Societe Generale Explains Today

Click on the Link above and then go to the actual report of Societe Generale.

Only a huge bank can play this game. There should have been margin calls daily on the bank, showing the true situation.

So the explanation doesn't wash.

http://www.nytimes.com/2008/01/27/business/worldbusiness/27cnd-bank.html?hp






--------------------------------------------------------------------------------

January 27, 2008
French Bank Offers Details of Big Loss
By DAVID JOLLY and NICOLA CLARK
PARIS — The French bank Société Générale offered greater detail on Sunday about how it said a low-level former trader carried out fraudulent trades that led to more than $7 billion in losses.

The release of the five-page document came as the accused trader, Jérôme Kerviel, 31, spent a second day in police custody. (Text of the Report, pdf)

Société Générale said Sunday that Mr. Kerviel had misappropriated other people’s computer access codes, falsified documents to enter fictitious trades and employed other methods to cover his tracks helped by his years of experience working in offices that monitor traders.

Until now, the bank, one of Europe’s largest, has insisted that Mr. Kerviel was the lone architect of elaborate trades that involved betting tens of billions of dollars of the bank’s money on European stock index futures. But during a conference call with reporters on Sunday, Jean-Pierre Mustier, chief executive of the bank’s corporate and investment banking arm, said: “I cannot guarantee to you 100 percent that there was no complicity,” The Associated Press reported.

So far, there has been no suggestion that Mr. Kerviel personally profited from the trades.

Talking to reporters Sunday in Paris outside the headquarters of the French financial police, Jean-Michel Aldebert, head of the financial section of the Paris court, said the questioning of Mr. Kerviel had so far been “extremely fruitful.”

He declined to give details of the interrogation, other than to say the trader addressed “the operations that Société Générale described as fictitious.” Mr. Kerviel, he said, had been explaining “what had happened in very interesting ways.”

Mr. Aldebert added that Mr. Kerviel’s state of mind seemed stable. “According to what he told me, he’s doing fine.”

Mr. Aldebert said the court had decided a decision to continue to hold Mr. Kerviel. On Monday, the trader is to be transferred to the main financial judiciary office in Paris, where he will see a judge. Under French law, Kerviel must either be released or face preliminary charges by Monday afternoon.

The Paris prosecutor’s office formally opened an investigation of Mr. Kerviel on Friday after Société Générale filed a complaint accusing him of falsifying bank records and computer fraud. The bank, which says it first uncovered the deals on Jan. 18, was ultimately forced to undo Mr. Kerviel’s trades early last week, leading to losses of 4.9 billion euros, or $7.2 billion, and requiring Société Générale to seek 5.5 billion euros in fresh capital.

The bank’s efforts to release new information appeared to be an attempt to quash widespread speculation that Mr. Kerviel had either exploited weaknesses in the bank’s internal controls or had had an accomplice.

French investigators on Saturday began examining documents and computer files obtained during two raids late on Friday, at Mr. Kerviel’s residence and at the bank offices where he had worked.

A lawyer for Mr. Kerviel, Elisabeth Meyer, could not be reached Sunday for comment. She did not return e-mail messages or answer her phone.

Laura Schalk, a Société Générale spokeswoman, said officers of the financial police had searched the bank’s offices in La Défense, a business district west of Paris, on Friday night. “They were there mostly to collect data from the trader’s electronic files,” she said.

The bank’s management has come under increasing pressure from French officials to come forward with a more detailed accounting of how Mr. Kerviel could have amassed such enormous losses by himself, over the course of a year, without raising any red flags among supervisors or internal auditors.

Daniel Bouton, Société Générale’s chief executive, has said Mr. Kerviel used in-depth knowledge of the bank’s risk-control software systems that he had gained from a previous back-office position. In an interview published Saturday in the French newspaper Le Figaro, Mr. Bouton described Mr. Kerviel’s efforts to hide his activities as being like a “mutating virus.” Mr. Bouton said, “The nature of his fictitious and fraudulent operations were constantly evolving.” He added, “And when the control systems detected an anomaly, he managed to convince control officers that it was nothing more than a minor error.”

