[mike777]

You can get technical and talk in terms of basis points but why bother.
99% of the experts cannot even tell you what simple duration or convexity is in the bond market.

As for the public, forget it.

[Winstonm]

mike777, on Jan 25 2008, 01:34 PM, said:

You can get technical and talk in terms of basis points but why bother.
99% of the experts cannot even tell you what simple duration or convexity is in the bond market.

As for the public, forget it.

I can't even spell bodn.

[kenberg]

skaeran, on Jan 25 2008, 12:27 PM, said:

grrigg, on Jan 25 2008, 03:08 PM, said:

Whenever I see someone use data in a deliberately misleading way I automatically lose respect for their positions.

Both posts said that yield on 10 year bonds spiked by 6% in 1 day. To me this would mean say movement from 3% to 9%, indeed an enormous and unprecedented event. In reality the move was from 3.281% to 3.426%.

You need to keep your math straight.

A movement from 3% to 9% is an increase in 6 percentage points , but at the same time a 200% increase. If you start out with 3 apples and suddenly have got 9 apples, the increase is 200%. It's obviously just the same if we are comparing %'s instead of apples.

My view here is that people who know math should take some pains to express themselves in ways that are less likely to be misunderstood. I guess the Fed cut the interest rate on short term loans by three-quarters of a percentage point. I believe this is widely reported as cutting it by three-quarters of a percent and this is understood as meaning that the old percentage rate minus the new percentage rate, is three-quarters, not that the new percentage rate is ninety-nine and a quarter percent of the old percentage rate. Given this common usage, describing something as an increase of six per cent is apt to be misunderstood. It's easy enough to say this in a way that causes no confusion.

The media often make a hash of anything involving mathematics, mainly because the people writing the stories have no idea what they are talking about. I recently read, for example, that over 350 million Americans have credit cards. Maybe someone signed up the stem cells. But the reporters can't help it, their minds are totally closed to mathematics, even to simple arithmetic. Folks who understand mathematics should try to speak plainly.

[han]

Get your math straight Grrigg!

[Gerben42]

Anyway I'm waiting for the markets to crumble a bit more before I buy anything. Keep 'em falling!

[Winstonm]

There is a lot of financial ink and pixels being spilled over this rogue French bank trader story.

Does anyone have a take on the plausibility of the account. Could a mid-level trader actually place a bank in this serious of loss position without the knowledge of those above him?

[luke warm]

Winstonm, on Jan 26 2008, 12:41 PM, said:

There is a lot of financial ink and pixels being spilled over this rogue French bank trader story.

Does anyone have a take on the plausibility of the account. Could a mid-level trader actually place a bank in this serious of loss position without the knowledge of those above him?

no, it's a conspiracy... a closer look will probably find that this same trader was in nyc the week before 9/11 and was seen doing "something funny" at wtc 7

[Winstonm]

luke warm, on Jan 26 2008, 02:04 PM, said:

Winstonm, on Jan 26 2008, 12:41 PM, said:

There is a lot of financial ink and pixels being spilled over this rogue French bank trader story.

Does anyone have a take on the plausibility of the account.  Could a mid-level trader actually place a bank in this serious of loss position without the knowledge of those above him?

no, it's a conspiracy... a closer look will probably find that this same trader was in nyc the week before 9/11 and was seen doing "something funny" at wtc 7

Wow, Jimmy, this post is beneath you - suddenly rather viscious and defensive of MSM and status quo - almost a Bill O'Reilly quality to it. What's next, will you be yelling, "Turn off his mike"?

My question was simple: is the story plausible? There was no implication of sinister enter-tangled world events, but there is history of CYA stories from bad judgement.

Did So Gen really get duped by a mid-level trader or did they scapegoat this guy to hide an insolvent derivitive counterpary or an SIV that went under?

I think this is a legitimate question - those who accpet blindly the truthfulness and forthrightness of the words of CEOs are probably now wall-papering their bathrooms with Enron and WorldCom stock. Those who asked questions and didn't like the answers got out in time.

