Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

How to lose $7.1 billion

The announcement by Societe Generale that a rogue trader had caused
losses of $7.1 billion was cryptic and baffling. The press
release
says that the bank:

has uncovered a fraud, exceptional in its size and nature: one
trader, responsible for plain vanilla futures hedging on European
equity market indices, had taken massive fraudulent directional
positions in 2007 and 2008 beyond his limited authority. Aided by his
in-depth knowledge of the control procedures resulting from his former
employment in the middle-office, he managed to conceal these positions
through a scheme of elaborate fictitious transactions.

Assuming that the indices in question have fallen by about 20% in
line with the broad European equity index, the notional value of the
plain vanilla futures position must have been over $35 billion. That a
trade of this size could be concealed by an isolated individual
appears difficult to believe since most large banks have internalized
the lessons from Leeson’s fraudulent trades at Barings more than
a decade ago. I have a sense that there is more to this than meets the
eye.

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