Société Générale this morning alerted the market that it had lost a significant amount from the actions of a Jérôme Kerviel, rogue trader....the words that send a frisson down the spine of any Hollywood producer, good ones. Less good frissons may be felt of those who worked around and above the as yet unnamed trader; people responsible for his oversight have also been relieved of duty. The trader has, according to a letter from the President of the SG group, been "mis à pied" (stood down).
Before we analyse this latest, let's take a walk down Rogue memory lane, and count the cost of each:
- Brian Hunter; Amaranth Advisors LLC: After studying weather patterns and other data Hunter, Head Energy Trader, made an enormous wrong-way bet that a Katrina-like hurricane would cause the difference between summer and winter natural gas prices to widen dramatically.Instead, a mild hurricane season caused that spread to collapse, wiping out about US$5 billion in value.
Speculation is that Amaranth may have conducted most of its trading away from the Nymex in a bid to "corner" the long contract on natural gas futures. Regulators don't have the same amount of reach in Over the Counter markets as exchanges. - Nick Leeson; Barings plc: Probably the most world famous case, inspiring a novel and movie. Leeson placed a short straddle (essentially betting that the Japanese stock market would not move significantly overnight) on Singapore and Nikkei exchanges. However, the Kobe earthquake hit early in the morning on January 17 1995, sending Asian markets, and Leeson's investments, into a tailspin.
Leeson attempted to recoup his losses by making a series of increasingly risky new investments, betting the Nikkei Stock Average would make a rapid recovery. But the recovery failed to materialize, and he succeeded only in digging a deeper hole. Losses eventually reached US$1.4 billion, twice the bank's available trading capital. Barings declared insolvent, and sold to ING for the princely sum of £1.
Sentenced to six and a half years in a Singapore prison, he was released in 1999. In 2005, soccer team Galway United FC named Leeson its General Manager. That same year, Virgin Books published his personal story/self-help book, titled "Back From The Brink, Coping With Stress." - Yasuo Hamanaka, Sumitomo: Hamanaka was also known as "Mr. Five Percent," according to the New York Times, because he once bought as much as 5% of all the copper traded in the world each year. He pleaded guilty in 1997 to hiding more than US$2.6 billion in trading losses and served seven years in prison. Copper futures plunged in 1996 after it was discovered that Hamanaka had artificially propped up prices.
- John Rusnak, Allied Irish Bank: Rusnak lost millions for Allfirst Financial, an Allied subsidiary, by incorrectly gauging the movement of the Japanese yen against the dollar. He forged paperwork to cover further trades and losses he says he incurred in a failed attempt to win the money back for Allfirst, based in Baltimore. He lost US$691 million over five years before his activities were discovered in 2002.
- Unknown “fat-fingered” trader, Mizuho Securities: Trader sold 610,000 shares in job recruiting company J-Com Co. for 1 yen apiece, instead of an intended sale of 1 share at 610,000 yen. Mizuho said it was unable to cancel the order, causing it to lose about US$340 million. The mistake was attributed to the “fat-finger” syndrome, shorthand for gaffes made when traders hit the wrong button on a keyboard and lose a bundle.
The Tokyo stock exchange later acknowledged that a glitch in its system made it impossible to cancel the trade. Mizuho and the exchange have discussed sharing some of the losses, but have so far failed to reach an agreement. - Nelson Bunker Hunt and William Herbert Hunt bought more than 100 million ounces of silver bullion in 1979 and 1980, causing silver prices to soar to a record of more than $50 an ounce before a sharp plunge. After the crash, the brothers were left with silver obligations of $1.75 billion and a silver hoard of 59 million ounces valued then at $1.2 billion, indicating a loss of US$550 million, according to the Journal. The Hunts, whose fortune was once estimated at $6 billion, filed for bankruptcy protection in 1988.
So if that's a hall of fame of the worst of financial trading losses, then this is a pretty bad one. I would suspect that he had a good working knowledge of the back room operations of the bank, and the exact limits on trading so that he could really make the most of his position. Although the bank has been batted around by the credit crunch, it has plenty of assets against which to increase its working capital, borrowing to "more than cover" its recent losses due to the activities.
Fitch has dropped its long term issuer rating from "AA" à "AA-" estimating that if the the fraud has happened in specific circumstances, it "raises questions on the effectiveness of (risk management) systems and creates a reputations risk for the company. S&P has will be reviewing its rating with a view to downgrade.
Update: His name is Jérôme Kerviel. More from the Wall Street Journal:
The bank identified the trader as Jerome Kerviel. Mr. Kerviel, 31, joined Societe Generale in August 2000 and was working as a trader on the futures desk at the bank's headquarter near Paris. He was in charge of futures hedging on European equity market indices, known as "plain vanilla" futures.
The bank said he was able to dupe the bank's own security system because he had inside knowledge of the control procedures gained from previous jobs with the bank. (Backroom knowledge pays in this case)
Though Societe Generale says it first learned of what it termed "massive fraudulent directional positions" on Jan. 19, it waited until it could close out those trades before going public with the problem. Winding down the trades, the bank said, resulted in a €4.9 billion write-down, making it potentially the largest loss ever from an alleged rogue trader. (Those recent equity market falls would not made the positions any smaller).
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