At the financial police headquarters in Paris, there was an unusual amount of activity for a Sunday, with police cars coming and going, some with sirens blaring. There are bars on the fourth floor, on the left hand side, on windows of the 10-story building where Mr. Kerviel was being interrogated.

Michel Histel, 62, a retiree who lives nearby and who, like many French people has been avidly following the story, described the scene as “very exceptional.”

“What’s so surprising about this to me is that they brought this young man so quickly to the financial police headquarters,” Mr. Histel said. “What is a little bit revolting to me is that people are attacking this young man.”

“But this bank has been playing with fire for a long time,” he said, referring to Société Générale’s leadership in financial derivatives products.

James Kanter contributed reporting.

Kerviel Today

The implication of all stories is that a BANK can take an unlimited position in billions of euros worth of derivatives. Doesn't that mean any trader can risk the bank's whole existence with a few keystrokes? How many other situations around the world exist like this?



http://www.bloomberg.com/apps/news?pid=20601087&sid=awKvzvsr.GmQ&refer=home

Jan. 30 (Bloomberg) -- Jerome Kerviel, the Societe Generale SA trader whose unauthorized bets led to the biggest trading loss in history, told prosecutors the bank cast a ``complacent look'' on his practices.

``As long as we were winning and it wasn't too visible, things worked out, no one said anything,'' Kerviel told police in a transcript cited by Le Monde, which was confirmed by the prosecutors' office. ``I am convinced my managers turned a blind eye to the means and amounts in question.''

Kerviel amassed 50 billion euros ($74 billion) in positions in European stock index futures, whose unwinding resulted in a 4.9 billion-euro loss at France's second-largest bank. Kerviel was charged on Jan. 28 with breach of trust, falsifying documents and hacking into computer systems. He was released from custody after turning in his passport, and was ordered not to leave France, associate with the bank or engage in trading.

In a transcript that draws from 48 hours of interrogation by the financial police, Kerviel provided details of his trades and the subterfuge he used to conceal his deals.

Societe Generale said a routine check exposed one of these bets on Jan. 18. That set in motion a three-day sell-off of his stakes and the bank's Jan. 24 announcement of the losses as a result of the actions of the ``rogue trader.''

Kerviel, 31, cooperated with the bank in explaining his trades, Chief Executive Officer Daniel Bouton said on Jan. 24. Kerviel handed himself over to police on Jan. 26.

`Not a Casino'

Kerviel ``did not have the right to gamble 50 billion euros,'' Societe Generale lawyer Jean Veil said yesterday in an interview on BFM television. ``A bank is not a casino.''

Kerviel joined Societe Generale in 2000, rising to ``trader'' status in 2005. He told investigators that he took his first bet that year, on Allianz SE, calling his 500,000-euro gain a ``jackpot.''

The initial Allianz success created ``a snowball effect,'' said Kerviel, who began creating phoney hedges for his positions. That wasn't hard to do, Kerviel told investigators.

In January 2007, Kerviel said he lost on a position on Germany's DAX Index when the market rose.

``The fake deal went unnoticed because there was no coherent control in January at Societe Generale,'' he said to prosecutors.

`Not Sophisticated'

His job was to arbitrage small price differences between contracts, not to take bets on market directions, Jean-Pierre Mustier, the head of investment banking at Societe Generale, said on a conference call on Jan. 27.

``By Dec. 31, 2007, my cushion was up to 1.4 billion euros, still unreported to the bank,'' Kerviel said.

Convinced the bank would start asking for proof of the fictitious accounts Kerviel said he began faking e-mails. Using skills he gained during his entry-level days at the bank's back office, Kerviel cut and pasted made-up client information into official-looking documents.

``The techniques I used were not at all sophisticated,'' he said during the interrogation.

