster of the early 1990s - which was supposed to have prompted all banks to put in place better checks and controls on the activities of their trading desks."

All this event proves is that the aforementioned "checks and controls" have not and will never be rigorously applied when there is a few quid to be made.

How could a SINGLE employee cause his bank such a huge loss ?

Judging by what has come out so far, the trader created profitable fictitious trades to offset his loss making ones.

But this technique would only square the bank's books internally. The bank would still have had an exposure versus the market (i.e. with all of the counter-parties with which it has traded).

Fictitious trades, by definition, do not create a market exposure.

Hence the bank MUST have known for some time that it was hugely exposed against the market.

Are there any jobs going at this bank? I'm a little sort of money just now!

Robert, just yesterday you reminded us that central banks, or financial authorities, had “direct responsibility for supervising the health of banks�. Today we have a spectacular instance where the stripping out of regulatory supervision is taking us, “…no proper risk management, functioning internal controls, effective compliance testing and control or internal audit�. Those who would continue to argue that regulators must have “a more indirect relationship with banks�, or responsibilities “for the stability of the financial system rather than the health of individual institutions�, cannot fool us or themselves any longer about that. We have to now throw out such “reforms�. Banks, themselves, cannot and will not put compliance procedures into practice. More than ever we need to reinstate supervision whereby financial authority auditors to go into banks etc., examine balance sheets, operating methods, and so on, and write requirements that must be met before the next visit. That is the way it used to work, keeping management on its toes, and that is the way it will work in the future. Today it has just been proved again.

Is there a link between the stock market falls on Monday and Soc Gen exiting their positions ?

I dont understand a word about how its been done.....and this simple fact worries me more than anything about a financial services industry that is gambling with my savings and my pension.

I am surprised the Bank had differentiated this loss with the $2.9 Billion sub-prime loss. I would have thought they would have simply lumbered the entire sum together, that way conceal the fact it was actually lost by a Rogue Trader. All previously concealed cooked books are now being passed off as losses incured because of the US sub-prime losses.

At the risk of being smeared as 'anti-American', I can't be though, can I? After all, I am American, calling me 'anti-American' would sound a little too much like a McCarthy/HUAC tactic, wouldn't it?

However, to be fair I am very critical of the path my country has taken over the last thirty years, culminating in this staggering financial meltdown, the consequences of which we barely comprehend, the depths of which we can only guess at.

Many foreigners bought worhless US paper because they were simply conned by criminals who falsified the books. This gigantic element of fraud, like ENRON only a thousand times worse, is the hidden story in this whole affair.

From my perspective in exile, large parts of the Anglo-American Capitalist financial model are pretty much a criminal conspiracy.

Have you seen John Gubert's latest financial thriller, One Step to Danger?

It is about a banker who steals a billion dollars from his employer. The Societe Generale fraud shows that the fiction of the novel could be reality.

The novel coincidentally also features a run on a bank, the collapse of world markets and management ignorance of what happens in their trading rooms....

John Gubert is an insider and was former head of HSBC Securities Services. He served on several Bank of England committees and was involved with the Group of 30 in Washington.

"I thought it would make a good film but it appears that today's news pages are as eventful and scary as my novel. I warned it could happen and it has

Someone has had a bad day at the casino

This doesn't really surprise me. I've worked for JPM in various back- and middle-office roles. The last thing that traders (and sales-people) worry about is regulations. They are more concerned with just how much cash they can make - and that is the role for which they are employed.

Unless the whole worldwide banking sector really tightens up on risk and controls instead of paying lip service this kind of thing will keep on happening. All banks have controls and risk management "in place" but they need to be forced to adhere to them!

Also, maybe some kind of psychological profiling for would-be traders would be useful to weed out the borderline megalomaniacs before they cause all this trouble.

One of the most worrying (and simultaneously desirable) aspects about banking since the late 1980s is the incredible sophistication of the both the products and the technologies used to administer them, which are often beyond the understanding of many in a supervisory authority.

I recall a few years ago sitting in a meeting with some very senior bankers who were listening to a 27 year old explain a hideously complex derivative product: only 2 of the 8 bankers present truly understood what was being discussed, yet all 8 had to make decision on it then and there.

As technology and mathematical knowledge advances in the financial sphere, the real power increasingly lies with a handful of people – usually in their twenties and early thirties - whose brilliance makes them able to implement and design the systems and products that the financial world uses to push the limits of profit potential…and spot and exploit holes in the audit and control procedures if they so desire.

As the truth slowly comes to light with what happened at SocGen, I would only suggest that the magnifying glass not be limited to that institution.

Simply a lie.

£4.9bn of fraud and the only consequence is three employees are fired?

They aren't even charged legally to appear in court?

A pitiful lie from SocGen.

The only people to believe it are the gullible.