[luke warm]

i apologize, winston... i'm reminded of something c.s. lewis wrote in one of his books that i've struggled with (and usually overcome)... he said, paraphrasing, that one of the dangers an intelligent person faces is that of being flippant

i meant no harm and your question was legitimate

[Winstonm]

luke warm, on Jan 26 2008, 02:55 PM, said:

i apologize, winston... i'm reminded of something c.s. lewis wrote in one of his books that i've struggled with (and usually overcome)... he said, paraphrasing, that one of the dangers an intelligent person faces is that of being flippant

i meant no harm and your question was legitimate

No problem. Just caught me by surprise is all.

[Winstonm]

To show there is a decent amount of scepticism about the story, this little bit from the Hindustan Times.

Quote

Many analysts in France and abroad were sceptical that a single trader, no matter how clever, could have carried out such a complex scheme for such a, long period of time without an accomplice or the tacit agreement of the bank's management.

Some analysts have suggested that the bank gave Kerviel a free hand in the hope he would be able to make up for losses it suffered because of the US subprime crisis.

It would be interesting to me to learn what European BBOers are hearing in their home countries about all this.

[Al_U_Card]

If governments can have false flag operations, why not banks......they are the new countries (based on quarterly numbers....) aren't they?

[pdmunro]

Dollar values below are Australian dollars. AUS$80 billion = about US$70 billion.

Quote

Rogue trader could have cost $80bn
Peter Wilson, Europe correspondent | January 26, 2008

THE SCARIEST thing about Jerome Kerviel is not that he managed to commit the world's biggest solo bank fraud of E4.9billion ($8.2 billion).

The truly frightening thing is that the damage could have been much, much worse because the 31-year-old junior trader at French giant Societe Generale had worked out how to beat the security systems of one of the world's great banks.

If the nondescript young trader had not made one relatively simple error last Friday he could have cost his bank 10 times as much money, wreaking enough damage to threaten banks and economies around the world.

...

SocGen corporate and investment banking chief Jean-Pierre Mustier, was driving home on Friday night when he got a call telling him something was wrong.

When he got back to the bank's glass office tower in La Defense, the business district in the west of Paris, Mustier was told that a compliance officer had detected something fishy about a transaction.

It was the early hours of Saturday before Mustier and his team realised that Kerviel seemed to be behind the problematic trade.

Kerviel had begun his career eight years earlier in the unglamorous middle and back offices that help supervise the traders.

A clean-cut, good-looking man who had graduated from a mid-ranking university in Lyons with a masters degree in finance, he spent five years learning the details of the compliance system.

A judo teacher and excellent English speaker, he was also something of a computer geek and took a close interest in how the various security systems worked to monitor the traders.

Some banks make a point of keeping people with those skills away from the trading floor to stop gamekeepers becoming poachers, but the backroom people often agitate for a chance to move over to where the bigger salaries are.

...

On Saturday afternoon, Kerviel was called in from his $3300-a-month apartment in Neuilly-sur-Seine, a walking distance from the office, and locked in a glass conference room with Mustier and his team for questioning that went all night.

"He said he had come up with a great new trading strategy, and if he was given time it would make a lot of money for the bank," one executive said.

He had made a small profit last year and some losses in the past few weeks but they could be turned around, he insisted.

To their horror, Mustier's team discovered he had placed bets worth more than $80 billion of the bank's money.

"He understood he was taking huge positions but I don't think he understood the impact," Mustier said.

"He kept telling me during the night that he had discovered a new trading technique which was performing very well."

...

Kerviel had gambled on European markets rising, and when he helped Mustier to uncover his punts they showed losses of E1.4billion ($2.34billion).

The bank decided those investments would have to be quickly and quietly sold off when trading resumed on Monday.

"We had no choice," Mustier said. "For the sake of our shareholders we cannot speculate with such a large position."