There were other signs that should have tipped off the bank, he told investigators. On one day in November 2007, he had a gain of 600,000 euros that he refused to explain to his manager. ``Under normal activity-levels, a trader couldn't generate that much cash,'' Kerviel said.

``The simple fact that I didn't take vacation days in 2007 should have alerted my managers,'' he told prosecutors. ``That's one of the first rules of internal controls. A trader who doesn't take vacation is a trader who doesn't want to leave his book to someone else.''

To contact the reporter on this story: Heather Smith in Paris at hsmith26@bloomberg.net

Last Updated: January 30, 2008 00:53 EST

Kerviel Was Winning

Read the following closely. Kerviel was winning but was betting more than authorized. So at the beginning of the year he set up, intentionally, losing positions, to cover his huge positions.





--------------------------------------------------------------------------------

January 26, 2008
French Police Search Societe Generale
By THE ASSOCIATED PRESS
Filed at 5:55 a.m. ET

PARIS (AP) -- The chief executive of France's second-largest bank insisted in an interview published Saturday that its actions after discovering a trader had cost it billions in a massive fraud scandal did not fuel turmoil on world markets.

Societe Generale was the target of a police search as investigators moved swiftly to sort out what happened.

The bank unsettled the already shaky banking sector when it said that 31-year-old Jerome Kerviel had put tens of billions of dollars at risk in one of history's biggest frauds. The trader also cost the bank more than $7 billion by making bad stock market bets, Societe Generale said.

Skeptics from Kerviel's neighbors to France's prime minister have questioned whether a single futures trader could have managed such large sums. Adding to the mystery, the bank said Kerviel may not have made any personal gain from his unauthorized trades.

The bank said it discovered the fraud last weekend and unwound the trader's losing bets starting Monday, when world markets tumbled. Some analysts have questioned whether Societe Generale exacerbated the fall and indirectly led to the U.S. Federal Reserve's subsequent decision to cut rates.

''It's absurd!'' CEO Daniel Bouton said of the suggestion, in an interview with Le Figaro daily. ''Anyone could calculate our contribution to the market in recent days.''

Bouton was quoted as saying the bank, in closing the trader's unauthorized positions, respected market rules that forbid any player from intervening with sums worth more than 10 percent of a given market. The bank says that is why it took three days to close the positions.

The bank maintains it was the biggest loser in the case, because of the timing of the discovery.

Kerviel had been investing the bank's money by hedging on European equity market indices. That means he made bets on how the markets would perform at a future date.

Bouton said the trader had been betting throughout 2007 that markets would fall. ''He was therefore winning, virtually,'' he said.

But the bank says he had overstepped his authority and was wagering more money than he should have.

So at the beginning of January, Bouton said, the trader voluntarily created losing positions, to neutralize his earlier gains and cover his tracks.

But markets dropped this month, and fast. ''This sad affair veered into a Greek tragedy: His virtual losing position became huge,'' Bouton was quoted as saying.

The bank's systems discovered an anomaly on Jan. 18, he said. At midday that day, a Friday, the trader's positions were neutral, but by the end of trading that day the positions were losing $2.6 billion, Bouton said.

On Sunday, the full scale of the problem was revealed to the bank's management -- ''enormous and totally abnormal,'' Bouton said. ''I decided ... to close the positions and alert the supervisory authorities.''

When Asian and European markets collapsed Monday, ''that had a catastrophic effect. The losses of Societe Generale became even more enormous,'' he was quoted as saying.

Ultimately it took three days to close the positions, and the bank lost $7.2 billion.

Bouton said the overall health of the bank was not at risk, comparing the situation to arson at a factory of a big manufacturer -- a devastating, but one-time, loss.

Asked if the bank could once again be the target of takeover speculation, he said, ''It wouldn't be the first time.''

Financial police searched the bank's headquarters Friday night, said spokeswoman Stephanie Carson-Parker. She gave no other details. Police also searched Kerviel's apartment.