Other banks aren't questioning it because they've got there own lies that they'll need people to believe in the future, and the bankers agreement of 'you don't point out my flaws, and i won't reveal yours', is still going strong.

Can't wait to see the details of how this happened. At all trading houses I know (and have worked), such a thing should be impossible - too many checks and balances, third parties being involved.

How one person can do this is unbelievable based on the early reports disclosed. It is a complete failure of all risk management and credit systems!!!

Really want to know how they avoided mark to market calls - unless SocGen made market in the futures, then the trades were offset by comingling client and firm funds... really amazing...

Finally! Some news from abroad!
Anyone for a reason for this happening in France?
Ask boy Dave! He'll probably say that Gordon Brown dithered on this one as well!
What a farce, what a farce!
By the way! Boy Dave is the one responsible for the early 90s financial misery in UK! Now he pretends to be a financial expert.
Talking of experts, here is some news re ID cards experts in UK.

Last-minute attempts by online activists to halt an electronic ID card failed Tuesday when the U.S. Senate unanimously voted to impose a sweeping set of identification requirements on Americans.
If the act’s mandates take effect in May 2008, as expected, Americans will be required to obtain federally approved ID cards with "machine readable technology" that abides by Department of 91Èȱ¬land Security specifications. Anyone without such an ID card will be effectively prohibited from travelling by air or Amtrak, opening a bank account, or entering federal buildings.
Thanks Robert, and well done.

i work in a control department in one of the investment banks, top managers are already asking questions, my god, thanks to this rogue trader, i can sense long working nights ahead............................

Robert Preston again!

His authority or reporting skills have been undermined after the recent run on Northern Rock. Thanks to over dramatic reporting by Robert Preston and the claim to fame of braking the story of 'a loan to a bank' we can no longer consider his view points as anything more than theatrical. Rubbing his hands at his new claim to fame. What about 'responsible journalism'. This week we heard Robert Preston reporting on the 0.75% cut by the Fed in the evening news. Again doom and gloom whithout a balanced view of the positive implications. I would suggest that the head of news in the 91Èȱ¬ tahes a closer look at Robert Prestons reporting and compares it to that of Evan Davis!

Robert, just yesterday you were reminding us how financial authorities had direct responsibility for supervising the health of banks, then straightaway we have a spectacular instance where this stripping out of supervision is taking us…no proper risk management, functioning internal controls, effective compliance testing and control nor internal audit.

How they can now argue that regulators have to have a more indirect relationship with banks, or responsibilities for the stability of the financial system rather than the health of individual institutions, when they themselves cannot or will not put compliance procedures into practice.

Today’s disclosure more than anything reinforces the fact that financial authority auditors have to go into banks etc., examine balance sheets, operating method and so on, and write up the business requirements that have to be in place by the next visit.

That is the way it used to be, keeping management on its toes, and that is the way it will be in the future, since obviously they themselves cannot or will not.

Can some one please tell me (just a simple engineer)where has all the money actually gone ?
The bank obviously lost.
Who has gained ?

While the risk/reward ratio for bankers is: get lucky = huge bonus & set up for life; get unlucky = fired & off to enjoy your winnings these scenarios will happen again and again. And we, the mugs, will end up paying for it through state aid, higher banking charges, economic slowdown, lost jobs...

Simply a lie.

No one has been or will be charged with Fraud.

Dismissal only. For £4.9bn of 'fraud'.

Only 3 low level employees blamed.

None of them named.

Sounds like a payout for taking the rap.

where have you been all these years mr. peston? has it really only just dawned on you?

Further proof if it were needed that the banks are totally incompetant at managing even the simplest risk.

Whilst risk models continue to be managed in spreadsheets by the entire banking industry these losses will continue.

The Risk Managers are flying blind and their Audit Committees and Regulators are tolerating their reluctance to use robust systems and processes to expose the reality of the situation.

This is just the tip of a large iceburg.

It really amazes me.
If you are 'Joe Bloggs' in the street and you go into the red on your bank account, the bank is onto you immediately and slaps a penalty charge on you. If you kept doing it they would soon close your account and come after you for the money.
Here we have another massive institution, charged with looking after billions of £, $, euros or whatever, with a loose-cannon trader (probably raking in massive six-figure salary and bonus) 'playing' with other peoples money, and the bank doesn't seem to have applied any controls at all.
All this is going to do is increase the charges we 'Joe Bloggs's' get hit with if we go overdrawn even by 1p so the banks can try and claw back from innocent customers some of the losses that they have themselves have instigated by their ineptitude.
Take the trader out and 'deal' with him permanently. All of the management above him need to be either sacked or their bonuses for the last x years repaid, and the Exec need to sort their lives out and get control of their company - again giving back all of their bonuses!!!

Ged Haywood. Are you on drugs? The end of civilisation?! lol best go buy my tin foil hat to stop the illuminati's mind control!

