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Oops I Lost 7 Billion Dollars

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This piece of news caught my eye this morning... a single trader blamed for 7.15 billion USD fraud at French bank, Societe Generale. I don't know about you, but if I lose $10 through some kind of fraud, I get pretty upset.

I can't help to think about the scam in Office Space to sweep the breakage from several accounts. The problem was that it worked too well and the parent company would notice. That was only a few hundred thousand if memory serves. Perhaps they could have gotten away with a billion or two more.

How do you manage to amass so much money and still be careless enough to lose 7 billion dollars by one man's action?

Posted on January 24, 2008.

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12 Responses to “Oops I Lost 7 Billion Dollars”

  1. Once you have that much money at stake, the amount you’re willing to gamble is higher. I’m reading a very good book right now called When Genius Failed, about a fancy hedge fund in the late nineties that thought they had it all figured out. They made tons of money but you can feel something awful is about to happen. The author wrote a great Warren Buffett biography too. A good read.

  2. Lily says:

    ::shrug:: If his job was to be a prop trader, then he amassed that much money the same way that he lost the money. His problem was that he had so many shorts out that when the shorts started unrolling he had to cover his positions with money that he didn’t have – then he tried to hide his losses. Same as the kid who wasted his allowance on sea monkeys and then lied to his mom about it.

    I’m not using the pressure of his job or the similarity to a kid’s error to excuse the guy. But it has happened before (Google “Nick Leeson”) and will probably happen again. US banks have pretty strict oversight of traders (courtesy of SEC regulations), but I can’t say with 100% certainty that the same thing can’t happen here.

  3. I think someone in the government might know ;-) … One billion here, one billion there, and soon you’re talking real money. Seriously though, there should have been risk management software in place to prevent those trades in the first place.

  4. Lily says:

    Why should there have been risk management software to prevent these trades? The trades made were completely run-of-the-mill shorts. Traders do it on a daily, nay, secondly (fine, not a real word) basis. Put risk management software in place to prevent these trades, and traders stop making money.

    There should have been oversight on his attempt to cover the loss and his hiding the losses. But the problem is that he had experience with the very measures put in place to prevent just such deception, so he circumvented the measures.

    You can’t design oversight measures wondering, “What happens if someone who knows about these measures try to circumvent them?” Because then every new set of countermeasures you put in place will face the exact same problem. But for most intents and purposes, the measures in place stop traders from making such huge mistakes. That’s why you don’t hear about traders losing billions of dollars on a daily basis.

  5. dong says:

    I work in trading environment and it always astounds these things can happen. Effective risk management does prevent these things from happening. It’s not even a question of covering your tracks which is difficult enough, but there are pure volumetric limits that should automatically triggered regardless if the positions were making money or losing money. To lose 7 billion dollars you have still have to stake a lot of capital. At most shops an ordinary trader would hit capital constraints that would prevent this from happening. Lots of people need to be fired for this.

  6. Think Ryuko says:

    This guy worked in the fraud detection department. It’s pretty simple. I mean, nobody appreciated him and he could build a virus that could rip that company off big time (wink). So he was obviously a deep insider. But what gets me — how was it that someone who worked in fraud detection also worked in trades? That seems like a conflict of interest to me. And like he had some accomplices, too. It’s good his supervisors were fired. I’m sure a further investigation will end up firing and maybe jailing a few others, too.

  7. Brip Blap says:

    Speaking as an auditor who has access to a HUGE amount of very confidential information and almost complete access to every sensitive system in most of my clients, it’s all about the access. Like dong mentioned, effective risk management prevents these things from happening – but EFFECTIVE risk management is not always there. I did an audit of my former company where one little thing I liked to do was show them how I would steal tens of thousands of dollars from them if they made one very, very tiny mistake in user entitlements (passwords, etc.). It doesn’t take much, to be honest.

    What prevents it? Tone at the top – a brutal organization that requires multiple layers of approval, mandatory vacations and thorough review through analytics of activity. Most companies hope that this will “never happen to them…”

  8. Lily says:

    Think Ryuko – he had experience in fraud detection but was not working there at the time of his craptacular actions. At that time he was strictly a trader.

  9. Ryuko says:

    The fact that he at one time was in the fraud detection department was a major conflict of interest either way. Maybe we’re just stricter in the States (or are we….hmm….) but someone HAD to have seen that coming. The temptation is just too great. I know from personal experience that this is never a good thing.

  10. plonkee says:

    I was going to say that it sounds just like Nick Leeson all over again. At least it’s happened to a French bank and not a British bank this time?

  11. Lily says:

    Ryuko – I don’t see any conflict of interest. I know plenty of compliance officers who have transitioned into sales or trading roles (in the US) with NO problems at all. You can’t expect everyone to be a criminal just because they have the means and opportunity, then systematically deny them the right to better employment opportunities.

    And if you have personal experience regarding securities fraud, you should probably report it to the SEC.

  12. guinness416 says:

    I’m in Ireland at the moment, and in reading about this became aware that Nick Leeson is now CEO of Galway United football (sawker) club, having been the GM there for a while. He’s holding court there offering his insight into this SocGen situation. It staggers me that someone could luck into what is essentially a dream job (I would give my right arm to run a football club in one of the nicer cities in Europe) given the background he has.

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