The $7bn/£4bn fraud at Societe Generale is pretty stunning. I’m not clear whether it is a ‘normal’ fraud with someone pre-defined actually benefiting (the counter-party to the trades made I’d guess) or just snowballing incompetence with the trader trying to cover his losses (like Barings/Nick Leeson). I’d guess the latter.
Of course, it may be true that it really was an extraordinary event that could not be effectively guarded against with current tools. But, there was a note on the news yesterday that the trader had not taken any holiday for more than a year. Many investment banks force traders to take at least a two week break each year explicitly for fraud management purposes – it’s judged too hard to cover a fraudulent position for that period without detection. SocGen clearly didn’t think that this was a worthwhile defence, even though it is so basic.
I’ve held back from writing anything since the failings were so blatantly obvious. But, it rolls on, and I read a story with some of the quotes folks have made. I am astonished at the breathtaking arrogance and incompetence of the senior management and politicians, and need to vent a bit …
“Societe Generale chairman Daniel Bouton said the fraud was a “one-off” and denied it was a trading or risk-management fault.”
How can the chairman define this as a one-off? I’m sure they have looked hard at internal exposures in the last few days, but the trader ran rings around their defences for more than a year. Barings should have been a wake-up call if any was required, but the same thing has happened again, so it isn’t a one-off in banking. And, how can this be ANYTHING but a risk management fault. Risk management in investment banking is supposed to protect the bank against risk exposures that they do not want, and this is certainly one they don’t want. It’s not credible to say that internal fraud should be an exception since it is such a moral hazard when you incent traders heavily, and they can seek to simply gamble to protect bonuses. That is exactly why there are explicit divisions between the front office and the middle office. Does the man have no humility? Or honesty? Or competence? The scary thing is that he might actually believe his own drivel.
Then we get the French President, Nicolas Sarkozy, who said that the losses “do not affect the solidity and reliability of the French system”. Since this has gone undetected for more than a year, then I suspect he may be technically correct – SocGen, at least, had massive risk management flaws a year ago, and now they are known. So, across a year the the solidity and reliability has not been affected – it had gaping flaws, and still did until at least a few days ago. But, he clearly meant to say that people could rely on the French investment banking system. He must think people are fools if he imagines that they will believe him. Since many people are not fools, the only real result from this sort of proclamation is to hurt his own credibility. He’s far from the first politician to make wild statements that are designed to reassure, but whose validity is patently suspect. Indeed that so many do should make politicians stop and think, but sadly it appears it doesn’t.
One more quote, from Jean, a 26 year old SocGen customer. “I can’t see how one single trader can pull this off, there are supposed to be different security levels. It is worrying that this can happen. But I didn’t lose confidence as I didn’t have any confidence before,” he said. Maybe he should run the bank. He’d more competent since at least he knows the limits of his knowledge.