There is more about this to come: as others have said, if the loss was on futures then there would have been massive cash payments to cover margin calls, surely someone would have noticed nearly €5 billion?!
Suprised the share price has not fallen very far, is there a take over premium built in already? Knowing how protectionist the French are to their national champions, Soc Gen will only go to another French bank. Competition of the day: who can make a suitable name from BNP Paribas Societe Generale?

Robert, just yesterday you were reminding us how finance authorities had direct responsibility for supervising the health of banks, then straightaway we have a spectacular instance where the stripping out of supervision is taking us…no risk management, no internal controls, no compliance testing and control, no internal audit.

How they can now argue that regulators have to have a more indirect relationship with banks, or responsibilities for the stability of the financial system rather than the health of individual institutions, when they themselves cannot or will not put compliance procedures into practice.

Today’s disclosure more than anything reinforces the fact that finance authority auditors have to go into banks etc., examine balance sheets and operating methods and so on, and write up the business requirements that have to be in place by their next visit, thus guaranteeing independence and transparency in process.

That is the way it used to be, keeping management on its toes, and that is the way it will be in the future, since obviously they themselves cannot or will not.

The problem here lies not only with the bank and their risk management and internal control procedures. Basel 2 requires, under Pillar 2 in the Capital Accord, that regulators actively review banks' internal processes and ensure that proper risk management and control mechanisms are in place, functioning, and continually improved on by the banks. Basel 2 ought to be in place throughout the EU and working. What's happening here? What was the French regulator doing during the past years? If control mechanisms at SG didn't work, how is it that the regulator didn't catch this?

Enormous amounts of money and time have been invested in drawing up and implementing the Capital Accord, so a large failure such as this begs the question as to the efficacy of the current approaches to operational risk management and control.

Ged Haywood. Are you on drugs? The end of civilisation?! lol best go buy my tin foil hat to stop the illuminati's mind control!

One of the most worrying (and simultaneously desirable) aspects about banking since the late 1980s is the incredible sophistication of the both the products and the technologies used to administer them, which are often beyond the understanding of many in a supervisory authority.

I recall a few years ago sitting in a meeting with some very senior bankers who were listening to a 27 year old explain a hideously complex derivative product: only 2 of the 8 bankers present truly understood what was being discussed, yet all 8 had to make decision on it then and there.

As technology and mathematical knowledge advances in the financial sphere, the real power increasingly lies with a handful of people – usually in their twenties and early thirties - whose brilliance makes them able to implement and design the systems and products that the financial world uses to push the limits of profit potential…and spot and exploit holes in the audit and control procedures if they so desire.

As the truth slowly comes to light with what happened at SocGen, I would only suggest that the magnifying glass not be limited to that institution.

Like Robert, I have been amazed that there has been virtually no backlash until now against the Americans with regard to sub-prime lending and the ensuing credit crunch. At the end of the day, the American instututions have been nothing short of irresponsible, and we are all going to be left to pick up the pieces.

Why are so many of these comments angry? What have you folks lost exactly from this episode? This isn't like NR (note that taxpayers have not lost any money there either... at least yet).

I suspect a lot of the idiotic, uninformed comments people make are really born out of jealousy of the sums of money paid to financial professionals.

Peston should also stop spinning the NR story and grow up.

If you think Britain would have been better served by allowing NR to collapse, you're stupid. That would have repercussions that would echo for decades.

Judging by what has come out so far, the trader created profitable fictitious trades to offset his loss making ones.

But this technique would only square the bank's books internally. The bank would still have had an exposure versus the market (i.e. with all of the counter-parties with which it has traded).

Fictitious trades, by definition, do not create a market exposure.

Hence the bank MUST have known for some time that it was hugely exposed against the market.

While the risk/reward ratio for bankers is: get lucky = huge bonus & set up for life; get unlucky = fired & off to enjoy your winnings these scenarios will happen again and again. And we, the mugs, will end up paying for it through state aid, higher banking charges, economic slowdown, lost jobs...

The risk controls have failed spectacularly!Lessons clearly have not been learnt from Mr Leeson debacle.

Given the current financial climate, this will not provide any comfort that banking institutions do not always know what is going on around them.

Judging by what has come out so far, the trader created profitable fictitious trades to offset his loss-making ones.

But this would only square the bank's books internally. The bank would still have an exposure versus the market (i.e. with all of the counter-parties with which it has traded).

Fictitious trades, by definition, do not create a market exposure.

Hence the bank MUST have known for some time that it was hugely exposed against the market.

Simply a lie.

No one has been or will be charged with Fraud.

Dismissal only. For £4.9bn of 'fraud'.

Only 3 low level employees blamed.

None of them named.

Sounds like a payout for taking the rap.

