The Societe General Fairy Tale

The rogue trader in Societè Generale of France is currently being held by French authorities and is risking a 5 years-term. How many of you would be willing to spend 5 years in jail and come out with a lot of money already booked for copyrights and perhaps some cash in a Swiss account or in a Caribbean Bank? Many, I suppose... Well... just find some partners in crime and you can achieve what this man achieved.

Why am I so sure that the guy has not been acting by himself? Let's say that if you were in the Risk Management business or even a trader you would have understood. I hope that French authorities would understand it too.

However, I think that the French authorities should open an investigation on SG itself for closing the positions and pushing the market down... One thing at the time.

If it is true that the trader has cumulated losses on Futures, this means that he has bought a huge amount of futures and made huge losses while he was running the positions. for those who don't know it, running a book on futures requires the payment down, at the clearing, of a margin and these margins are used at every closing day to settle the differences between the purchase price and the closing of the day. This means that if the trader was losing, the clearing house would have asked for the payment of a margin and, this margin would have been in the order of a few billion-euro. Who pays this margin down? Normally it's within the Operations area, which is not the Treasury, the department where the rogue trader worked. So, someone must have paid down this margin. The margin gets authorised by a Control department (3rd department) and funded in the market by the Liquidity desk (4th desk involved). When the payment is made, there are some credit risk impacted towards the clearing house that are normally followed by the Risk Management area (5th) that follows all sort of risks. In this case, Credit, settlement and, most important, position risk. We are talking of at least 5 areas of the bank involved.

According to the news, this gentleman was coming from the middle office area and as such he had some special rights and he knew the system in place and its week points. Possible but, at the same time, impossible. Let's assume that he knew all the possible passwords to access data and manipulate some parameters, including Profit Centres (excluding his portfolio from the Risk monitoring could have been possible), create false counterparts (this way he would have stopped the Clearing House Credit risk being monitored), create offsetting positions using false counterparts... I am afraid not.. it's not so easy...

At the end there would have been always a weak point. This weak point was cash. The margin had to be paid anyway and the only way to overcome this issue would have been another collusion in the Clearing House. Thing that at the moment seems to be impossible. Or another few partners in crime. Let's see how this could have been possible.

I am the trader that plans it all and trades on the market. I would need a Risk Manager or his/her password to authorise all position and credit breaking limit. Once the Clearing house will ask for more cash to refill the margin, I should have the authority of a Treasurer to pay and order the Liquidity trader to fund my position... But... pals, we are talking of a few billion euro! And funding a few billion euro in this market is not so easy!

There is something fishy going on and I think that the investigation should be extended to the whole bank. The bank has been closing positions in the market. I would investigate in that direction. I think that naivety can be found in those who are not in the business but, please don't give me that bullshit. This guy has a brilliant future ahead and unlike the Baring Bros story, there are so many Risk Management measures in place these days that it is impossible that a trader reaches such high levels of losses. Between all BIS ruling and local central banks ones and the IT systems in place, even in SG, the cheaters are somewhere else... Someone made a lot of money! And someone else accepted it to get rid of some losses and someone in 5 years time will see his 100K euro per annum salary as the tip for the maid...

Stop fooling people with these things, only commoners can believe you!