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
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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)
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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
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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
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