Until all holdings off balance sheet are returned so we can see what the
banks have been up to we should not be suprised by this or other problems.
It may seem niaive but if $1 trillion of SIV and Sub Prime products has been purportedly sold, with a possible market value of only 50% of face value today, and $100 billion of losses decared to date; that leaves roughly $400 billion of losses still to come out.
Banks have been the only declared loosers so far but my money is on Insurance companies taking a massive hit, and hiding it by moving all the damage to long term funds.
Such activity happens all too often and its about time the Regulators woke up.
But then there is as much chance of that happening in the UK as there is of us all walking on water.

This story just leaves me wondering where were the market regulators?
Apart from the obvious failings of SocGen's internal audit and regulatory teams (assuming they have got some) some of these contracts must have been Exchange traded (rather than OTC with another bank).
So it beg's the question (as in Nick Leeson's case) where were the market watchers? Why were they not asking questions of SocGen about the size of their positions?
All horribly predictable when people don't do their job I'm afraid-wonder who's next?

How on earth can a sole trader cover up losses for an extended period through "a string of fictitious trading positions"? If that's all it takes to potentially bring down a bank, the senior management should go.

The problem here lies not only with the bank and their risk management and internal control procedures. Basel 2 requires, under Pillar 2 in the Capital Accord, that regulators actively review banks' internal processes and ensure that proper risk management and control mechanisms are in place, functioning, and continually improved on by the banks. Basel 2 ought to be in place throughout the EU and working. What's happening here? What was the French regulator doing during the past years? If control mechanisms at SG didn't work, how is it that the regulator didn't catch this?

Enormous amounts of money and time have been invested in drawing up and implementing the Capital Accord, so a large failure such as this begs the question as to the efficacy of the current approaches to operational risk management and controls.

Btw. if you'd like to know what SG claims to do in terms of risk management and internal control, have a look at their risk management policy page: Unfortunately, much of this has now turned out to be a control fantasy.

This is not only a terrible breach of the banking system - but of the kind of people banks employ.

I don't care that this trader had middle office knowledge (he therefore could hide losses and true positions due to this experience) - it should be impossible for one person to get away with this.

Surely there are secondary and external checks that must be in place to monitor the access of front office staff to middle office systems. Not only this, but its not as if futures are complex products that front office/middle office staff would find hard to interpret!

Thirdly trust and training from the bank - how could a person feel he had to try conceal this mess in the 1st place. Bank hiring policy must be questioned and indeed so should their training measures, and "wrong" focus on a stressed pressurised environment.

D Kearney

Two observations: One the CDO/SIV/Credit default swap/sub-prime debacle is once again Wall Street being too clever by half (anyone remember 'portfolio insurance' which provided the rocket fuel for the crash of '87?). Two that European banks are ensnared in this mess demonstrates once again that European bankers (despite the Euro at 1.46 to the dollar) are no smarter than American bankers. On the Soc Gen "fraud" something does not sit right: to me the statement that a single desk trader at the second largest bank on the continent could perpetrate a 4.9 billion euro fraud in "plain-vanilla" futures does not pass the straight-face test; there had to be collusion, no one is that clever to pull this off single handedly. Also trading is a zero sum game; if Soc Gen lost 4.9 billion, then there there is a collective profit of 4.9 billion out in the markets; who was on the other side of the trades? One other note; this is not the first scandal in SocGen's history.

I'm not sure which is worst:
SocGen losing $7bn on an accidental position; or Merrills losing $10bn on a position they thought was a good idea ?

Simply a lie.

No one has been or will be charged with Fraud.

Dismissal only. For £4.9bn of 'fraud'.

Only 3 low level employees blamed.

None of them named.

Sounds like a payout for taking the rap.

Are there any jobs going at this bank? I'm a little sort of money just now!

The comments from Borys really worries me. My son, early twenties, has recently been promoted to the trading floor of a major bank. An ex-Oxbridge maths guy, I'm sure he's really bright and up to the job, but I can't follow him at all when he explains to me what he'll be doing for a living (and I'm a scientist!).

Betting such huge sums with other's money sounds faintly immoral to me.

I have a retail account at a major French bank. They appear to ride roughshod over what would be considered normal banking practices. They open accounts that "can't" exist. They "lose" accounts for 6 months at a time. They continually lose my phone number and address! Impossible to find out what charges are applicable for any transaction. Many where I live have the same sort of problems. So if that's what it's like in the retail sector, I'm not suprised by these trading desk shenanigans. I think they just think they're above the law.

One thing I've never really understood is how financial wizards make money out of betting on the stock market if it falls, although I gather that plenty of them do.

How does this work? Presumably if someone bets on a falling market and wins, thereby making money, that money has come from somewhere? Does the whole system rely on a small number of people like this losing outrageous sums of money on similar bets for it to work? And if so, does it mean there are more cases like this out there?

