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Replying to Topic: Societe Generale shocker
Created On Thu Jan 24, 08 12:06 PM by lrt1980

lrt1980
Member

Posts: 46
Joined: Feb 2007

Thu Jan 24, 08 12:06 PM

Wow, now I'm only young to the scene, but have there been any losses due to fraud as big as this??

http://news.bbc.co.uk/2/hi/business/7206270.stm

I've seen plenty of jobs from these guys on efin careers, wonder if they will still be offered for much longer. The drop in profit for the year would make you cry if you were in charge.

Posts: 59
Joined: Feb 2007

Thu Jan 24, 08 12:44 PM

This would be the largest to be reported:

http://en.wikipedia.org/wiki/List_of_trading_losses

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SAS
Junior Member

Posts: 5
Joined: Dec 2002

Thu Jan 24, 08 01:37 PM

Jan. 24 (Bloomberg) -- Societe Generale SA, France's second-
biggest bank by market value, disclosed one of the biggest
trading losses after discovering an alleged fraud in its Paris
office.
Societe Generale said today in a statement that a trader
secretly set up positions that will cost the company 4.9 billion
euros ($7.2 billion) before taxes. The trader, who wasn't
identified, went beyond permitted limits on futures linked to
European stock indexes, the company said without being more
specific.
Following is a timeline of previous scandals.

Company Date Detail

Societe Generale 2008 Lost 4.9 billion euros ($7.2
billion) before taxes after
trader went beyond permitted
limits on European stock
index futures

Bank of Montreal 2007 Wrong-way bets on natural gas
led to a pretax loss of about
C$680 million ($663 million)

Amaranth Advisors LLC 2006 Trader Brian Hunter's bad bets
on natural gas triggered
$6.6 billion of losses

Refco Inc. 2005 Declared bankruptcy after
hiding $430 million of debt

China Aviation Oil 2004 Lost $550 million on
(Singapore) Corp. speculative oil-futures
trades, forcing debt
restructuring

Allied Irish Banks Plc 2002 Trader hid $691 million in
currency market losses

Plains All American 1999 Lost $160 million because of
Pipeline LP unauthorized crude-oil
trading by an employee

Long-Term Capital 1998 Lost $4 billion after a debt
Management default by Russia

Peregrine Investments 1998 Collapsed from at least
Holdings Ltd. $300 million of debt bought
from insolvent companies

National Westminster 1997 Disclosed $125 million charge
Bank Plc to cover options-trading loss

Deutsche Morgan Grenfell 1996 Fired fund manager Peter Young
for unauthorized trading and
paid $279 million to bail out
investors

Sumitomo Corp. 1996 Disclosed a $2.6 billion loss
on unauthorized copper trades
by Yasuo Hamanaka

Daiwa Bank 1995 Disclosed a $1.1 billion loss
from unauthorized trades

Barings Plc 1995 Collapsed after trader Nick
Leeson racked up $1.4 billion
in losses

Orange County, 1994 Lost $1.7 billion from debt
California and derivatives used to expand
its investment fund

Kidder Peabody & Co. 1994 Took a $210 million charge
to reflect what it said were
false bond trading profits by
trader Joseph Jett

Codelco 1994 Trader Juan Pablo Davila lost
more than $200 million
speculating on copper

Metallgesellschaft AG 1993 Lost more than $1.5 billion
trading oil futures contracts

Drexel Burnham 1990 Filed for bankruptcy after
Lambert Inc. pleading guilty to charges of
insider trading and stock
manipulation

Merrill Lynch & Co. 1987 Mortgage trader accused of
racking up $377 million loss
in unauthorized trades

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Aaron
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Posts: 6371
Joined: Jul 2001

Thu Jan 24, 08 02:19 PM

This is mixing market losses with frauds and intermediate types of miscalculations.

So far, this appears to be an intermediate case, although SocGen is presenting it as a fraud. An authorized trader exceeded limits and lost more than he was supposed to be able to lose. SocGen claims the trader fraudulently concealed the losses, but this is a common claim after large losses, and one that is rarely substantiated later. Even in the relatively clear-cut case of Nick Leeson, some people believe that knowledge of the trades went beyond Nick himself.

