Leeson Lesson Unlearned

25 January 2008



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Rogue Trader Costs Societe General €4.9 Billion

Societe General, the huge French bank, has announced that a rogue trader has managed to hide losses of €4.9 billion, in addition to its €2.05 billion loss in the sub-prime mortgage mess. When Nick Leeson bankrupted Barings Bank in 1995, his losses were a quarter of that at £860 million. Somehow, Societe General will post a net income of €600 million to €800 million for the year, although the balance sheet needs some help.

Chairman Daniel Bouton, who honorably offered to resign and whose resignation was declined by the board, issued a statement in which he said, “The transactions that were built on the fraud were simple, positions linked to rising stock markets, but they were hidden through extremely sophisticated and varied techniques.”

It turns out that the trader in question is a former back office employee who was hired in 2000 and who moved to the trading floor in 2006. This gave him intimate knowledge of the sorts of procedures and controls the bank had in place. And that meant that1:27 PM 1/24/2008 he knew where the holes in the system were.

Co-Chief Executive Officer Philippe Citerne told reporters that the trader balanced his real trades with fictitious ones and would roll over the real trades before they matured. It turns out he was doing quite well at the end of the year. His trades tanked this month, and he was busted when a compliance officer found a trade that exceeded bank limits. When Compliance called the counterparty about it, Societe General learned that the trade didn’t exist. The trader is being sued, is probably looking at jail time, and his managers’ careers have taken a turn for the worse.

Axel Pierron, senior analyst at Celent, an international financial research and consulting firm, said, “The situation reveals that banks, despite the implementation of sophisticated risk management solutions, are still under the threat that an employee with a good understanding of the risk management processes can getting round them to hide his losses.” Risk management that allows a back office guy to become a trader, set up a phony account to balance trades, and go undetected for months isn't really risk management. A re-tooling is in order.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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