The comments from Borys really worries me. My son, early twenties, has recently been promoted to the trading floor of a major bank. An ex-Oxbridge maths lad, I'm know he's really bright and sure he's up to the job, but I can't follow him at all when he explains to me what he'll be doing for a living (I'm a scientist).

Betting such huge sums with other's money sounds faintly immoral to me.

I've worked on various desks around the City, New York and Toronto as a TA or around the Middle Office.

I find this hard to believe that someone can hide 3.7bnGBP fraudulently without another internal group finding out.

I assume he would do this in his Front Book P&L and manually adjusting prices and valuations. Banks internally have atleast two maybe three checks and balances to catch this; the Middle Office; Finance and Compliance. I understand he's had middle office experience, but even that group is regulated by Finance.

This definitely sounds stinky.

Most desks/traders adjusts valuations to markup or mark down their book, but sooner or later it'll get find out.

Socgen systems must be either incredibly archaic,or most likely there is more to this story.

Simply a lie.

No one has been or will be charged with Fraud.

Dismissal only. For £4.9bn of 'fraud'.

Only 3 low level employees blamed.

None of them named.

Sounds like a payout for taking the rap.

"At 12:21 PM on 22 Jan 2008, David wrote:
Another thing which often comes to light in a downturn is fraud and dishonesty.

We may soon see another BCCI or Barlow Clowes."

It didn't take too long to be proved right on that one, did it?

Why should anyone expect risk management software in place? This is France! I have lived here for 5 years and still no sign of getting broadband in my neck of the woods.

Couldn't happen to a nicer bunch of guys if you ask me.... merde!

Where has the money gone?
Where has the trader gone?
(Where will his bosses go?)
Where have the internal controls gone?
Who got bonuses?
Who exactly loses?
Who exactly gains?
Why is one big lie being propounded?
Which bank is next and who are the ultimate losers?
US
and life goes on .......

Do we wait and wonder what more comes out of the woodwork. If no one is prosecuted for this do we imply that it was a front for the Bank itself with the trader being the fall guy.
As a Banker I know that there are always controls in place therefore others have to be involved.

Could this be the French way of writing off sub prime without having to admit to being involved in the American/British folly. It would be interesting to note. Its also amazing that this surfaces just as the Bank are prepared to issue its annual results. Where have I seen this before ,Oh with every other fraud >

So, Who has gained...

In simple terms he had a better against someone. thats how betting works!!! Someone must gain?

Max is correct. Where were the margin calls ? this story smells. Wait to see what comes out in the next few days.

The comments from Borys really worries me. My son, early twenties, has recently been promoted to the trading floor of a major bank. An ex-Oxbridge maths lad, I'm know he's really bright and sure he's up to the job, but I can't follow him at all when he explains to me what he'll be doing for a living (I'm a scientist).

Betting such huge sums with other's money sounds faintly immoral to me.

There is far more to this than meets the eye.

Even in the least sophisticated of trading environments all trades must recorded by the two sides of the deal, a buyer and a seller, even when using an exchange.
Trade confirmations are invariably exchanged.
Initial margin is taken and variation margin is calculated daily by the exchange
At the very least the settlements department should be aware of all claimed trades through both end of and intra day reconciliations.
There should be monitoring of limits: position, credit, counterparty, daylight, settlement and margin.
There should be risk monitoring that includes some form of stress testing showing value at risk on outstanding positions, both at product and bank level.
There should be daily and intraday P&L agreements between the traders and one of: the accounts department or middle office or risk.
Margin calls must be met (and given the loss, the positions and hence the calls must have been enormous.)

And yet Soc Gen claim this is on a vanilla product. I don’t think so.

At the exchange level someone must have been aware of the Soc Gen situation and even allowing for a massive line the exchange has to consider the credit exposure. In addition someone must have made money on these deals.

If people are to be fired it should run right the way through the bank and at all levels of management. The board for granting limits they clearly did not understand; the executive directors for their total lack of awareness about what was happening across the bank; the senior dealers for not even being remotely aware of what one of their dealing team was up to; the IT and operations staff for installing systems so totally lacking in basic controls; the accounts department for failing to conduct proper P&L analysis and reconciling management accounts to ledgers; the settlement teams for not being up to date with confirmations and margin statement from the exchanges and the brokers; the risk and middle office for their failure to monitor and stress test positions and P&L; the credit department for not knowing the exposures; Compliance for inadequate monitoring activities and internal audit for not identifying and reporting on the control inadequacies; the HR department for inadequate staff selection and just for good measure

KICK THE CAT

There is likely to be far more to come from this and I for one would avoid putting more capital into that joke shop.

Has anyone asked Nick Leeson about losing his title to the French.

Come on GB we can do better than that!

Swings and roundabout guys ... one side loses seven billion dollars means someone else somewhere has made seven billion ... who has made this money??