Paris prosecutors are conducting a preliminary investigation based on three complaints: one by the bank accusing 31-year-old Kerviel of fraud, and two by small shareholders. Kerviel's whereabouts are unknown, though his lawyer says he is not fleeing.

French presidential aide Raymond Soubie said the trader had been dealing with more than $73.3 billion. That figure outstrips the bank's market capitalization of $52.6 billion, and is close to the annual GDP of entire nations such Slovakia, Qatar or Libya.

It remains unclear whether Kerviel's actions, if proved, were out of malevolence, ambition or some other reason. Three union officials representing Societe Generale employees said managers at the bank who briefed them about the fraud told them Kerviel was having family problems.

The debacle generated buzz at the World Economic Forum in Davos, Switzerland, and raised questions sector-wide about risk management.

The bank's shares have lost nearly half their value over the past six months. After an up-and-down day Friday, the shares closed down 2.5 percent at $108.62.

The company, which also posted another $2.99 billion subprime-related loss, planned to raise $8.02 billion in new capital.

------

Associated Press writer Cecile Roux in Paris contributed to this report.

Kerviel and the Addiction of Trading

From the New York Times this morning. You must read.



--------------------------------------------------------------------------------

February 7, 2008
Craving the High That Risky Trading Can Bring
By JENNY ANDERSON
It is easy to dismiss Jérôme Kerviel, the rogue trader at Société Générale, as a fluke.

So here is a sobering thought for Wall Street: There may be a bit of Mr. Kerviel in all of us.

A small group of scientists, including some psychologists, say they are starting to discover what many Wall Street professionals have long suspected — that people are hard-wired for money. The human brain, these researchers say, responds to high-stakes trading just as it does to the lure of sex. And the riskier the trades get, the more the brain craves them.

French prosecutors have likened Mr. Kerviel’s trades to a drug habit. That is no surprise to Brian Knutson, a professor of psychology and neuroscience at Stanford University and a pioneer in neurofinance, an emerging field that combines psychology, neuroscience and economics, to examine how the brain makes decisions.

Mr. Knutson has sent volunteers through high-power imaging machines to map their brains as they trade. He concludes that sometimes, people get high on making money.

“The more you think you can gain from the risk, the more you take the risk and the more activation in the circuitry,” Mr. Knutson said.

Neuroeconomics has not won many converts on Wall Street. Researchers like Mr. Knutson have yet to show how their work can be applied effectively in the markets. And some academics question whether the field is of any use in economics.

“Economics is about equilibrium, and supply and demand, and forces that come to some stabilized system,” says Stephen A. Ross, the Franco Modigliani Professor of Finance and Economics at the Massachusetts Institute of Technology. “It’s not about atoms or how little people behave.”

Even so, the field seems to be gaining some traction. Last year Jason Zweig, who edited the 2003 edition of “The Intelligent Investor” by Benjamin Graham, wrote a 352-page book entitled “Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make Your Rich.”

One of his findings was that brain images of drug addicts who are about to take another hit are indistinguishable from those of traders who are making money and about to place another trade. “That tells us pretty confidently that if you make money and make money again,” Mr. Zweig said, “it is very similar to a chemical addiction and it becomes very hard to let go.”

Mr. Kerviel, 31, told prosecutors that he was thrilled when his surreptitious trades in European stock index futures began to pay off. By late December, he had made a profit of about $2 billion. “That produced a desire to continue,” Mr. Kerviel said. “There was a snowball effect.”

But when the markets turned against him, Mr. Kerviel made an all-too-common mistake: He refused to cut his losses, which would balloon to more than $7 billion as the bank frantically unwound his positions on Jan. 21-22.

Daniel Kahneman, a Nobel Prize-winning psychologist, showed that individuals do not always act rationally when faced with uncertainty in decision making. When faced with losses, individuals may seek to take more risk rather than less, contrary to what traditional economic thought might suggest.

