Rogue Trading

ROGUE TRADING….We learned today that Jerome Kerviel, a “rogue trader” at Societe Generale, was responsible for $7.2 billion in recent trading losses, the largest in banking history. So how’d he do it?

His approach was to balance each real trade with a fictitious one, and his “intimate and perverse” knowledge of the bank’s controls allowed him to avoid detection, co-Chief Executive Officer Philippe Citerne told reporters. He rolled over his real trades before they reached maturity.

By the end of December, he was “massively in the money,” said [Philippe Collas, the head of asset management at the bank]. Since the beginning of the year his trades became unprofitable.

The trades first came to management’s attention on the evening of Jan. 18, when a compliance officer found a trade that exceeded the bank’s limits, Mustier said. When Societe Generale called the counterparty, they were told the trade didn’t exist.

Naturally, my first question is how Kerviel managed to do this. How did he construct all these fake trades? And shouldn’t the sheer volume of trades triggered alarms, regardless of whether they were balanced with other trades?

I suppose eventually someone will tell the whole story and we’ll learn what happened. But my second question is this: what if Kerviel’s friskiness had been discovered at the end of December, when he was “massively in the money,” instead of two weeks later? Would we ever have found out about this? Or would Societe Generale have announced massive fourth quarter trading profits and invented some smooth story about how they had cleverly outsmarted the market?

Common sense suggests that, at least occasionally, these “rogue traders” must make a lot of money. But when was the last time you heard a bank announce such a thing? Does it really never happen? Or does it just get hushed up when it does?