Robert, just yesterday you were reminding us of how finance authorities had direct responsibility for supervising the health of banks, then straightaway we have a spectacular instance of where the stripping out of supervision is taking us…no risk management, no internal controls, no compliance testing and control, no internal audit.

How they can now argue that regulators have to have a more indirect relationship with banks, or responsibility for the stability of the financial system rather than the health of individual institutions, when they themselves cannot or will not put compliance procedures into practice.

Today’s disclosure more than anything reinforces the fact that finance authority auditors have to go into banks etc., examine balance sheets and operating methods and so on, and write up the business requirements that have to be in place by their next visit.

Only then will you guarantee independence and transparency in the process. That is the way it used to be, keeping management on its toes, and that is the way it will be in the future since obviously they themselves cannot or will not be trusted.

The timing of the news release is suspicious, may be it happened long ago and they were waiting till the American Banks lead the headlines.

Also, I cant possibly imagine a 30 something guy alone hiding Billions of dollars in losses, just thing what would have happened if he just would have decided to steal and run away...

One thing is sure, if a bank cant even take care of its employees then it sure cant look after your money......

When are we going to face up to the fact that "investment" is just glorified gambling with someone else's money? I've always despised bankers for their pretence that they actually add value and are worth their obscene salaries -this whole bubble just reinforces my feelings.

No doubt the "rogue trader" and/ or his cohorts have been given a payoff of a few million (nothing really in realtion to 7 billion)to keep quiet- or if not they'll make millions from the book and film rights in the not too distant future,- Now that's what I would call Futures trading!

I worked in the City of London for 30 years. I partly left because of the compliance. We had cameras watching us all day long. Telephone conversations were recorded... even in the conference rooms. We had for instance to read and sign a loose leaf booklet, that was continually updated, that made us liable to inform on colleagues, who may have been acting strangely.... say, using a shredding machine at 8pm ... under the possibility of being compliante with this person, should he or she suddenly be guilty of some fraud. It goes on..and on. I am not saying this is wrong. I think it is standard practice in every Major firm. If I entered a trade into my computer, it would generate all the settlement instructions and be tested against credit limits etc immediately. Anything that was 'out of line' would set bells ringing. So I wonder how one of the major Banks in the world allowed this to happen. It doesnt quite ring true. I hope we learn the full story and that the people at the top take their share of the blame. Dont blame a lone trader.

A: Trading is only a zero sum game up until your 'absorbing' barrier has been hit i.e. you are deemed insolvent and hence cannot deposit any margin on your futures positions and are forced to close out.

B: As these were exchange-traded futures it does not imply one single counterparty has made 4.9bn Euros. You are not necessarily betting against someone. If I choose to buy 10 FTSE 100 index futures, I could in theory have 10 counterparties all selling me 1 future each, anonymously, through the exchange.

C: The counterparties selling the futures might have actually been closing their previously held open positions, and would not have profited from the sharp drop in equity indices this week.

Who gains?

Lets guess - the investment bankers of the London banks (not SocGen) who received their bonuses in the city for their astute trading.

Or put another way, one bank screws up to pay the bonusses of another.

Meanwhile the public coffers pump more inflationary money into the system to enable dodgy banks to restore balance sheets for those that lose.

Public Joe Bloggs loses, investment bankers worldwide win and the whole merry-go-round continues.

I am now thoroughly fed-up with the whole banking system and destruction of value it has created.

I may sound naive asking this question, but when one person loses money, somebody else usually gains it. If SocGen have lost it, who came out the winner?

Quite how vanilla index futures trades led to such a loss is beyond most of the people posting here.
I am against the opinion that many traders deliberately try to circumvent the rules, and anyway many rules cannot be breached at the banks I have worked in, as if the risk managers do not pick up the abherrent positions, back-office / settlements should.
How this size of loss was built up is incredible, unless only an annual review of nostro breaks was done. I used to help the Middle Office conduct a daily and weekly review....so unless Soc Gen suffered a systematic breakdown in controls across the board, this type of abuse of trading should not have happened

I must say that I find the idea that "the fault lies with the foolish German and French bankers who bought the toxic stuff" rather smug.

Considering that Merrill Lynch posted a 10 Billion dollar quarter loss, not to mention Citibank, it seems that the problem lies not in the bad judgement of various bankers but that they had trusted the integrity of the banking system.

If even Rubin, Greenspan, Citibank did not know that this was « toxic stuff », there is a problem!

It seems to me what the sellers did was the equivalent of taking meat at its rotting point, and stamping it AA sirloin. Why would a grocer who does this be convicted of fraud, while his cousin on Wall Street rewarded with tens of Millions of dollars ?

I work in the middle office of a major bank. I can honestly say that in no way would it be possible to hide anything at any bank which has even the most rudimentary of control and risk measures in place.