BCCI was a clear fraud, about 50% bigger than this one (and that was in 1990 money). If you aggregate all the fraud in the US Savings and Loan industry in the mid-80's, you get something two orders of magnitude larger. But there has never been a concealed trading problem this big, or at least, there has never been one that became unconcealed. It's wise to remember that we have never seen a story of outsized concealed trading gains. Since you figure half the rogue traders guess right about the market, and far more than half should make money given that they can costlessly double-up after losses, you should remember that you are looking at censored data.

-------------------------
Aaron Brown

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ppauper
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Posts: 27353
Joined: Nov 2001

Thu Jan 24, 08 02:31 PM

Quote
Originally posted by: Aaron
If you aggregate all the fraud in the US Savings and Loan industry in the mid-80's, you get something two orders of magnitude larger

I'm glad someone else remembers this......google "keating five" and you might rething that vote for john mccain

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friesenjung
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Posts: 183
Joined: Mar 2005

Thu Jan 24, 08 02:38 PM

Quote

Since you figure half the rogue traders guess right about the market, and far more than half should make money given that they can costlessly double-up after losses, you should remember that you are looking at censored data.

although I'm with Aaron on the issue that "there have never been reports about concealed trading gains" I am not in line with this one. The problem is that markets ARE NOT atomistic when you reach a certain size of your books. And exactly BECAUSE concealed trading positions can be doubled up easily there should be less people having concealed gains then losses.

Let me explain.
First, why do you conceal trading positions? Maybe because you want to make bigger bets than you are supposed to, but I do believe that most of those positions are concealed because they are under water, the trader thinks he's right and the other ones stupid, the market will come back and nobody will discover his initial losses (Leeson Scenario). This strategy, though it might be right sometimes, most likely will go bust at some point. Why? Because if you have this kind of egomania and trade against the market you will inevitably loose money. period.
Second, if the trader is able to double up easily and is able to circumvent limits (which usually should be the reason for concealing except in the Leeson Scenario) he probably is some kind of a gambling type. This means, if he's loosing, he'll try to make it back, if he's winning, he'll feel supported and wants to make more. This ends not with gains. It ends if somebody discovers the concealment (which might be while the trader is in front) or if the position is becoming so big that it cannot be unwound without effecting the market which ends in losses.
[edit]
The second point would compare to a casino business case. if you go with statistics you should be loosing x on any given casino game. since, at some point, you'll be broke and can't come back out of an under water position, you'll very probably loos more than X. [/edit]
Am I wrong?

Edited: Thu Jan 24, 08 at 02:44 PM by friesenjung

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farmer
Senior Member

Posts: 7258
Joined: Dec 2002

Thu Jan 24, 08 03:25 PM

I also disagree with Aaron's theory that rogue-position payouts follow a symmetric distribution. If I were to walk up to a futures market, flip a coin, bet $35 billion in that direction, and unwind the bet exactly 24 hours later in secret, I would almost certainly sell lower than I bought.

If you walk up to a market, buy one future, and immediately sell it, your expectation is negative. The longer you hold it, the larger the random effect relative to the negative effect. But the larger the position, the larger the negative effect relative to the random effect. For the random effect to outweigh the negative effect on a $35 billion position so that it is basically symettric - let's say 45% winners - I think you would need a holding period of at least a year.

Anyway, if they had just gone to one of Taleb's lectures and been enlightened as to the flaws of VAR, this could all have been averted.

-------------------------
Unemployment peaked at 9% two months after the October 1929 crash and then began drifting down over the next six months, falling to 6.3% by June 1930. In June 1930, against the advice of 1000 economists who took out newspaper ads warning against it, the US raised tariffs in order to save jobs by reducing imported goods.

profile pic background music

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TraderJoe
Senior Member

Posts: 11057
Joined: Feb 2005

Thu Jan 24, 08 04:24 PM

From Bloomberg...

