Thursday, January 24, 2008

Junior SocGen trader Jerome Kerviel manages to lose $7 billion

Pictured here on the left, Monsieur Kerviel must have had more than 5 times his losses in notional futures positions, and was able to hide them successfully for several months.

FT Alphaville update here. WSJ article here.

So maybe that new low made yesterday morning was the Societe Generale unwind, and that VIX spike the day before was not due to economics.

UPDATE: FT has the mugshot.

UPDATE: Commenter etienne asks how this could be covered up for so long? My understanding is that he couldn't have done it alone. A lot of capital needs to be posted to the clearing corporation and as margin. That pledging must be done with the approval of senior officers in the bank. Monsieur Kerviel could be a scapegoat, like Nick Leeson was.

UPDATE: The head of SocGen investment banking, Jean-Pierre Mustier, says:
The specific pattern of his transactions was that they used fake transactions rolled on a permanent basis
Kerviel may have been booking bogus swaps against his futures positions, and someone else in SocGen may have gone to a named counterparty looking for a cash payment.

UPDATE: Bloomberg confirms my theory:
``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,'' Bouton, 67, said in a letter posted on the bank's Web site.

His approach was to balance each real trade with a fictitious one, and his ``intimate and perverse'' knowledge of the bank's controls allowed him to avoid detection, co-Chief Executive Officer Philippe Citerne told reporters. He rolled over his real trades before they reached maturity.

The trades first came to management's attention on the evening of Jan. 18, when a compliance officer found a trade that exceeded the bank's limits, Mustier said. When Societe Generale called the counterparty, they were told the trade didn't exist.

He ``breached five levels of controls,'' Christian Noyer, the governor of the Bank of France, said at a press conference today. He described the trader as ``a computer genius'' and said he was told he was ``on the run.''

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