Even a few hundred dollars' worth of ddiscrepancies are noticed the next day and no control measures can allow anyone to hide such huge positions and losses, no matter how intrictate their knowledge of middle- and back-office systems is. It just doesn't happen.

This is something else and I for one am keen to find out what it is. I wonder if there was a systems glitch at play, because nothing else that anyone who works here thought of as a possible reason, makes sense. Either that, or they're lumping all their cooked books together and trying to write them off in one go.

I think SG is lying. Probably their losses in subprime are much larger than what they have shown. And they cooked up the fraud story to cover their negligence in subprime. Just look at the timing when they are announcing the fraud.

No need to worry folks...

The fraud was caused by one fairly junior member of staff who has now been sacked...

and this is meant to make us think that everything is ok in the banking industry...

how can one junior member of staff lose this amount of money without anyone noticing?

Here is something which may help to put recent developments into perspective:

"Let me issue and control a nation's money and I care not who writes its laws."

Meyer Rothschild made this pronouncement from his flagship bank in Frankfort in 1790. With Rothschild's bright idea firmly in mind, the worlds banking leaders have really had a fine old time for the last two hundred odd years.

Time for a few questions, perhaps?

cb

I am really suspicious of Soc Gen's announcement. A loss of this magnitude implies a truly massive underlying position. Trading counterparties must have been aware of it, inter dealer brokers must have been aware of it, Soc Gen's treasury must have been funding it, Soc Gen's credit lines must have been stretched, trading volume through that particular desk (or dealer) must have been spectacular (way above the historic norm), and management (particularly local desk management) could not have failed to notice. I just don't buy it.

Isn't it funny how everyone is calling for regulators to observe and control the financial system.
What do we get? People and institutions who learn to get around rules and regulations. The sub-prime disaster hit mainly regulated entities, now the SocGen blow up..

It seems to me that the self regulated hedge fund industry is doing a far better job than the admin heavy regulated banks. It seems wiser to understand the risks than merely hiding behind procedures.

Well, I hope he had a good time with the money, Carla !!

Thank you for your pro-american comments...It is curious that, two weeks ago, a british national friend,living in the US, was passing the same comments to me on their banks over there. May be have you ignored the City Bank losses lately? Previous bank frauds happened in the 90's in the UK, of course less costly compared to these days' frauds, but frausters are getting more greedy with time.
SocGen has been done, so PariBas, so Credit Lyonnais.It will happen again and again because the money market is ridden with greedy people.
How much was it for the Northern Rock business?

A: Trading is only a zero sum game up until your 'absorbing' barrier has been hit i.e. you are deemed insolvent and hence cannot deposit any margin on your futures positions and are forced to close out.

B: As these were exchange-traded futures it does not imply one single counterparty has made 4.9bn Euros. You are not necessarily betting against someone. If I choose to buy 10 FTSE 100 index futures, I could in theory have 10 counterparties all selling me 1 future each, anonymously, through the exchange.

C: The counterparties selling the futures might have actually been closing their previously held open positions, and would not have profited from the sharp drop in equity indices this week.

Here is something which may help to put recent developments into perspective:

"Let me issue and control a nation's money and I care not who writes its laws."

Meyer Rothschild made this pronouncement from his flagship bank in Frankfort in 1790. With Rothschild's bright idea firmly in mind, the worlds banking leaders have really had a fine old time for the last two hundred odd years.

Time for a few questions, perhaps?

cb

Where is the money now? I refer to the $7.1 billion. Where is it?

The single most important step any financial institution can take is to insist that all its junior traders take a course in business ethics. Then, the second step is that the bank has to inform these very ambitious young men (who are compulsive gamblers cloaked in semi-respectability) that they will be prosecuted when they transgress. Yet this young French trader was permitted to walk away from the mess.

A: Trading is only a zero sum game up until your 'absorbing' barrier has been hit i.e. you are deemed insolvent and hence cannot deposit any margin on your futures positions and are forced to close out.

B: As these were exchange-traded futures it does not imply one single counterparty has made 4.9bn Euros. You are not necessarily betting against someone. If I choose to buy 10 FTSE 100 index futures, I could in theory have 10 counterparties all selling me 1 future each, anonymously, through the exchange.

C: The counterparties selling the futures might have actually been closing their previously held open positions, and would not have profited from the sharp drop in equity indices this week.

Can't Gordon Brown just issue some bonds?

I trade futures contracts and forex markets where the leverage is 200:1.Whith that kind of leverage people can understand the huge amount of losses or profits you can take from the market.For each one million you can operate 200 million euros,thats the leverage that explain the huge amount of money involved in this sad history.

Hello everyone

The sheer scale of loss is overwhelming but can someone please tell me where this sort of money goes? Can the bank recover it? Does it not 'circulate'in the system/ stock market? On a wider note, what happens to money that is wiped off the stock market?
Can anyone recommend an idiot's guide to the stock market type book for me as I get really confused

And finally if people are essentially gambling at what may or may not occur in the distant future why the surprise at losses?