Bouton said: "If we had announced it on Monday morning, the loss (for the bank) would have been 10 times higher. Its scale would have destabilised the whole market."

[I think the bank released the news on the Wednesday after closing off a number of positions.]
http://www.theaustralian.news.com.au/story...63-2703,00.html

From another article, a couple of quotes that made me smile:

Quote

A senior bank board member told Reuters Mr Kerviel "was not a star", but Bank of France Governor Christian Noyer told reporters the rogue trader was a "genius of fraud".
...
He had an account on the facebook.com social web site. At the start of the afternoon, when his identity was revealed, he had 11 friends listed. That number dropped to four just hours later.

... many bankers were astonished that his bosses failed to detect the fraud earlier.

"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," said the head of derivatives trading at an American bank, who declined to be named.

http://www.theaustralian.news.com.au/story...5-12335,00.html

[ArcLight]

How can one hide 75~ billion USD in trades? Even if you hack the system, you have to pay for the securities, or pay margin. And if its an exchange of securitoes, wouldn't the counter parties say "Where are the 80 billion in securities you owe us"? How could this have bene kept quit for mor than a few weeks.



>no, it's a conspiracy... a closer look will probably find that this same trader was in nyc the week before 9/11 and was seen doing "something funny" at wtc 7

Why do people blame the rating agencies?

The best and smartest people don't work for the rating agencies, they work on Wall Street on in hedge funds. Plenty of them took huge losses, so why expect the rating agencies to have better models? (I'm not saying the rating agencies shouldn't have looked more critically the last year before the meltdown started. )

2. Who are all the investors who bought tens/hundreds of billions of securities without understanding them? Would having more rating agencies (i.e. competition) have helped? They would not have gotten any business early on.
If the buyer pays a fee for a rating, rather than the seller, how will buyers be able to afford the ratings? Its expensive to do the analysis. Would you trust a small independent company? How would anonymous buyers team up to split the costs of paying a fee to a rating agency.

[mike777]

ArcLight, on Jan 27 2008, 06:47 PM, said:

How can one hide 75~ billion USD in trades?  Even if you hack the system, you have to pay for the securities, or pay margin.  And if its an exchange of securitoes, wouldn't the counter parties say "Where are the 80 billion in securities you owe us"?  How could this have bene kept quit for mor than a few weeks.



>no, it's a conspiracy... a closer look will probably find that this same trader was in nyc the week before 9/11 and was seen doing "something funny" at wtc 7

Why do people blame the rating agencies?

The best and smartest people don't work for the rating agencies, they work on Wall Street on in hedge funds.  Plenty of them took huge losses, so why expect the rating agencies to have better models?  (I'm not saying the rating agencies shouldn't have looked more critically the last year before the meltdown started.  )

2. Who are all the investors who bought tens/hundreds of billions of securities without understanding them?  Would having more rating agencies (i.e. competition) have helped?  They  would not have gotten any business early on.
If the buyer pays a fee for a rating, rather than the seller, how will buyers be able to afford the ratings?  Its expensive to do the analysis.  Would you trust a small independent company?  How would anonymous buyers team up to split the costs of paying a fee to a rating agency.

Good questions, and the answer is?

http://www.bankersal...nk/wldrank.aspx

The bank in trouble is rated ninth in the world, let me ask a senior compliance manger from the number tenth bank who is inches away from me.

[ArcLight]

OK, this explains how he hid the trades. No securites were excahnged at the time, just an agreement to do so at a later time (a futures contract)


>>Since those bets greatly exceeded the amount of capital he was allowed to put at risk, Kerviel entered fictitious and offsetting trades in Societe Generale's computer system that appeared to minimize the odds of big losses, the bank said. The trades were purposely chosen to avoid detection because they did not require cash contributions and were not subject to margin calls, which would require putting up more money if the fictitious bet soured, it said.