-------------------------
That the ultimate felicity of man consists in the contemplation of God � St. Thomas Aquinas.

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TraderJoe
Senior Member

Posts: 11057
Joined: Feb 2005

Thu Jan 24, 08 04:31 PM

Quote
Originally posted by: Aaron
This is mixing market losses with frauds and intermediate types of miscalculations.

So far, this appears to be an intermediate case, although SocGen is presenting it as a fraud. An authorized trader exceeded limits and lost more than he was supposed to be able to lose. SocGen claims the trader fraudulently concealed the losses, but this is a common claim after large losses, and one that is rarely substantiated later. Even in the relatively clear-cut case of Nick Leeson, some people believe that knowledge of the trades went beyond Nick himself.

BCCI was a clear fraud, about 50% bigger than this one (and that was in 1990 money). If you aggregate all the fraud in the US Savings and Loan industry in the mid-80's, you get something two orders of magnitude larger. But there has never been a concealed trading problem this big, or at least, there has never been one that became unconcealed. It's wise to remember that we have never seen a story of outsized concealed trading gains. Since you figure half the rogue traders guess right about the market, and far more than half should make money given that they can costlessly double-up after losses, you should remember that you are looking at censored data.

Forget S&L. What about subprime? $500billion and counting. Fraud of the millenium!!!

-------------------------
That the ultimate felicity of man consists in the contemplation of God � St. Thomas Aquinas.

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friesenjung
Member

Posts: 183
Joined: Mar 2005

Fri Jan 25, 08 08:28 AM

Quote
Originally posted by: TraderJoe

Forget S&L. What about subprime? $500billion and counting. Fraud of the millenium!!!

And the funny thing? The fraudsters in this case are managing to be seen as the victims with the support of leftist politicians and media

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ppauper
Senior Member

Posts: 27353
Joined: Nov 2001

Fri Jan 25, 08 02:34 PM

Quote
Originally posted by: friesenjung
Quote
Originally posted by: TraderJoe

Forget S&L. What about subprime? $500billion and counting. Fraud of the millenium!!!

And the funny thing? The fraudsters in this case are managing to be seen as the victims with the support of leftist politicians and media

indeed, this very morning I read that Fannie and Freddie are to guarantee larger mortgages:
>>Currently, that means the largest mortgage they will buy on single-family homes in the continental U.S. is $417,000.
>>The package agreed upon by Congress would temporarily allow Fannie and Freddie to buy or guarantee mortgages as high as $729,750 in cities with high housing prices, according to House Speaker Nancy Pelosi.
>>House Republican Leader John Boehner put the ceiling at $625,000.

Let the bubble continue

Investors "assume that the two companies, which are private but were created by Congress, would get a bailout in a crisis"

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Aaron
Senior Member

Posts: 6371
Joined: Jul 2001

Fri Jan 25, 08 04:30 PM

I stand corrected on the symmetry of hidden losses and gains. But I still think there are cases of hidden trades leading to gains. The big cases are the gamblers, and these do lead to losses for the reasons cited. But there are littler cases of traders hiding things, making money, and never doing it again.

-------------------------
Aaron Brown

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TheVulture
Junior Member

Posts: 2
Joined: Jan 2008

Fri Jan 25, 08 05:22 PM

Quote
Originally posted by: Aaron
I stand corrected on the symmetry of hidden losses and gains. But I still think there are cases of hidden trades leading to gains. The big cases are the gamblers, and these do lead to losses for the reasons cited. But there are littler cases of traders hiding things, making money, and never doing it again.

Which prompts the question (in my mind at least): what if the people at Goldman Sachs who made their $3.9 billion profit (or whatever it was) last year on the sub-prime situation had instead made a huge loss? We see stories now of how the directors there nervously allowed them to continue... if they had made a $2 billion loss (say), do you think the knowledge of the bosses would be being reported, or would it be another 'rogue trader' story?

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jfuqua
Senior Member

Posts: 1151
Joined: Jul 2002

Fri Jan 25, 08 08:21 PM

Big come-down after having been RISK publications "Equity Derivatives House of the Year" 2008 !

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