Kind regards

Maybe the plot is:
1. Turn a slide on equity markets into an avalanche.
(Monday)
2. Start a chain reaction of margin calls, eg Gold down to $US860 (Tuesday Europe)
3. Panic the US Fed into pumping the markets, putting further down pressure on USD and inflation up in the USA.
(Tuesday pre US)
4. Bank of France informs US Fed about its "bad boy" and EUR 50B sales.
(Wednesday)
4. ECB reaffirms priority of inflation control, not significant need for cuts.
(Wednesday)
4. Feed a flight of capital from the US to Europe and Asia. (2008 ...)
5. GNPs 1 Europe 2 China 3 USA.(2015)
C'est magnifique ! Maybe !

Reply to #140
"Can anyone recommend an idiot's guide to the stock market...'

Best ask a professional idiot - most of them seem to splash about in the finance sector.

1. We have an electronic market, why don't we have electronic back offices, deal matching linked to position monitoring in near-live time?
2. Watch for SocGen to be sued for everybody's losses if they've falsified the market.

Margin Call for loss making positions - this is my starting point.
Nick Leeson called London and, without any understanding of the position, Barings were happy to send over cash because Nick was the blue eyed boy who had made them money in the past and could do no wrong. So what if we don't understand it - as long as he does.

But this is totally different. Someone authorised the posting of margin - with Vanilla Exchange Traded positions, there is no getting away from it.

Who paid over the money to cover the positions - and why?

I agree - something stinks here. And in due course, the truth will out.

Who "won" the £3.7bn that Soc Gen "lost"

Since all the trading is with other financial institutions, surely that 3.7bn has just been re-distributed across the rest of the financial world. That's got to raise the share price of the companies who took all that money...

Should there be some kind of international bankers crime tribunal (as per the Hague War Crimes and Nurenburg post World War 2?

It seems that certain bankers have in recent years been guilty of neglect and worse to the extent that the world economy and the standard of living of millions of people is at greater risk than that inflicted by violent terrorists and criminals. Is there no way of bringing those responsible to account?

An interesting little aside is that the story of this fraudster is uncannily predicted in a novel published just last week called 'Meltdown'. It invovles an apparently 'rogue' trader trading off the book in a bank in Paris who triggers a global meltdown and goes on the run. Strange but true. The novel is written by Martin Baker, who happens to be married to financier Nicola Horlick.

In mathematics a dynamical system is called "unstable" if a small
perturbation of a single input parameter has dramatic and global
effects. If a single person can cause such dramatic effects on
global economy, then we should call the financial system unstable as well.

This sounds to me like a good old fashioned 'double or quits' move by SocGen.
They gambled an amount equal to their sub-prime position in the hope they could escape the disclosure of said losses.
Unfortunately for them, they lost.

Ironically, those trades would probably have been in the black by mid-week. I just wonder when ever we do have a good old fashioned equity market collapse, will banks start failing?

If the sell-off on Monday was instigated by SocGen's disposals then what a wonderful paradox !
The Fed cut was a week early and came as a complete surprise, no doubt as a reaction to Monday's instability in world markets.

So everyone have a drink this week-end on SocGen. Cheers !

Bank management is stupid....not for allowing the "fraud"..but for concoting such a idiotic story!!

USD143bn support for world's banks?
Isn't it about time Northern Rock gets properly reported in context?
Its solvent and pays its bills. If it lost like M Lynch, Citi etc it would be well out of business. Yet it still supports 6k jobs, a major charitable foundation and pays dearly to HM Treasury. Its not the only British bank to receive support recently yet gets villified. Why?

Re the Rogue Dealer …I could not resist sending an email to a university chum of mine at Societe Generale who is… how should I say… at completely the OPPOSITE end of the Company from the ‘lady who makes the morning tea’.., the following 'rib':....'I see YOUR lot are good at 'keeping-their-house-in-order'....to which he replied: 'Funnily enough we are the global leader in equity derivatives and have been for years. We have just been made Equity Derivatives House of the Year (again) by Risk magazine. Just goes to show that this can happen to the best of us.'….You know when you feel so… SO strongly about something but can never really find the words to do true justice…..like my hate of the Global Financial System….

He might have 'lost it' but, who has gained it.

The billions could be spread across many financial institutions. Equally they might have gone to just a few. I'd love to know what company has gained most.

With all the questions that are being asked in banking circles about Soc Gen's Systems and Controls the irony and timing of one of the financial world wider read publications is extra-ordianry (https://www.risk.net/public/showPage.html?page=685494).

SG is without a dout an exellent Bank that has been molested slightly by a rogue trader. All Banks can learn from this experience and improve thier controls, fully conduct criminal checks ect..