[mike777]

"The trades were purposely chosen to avoid detection because they did not require cash contributions and were not subject to margin calls, which would require putting up more money if the fictitious bet soured, it said. "


1) What kind of trades are there where you put up zero cash and are not subject to margin calls? Cool, can we play too?

2) What is a fictitous trade that can be be put into a computer and not discovered to be fictitous? IF we can put in fake trades and the computer/compliance manager does not find out..... cool........can anyone provide a computer link so I can play too....

[ArcLight]

>1) What kind of trades are there where you put up zero cash and are not subject to margin calls? Cool, can we play too?

A forward rate agreement where you agree to settle up at some time in the future. Of course you expect the counter party to be AAA and sane.


The point is you aren't buying something that requires you to pay cash on the spot, such as an option. You are entering into an agreement.

Bet the farm!

[pdmunro]

ArcLight, on Jan 27 2008, 06:47 PM, said:

How can one hide 75~ billion USD in trades?  Even if you hack the system, you have to pay for the securities, or pay margin. 

Quote from Reuters:

"FACTBOX: Rise and fall of the SocGen rogue trader
Sun Jan 27, 2008 3:35pm EST

* His job was to buy and sell similar financial instruments simultaneously, making money only on the tiny and momentary spread in prices between them -- classic arbitrage trading.

* He was not allowed to leave the bank with a net exposure.

* The alleged fraud, as outlined by the bank, included a genuine long position in regulated stock market index futures, contracts bought in the hope that prices would rise.

* Usually an arbitrageur hedges such a long position with an equal and opposite sale, or short position, reaping a profit from any gaps between the values of the two transactions.

* The SocGen trader did hedge the first position with a second, but the trades in that portfolio were fake. So the bank was unwittingly holding long futures positions without cover, leaving it exposed to the risk that prices would fall.

* To evade controls, for the second portfolio he chose unregulated over-the-counter derivatives which do not need a downpayment, including forward contracts.

* Because there was no downpayment, or margin, these trades were not subject to the same immediate checks as the real futures positions held in the first portfolio.

* Since the real and fake trades balanced each other out, SocGen says its computers perceived "low residual risk" overall.

* As the market turned against him, he sought to cover up mounting losses to avoid further tiers of compliance checks.

* The bank alleges that he misappropriated computer passwords and faked documents. To prevent supervisors from uncovering the fictitious positions, he would erase them before the checks and rebuild new ones immediately afterwards.

* He ended up with a 50 billion euro portfolio, worth more than the bank itself.

http://www.reuters.com/article/ousivMolt/i...0080127?sp=true

****************************************************************

Wall Street Journal

"Rocked by Rogue Trader Société Générale Blames $7.2 Billion in Losses On a Quiet 31-Year-Old
By DAVID GAUTHIER-VILLARS, CARRICK MOLLENKAMP and ALISTAIR MACDONALD
January 25, 2008; Page A1

Mr. Kerviel essentially made bets on which way large European stocks would move, in one of the most liquid markets linked to equities globally. His expertise was trading futures tied to baskets of stocks such as the Euro Stoxx 50. In normal markets, some $40 billion to $50 billion of the futures of that index trade daily. The index gives traders such as pension and hedge funds quick access to a large swath of the European economy, by investing on the belief the index will rise or fall to a certain point in the future. Mr. Kerviel also made trades in Germany's DAX Index and France's CAC-40.

According to Mr. Bouton, the Société Générale chairman, Mr. Kerviel began conducting fraudulent trades sometime in 2007. People familiar with Mr. Kerviel's behavior believe he worked late into the night, essentially burrowing into Société Générale's computers, as he allegedly built a multilayered way to hide his trades by hacking into the computer systems.

Société Générale's computer systems are considered some of the most complex in banking for handling equity derivatives, that is, investment contracts whose value moves with the value of other assets. Officials of the bank believe Mr. Kerviel spent many hours of hacking to eliminate controls that would have blocked his super-sized bets. Changes he is said to have made enabled him to eliminate credit and trade-size controls, so the bank's risk managers couldn't see his giant trades on the direction of indexes.

