[update below] You see, SocGen (OTCPK:SCGLY) didn’t lose much money on subprime, they had an “exceptional fraud”, nuance as they say. All reports I have seen so far use “fraud” instead of plain fraud. SocGen’s credibility is sinking to Bernankian depth.
The bank found out last weekend that a trader in Paris had secretly set up positions that will cost the company 4.9 billion euros before tax. The trader, who wasn’t identified, went beyond permitted limits on futures linked to European stock indexes.
Societe Generale’s report of fraud comes four months after French competitor Credit Agricole SA said an unauthorized proprietary trade at its investment-banking unit in New York cost it 250 million euros.
Societe Generale said that it’s already closed all the positions set up by the trader, who had used his experience working in the back office to hide his trades through fictitious transactions. The fraud was discovered Jan. 19 and 20.
Societe Generale said it’s taking 1.1 billion euros of writedowns linked to the U.S. residential real estate market, 550 million euros linked to U.S. bond insurers, and 400 million euros on other unspecified risks.
In the third quarter, the bank reported 375 million euros of writedowns and trading losses linked to turmoil in financial markets. The world’s biggest financial companies have announced more than $120 billion in writedowns and credit losses as the U.S. housing slump rattles debt markets.
Via Bloomberg : Societe Generale to Raise EU5.5 Billion After Fraud
On the left, the “fraud” starts. Funny, funny nobody is complaining and later on…
Hand on top around December 18th, great job Luc, you are promoted to Head of Global Equities & Derivatives Solutions!
Oops, markets go sour and the ever devoted French workers discover an “exceptional fraud” on a Saturday night at 10pm…
Bottom hand, Luc you are fired!
This is mixing market losses with frauds and intermediate types of miscalculations. So far, this appears to be an intermediate case, although SocGen is presenting it as a fraud. An authorized trader exceeded limits and lost more than he was supposed to be able to lose. SocGen claims the trader fraudulently concealed the losses, but this is a common claim after large losses, and one that is rarely substantiated later. Even in the relatively clear-cut case of Nick Leeson, some people believe that knowledge of the trades went beyond Nick himself. BCCI was a clear fraud, about 50% bigger than this one (and that was in 1990 money). If you aggregate all the fraud in the US Savings and Loan industry in the mid-80’s, you get something two orders of magnitude larger. But there has never been a concealed trading problem this big, or at least, there has never been one that became unconcealed. It’s wise to remember that we have never seen a story of outsized concealed trading gains. Since you figure half the rogue traders guess right about the market, and far more than half should make money given that they can costlessly double-up after losses, you should remember that you are looking at censored data.