“When you are threatened with extinction, you act like nothing matters,” said Andrew Lo, a professor at M.I.T. who has studied the role of emotions in trading. Mr. Kerviel, he said, is a case study in loss aversion.

Mr. Lo and Dmitry V. Repin of Boston University have studied traders to determine how stress and emotions affect investment returns. They monitored traders’ vital signs like heart rate, body temperature and respiration as their subjects darted in and out of trades.

The findings, while preliminary, suggest — perhaps unsurprisingly — that traders who let their emotions get the best of them tend to fare poorly in the markets. But traders who rely on logic alone don’t do that well either. The most successful ones use their emotions to their advantage without letting the feelings overwhelm them.

“The best traders are the ones who have controlled emotional responses,” Mr. Lo said. “Professional athletes have the same reaction — they use emotion to psych them up, but they don’t let those emotions take them over.”

Or, as Warren E. Buffett once put it, “Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Of course most traders do not breach ethical boundaries like Mr. Kerviel, who doctored e-mail messages to hide his unauthorized trades. But unbridled ambition and the hit from the money high are a dangerous combination.

People like to think that logic prevails in the financial markets, that traders and investors always act rationally. “Clearly, institutional investors want to believe it’s all scientific,” said Mark W. Yusko, president of Morgan Creek Capital Management.

But Wall Street can get carried away. The Internet boom and bust were followed by an even bigger boom and bust in mortgage lending. Wall Street is now saddled with more than $100 billion in losses stemming from mortgage investments, and the economy may be sliding into recession.

Alpesh Patel, principal at the Praefinium Group, an asset management company, said that when traders get too emotional, they start making bigger, more frequent trades.

“You know you are damaging yourself, and there’s no gain in a financial sense, but the highs from the winning lead you to take bigger risks,” said Mr. Patel, who has written 11 books on trading psychology and risk management.

Legendary Wall Street traders like Steven A. Cohen and Julian H. Robertson Jr. are students of human emotion. Mr. Cohen, who runs a $15 billion hedge fund called SAC Capital Advisors, keeps Ari Kiev, a psychiatrist, on hand to work with his legions of traders, people from SAC say. (Dr. Kiev declined to say whether he worked for Mr. Cohen’s firm.)

Mr. Robertson, the founder of Tiger Management, which at its peak in 1998 managed $22 billion, turned to a psychoanalyst, Dr. Aaron Stern, to test and evaluate Tiger’s traders.

Dr. Kiev, author of the forthcoming “Mastering Trading Stress: Strategies for Maximizing Performance,” said many traders, professionals and everyday investors alike, fail to manage their risks.

“It is more common for people to hold onto losers and see their investment go to zero, or shorts go to the sky, than it is for them to practice good risk management and get out,” Dr. Kiev said.

Kerviel -- From Floyd Norris Blog

I thought so! Kerviel was ahead at the end of the year 2007!

May 13, 2008, 6:27 pm
SocGen Changes Its Numbers
Société Générale, the French bank that lost billions from a rogue trader, disclosed today that it had restated quarterly income figures for last year to account for the unauthorized trades. The audited numbers, which the company admitted violated accounting standards, now turn out to have been wrong. (The violation of accounting standards, as I explained in this column, involved shifting losses taken in 2008 to 2007. The company got its auditors to agree that was fine, despite the rules.)
SocGen still wants to report all the losses in 2007, but it concedes that losses came as early as the first quarter. Previously it had not disclosed any impact before the fourth quarter.
My colleague Nicola Clark of the International Herald Tribune brings to my attention the fact that the restatement can be found in today’s first quarter earnings release. You can find them on page 24, in appendix 3.2 How’s that for prominent disclosure?
Here is the latest on when the trader, Jérôme Kerviel, made and lost money on his unauthorized trades:
First quarter 2007 — A loss of 97 million euros.
Second quarter 2007 — A loss of 2.064 billion euros.
Third quarter 2007 — A profit of 2.524 billion euros.
Fourth quarter 2007 — A profit of 1.108 billion euros.
First quarter 2008 — A loss of 6.382 billion euros.