Mr. Citerne said the bank didn't notice the unauthorized trading until last week because the trader had "intimate and malicious" knowledge of its procedures and knew at what dates checks were conducted. "Each time he took a position one way, he would enter a fictitious trade in the opposite direction to mask the real one," Mr. Citerne said. According to one person familiar with the situation, Mr. Kerviel used the computer log-in and passwords of colleagues both in the trading unit and the technology section.

According to one person familiar with events, the bank's controls did red-flag an outside trading partner of the bank, whose account showed unusually high finance levels. The client, when asked by the bank about the account's finances, denied knowing of it. Pursuing this matter ultimately led to Mr. Kerviel."

http://online.wsj.com/article/SB1201158146...=hpp_us_pageone (temporary link)
***************************************************
Patrick Hosking: Commentary "The Times" January 25, 2008

To a lot of people Jérôme Kerviel is a hero. Sure, he lost his employer £3.7 billion, but by definition the people he traded with therefore made £3.7 billion. With a few reckless bets, the junior banker has created the equivalent of 3,700 millionaires among the hedge fund managers and traders of the City and other financial centres.

In derivatives trading winners exactly match the losers. Mr Kerviel has merely redistributed wealth from Société Générale shareholders and his former colleagues, whose bonuses will shrink this year, to the happy counter-parties he traded with. To that extent, ordinary bank customers may shrug and say: “So what?” But the fraud has much bigger implications, partly because of the impact that it had on financial markets and policymakers, but mainly because of the stark warning it gives of a much bigger calamity narrowly averted — one capable of hurting every worker, saver and taxpayer in the West.

SocGen’s secret unwinding of the rogue bets almost certainly exacerbated the extraordinary turbulence suffered in European equity markets on Monday and Tuesday. The closing-out of such vast positions pushed share prices lower. Just as a punter will move the odds by placing a sackful of cash on a rank outsider on a quiet afternoon at Uttoxeter, so SocGen’s rushed attempts to extricate itself worsened an already nauseous day for shares.
...
SocGen ... has trades outstanding with other global banks with a face value of trillions of dollars. It claims to be the biggest equity derivatives house in the world. The failure of such an institution would lead to paralysis in markets, with everyone terrified of doing business with everyone else for fear that they too had been contaminated. That would without doubt lead to a world recession, a world depression probably."
http://business.timesonline.co.uk/tol/busi...icle3248283.ece

****************************************************************
From "The Times" January 26, 2008

"Dark ideas on SocGen affair" Martin Waller: City diary

"Meanwhile, an entirely convincing conspiracy theory suggests Jérôme Kerviel phoned a friend at A Well-Known US Investment Bank on Sunday for advice, and that the said bank positioned itself rather conveniently in the falling market on Monday morning as a consequence. I think I'd better not name the bank."

http://business.timesonline.co.uk/tol/busi...icle3254292.ece

*****************************************************************************************

[Winstonm]

I have to profess ignorance, here, as I thought these OTC derivitive products had no organized market and were essentially hammered out one-to-one, such as credit default swaps.

Quote

The alleged fraud, as outlined by the bank, included a genuine long position in regulated stock market index futures, contracts bought in the hope that prices would rise.

O.K., this doesn't make sense, either. If he bought futures contracts in a regulated market he was subject to margin requirements.

So, tossing this out as a speculative theory only, So Gen did not cause the market turmoil but instead was caught up in it and exacerbated the declines.

Thinking is thus: rogue trader has real long futures and false hedges; monoliner's downgrades shakes up Asian markets which open gap down; So Gen gets margin call on long positions - the first time the bank knew about this; panicked by the size of the losses and unwilling to meet the margin demand, So Gen sold into an already weakened and frightened market, pushing the panic higher still.

Speculative, but in my mind it makes more sense.