Those losses were taken after the bank found out about the trades and liquidated his positions in a hurry.
Previously, the company had reported the net amount for all the trades in the fourth quarter. It disclosed (in note 40 on page 247 of its annual report) that the 6.4 billion euro loss actually came on trades in the first quarter of this year, but it decided to report them in 2007 anyway. It still does that, but it spreads the earlier results among the other quarters when they actually occurred.
The interesting news for the first quarter of 2008, to me at least, is that SocGen spent 274 million euros to bail out its money market funds, which owned “securities that had become illiquid” and that could not be sold for their face value. It appears that Mr. Kerviel was not the only SocGen trader who made bad bets.

Kerviel -- i Repeat

How do this without an immediate margin call????

http://natgagu.blogspot.com/search?q=kerviel

Kerviel

More on Kerviel. No one discusses the simple fact that bets of such magnitude have to be "settled" within one-day, or is it the dirty little secret that if your name is big enough, no one calls for the money???

Click on Title for today's New York Times article.

http://www.nytimes.com/2008/02/15/business/worldbusiness/15socgen.html#

kerviel

Click on Title above or cut and paste the following:

MIT covers this topic:


http://www.bloggingstocks.com/2008/01/31/what-jerome-kerviel-demonstrated-mit-proves/

"Kerviel, Your Winning Position Risks Too Much"

From the previous article:



Kerviel had been investing the bank's money by hedging on European equity market indices. That means he made bets on how the markets would perform at a future date.

The trader had been betting throughout 2007 that markets would fall. ''He was therefore winning, virtually,''.

But the bank says he had overstepped his authority and was wagering more money than he should have.

So at the beginning of January, Bouton said, the trader voluntarily created losing positions, to neutralize his earlier gains and cover his tracks.

But markets dropped this month, and fast. ''This sad affair veered into a Greek tragedy: His virtual losing position became huge.'

More Kerviel Discussion

O.K. nobody has answered my basic question:

Kerviel "bet" real euros -- enough to break the bank. He was hedging with "bogus" hedges.

So, what's the counter-party see? A huge bank about to go broke. So where were the "margin calls?" Or, as I suspect, is there a general agreement that "you're good for it," because you are Societe Generale.

Kerviel

The following is from the Globe and Mail. Click on the Title above. Kerviel's 2007 trading was prescient.
http://www.theglobeandmail.com/servlet/story/LAC.20080131.RKERVIEL31/TPStory/Business

Kerviel

More...

Click on Title for full story.

http://www.nytimes.com/2008/02/11/business/worldbusiness/11socgen.html

Kerviel II

Test. I'm working with the new "enclosure link" feature.

Kerviel's Chart

http://www.portfolio.com/views/blogs/market-movers/2008/02/20/chart-of-the-day-jerome-kerviels-pl

Kerviel

\

Another rogue trader. Yeah. Click on Title or:

http://www.nytimes.com/2008/02/28/business/apee-wheat.html

Fairly Good Analysis on Kerviel

I like this analysis. And the recalling of Tom Friedman's article on Superempowered individuals who can muck up the world.

http://www.freedom4um.com/cgi-bin/readart.cgi?ArtNum=73044

Kerviel and Societe General

"firstly, he ensured that the characteristics of the fictitious operations limited the chances of a control: for example he chose very specific operations with no cash movements or margin call and which did not require immediate confirmation;"

How, how, how?

$8 Billion Found in Kerviel's Middle Drawer

April Fools!

Another Arrest in Kerviel Societe Generale Case

More, but not too revealing. Still, no one talks about why the bank didn't get a margin call within one day of the big bets. That would have exposed what was going on.

http://www.nytimes.com/2008/03/12/business/worldbusiness/12cnd-bank.html?_r=1&hp&oref=slogin

Kerviel "Voluntarily Created Losing Positions"

Incredible.