…and this, according to the Wall Street Journal, is what he told investigators:
“I cannot believe that my superiors did not realize the amount I was risking. It is impossible to generate such profit with small positions. That’s what leads me to say that while I was positive [in the black], my supervisors closed their eyes on the methods I was using and the volumes I was trading. A trader can’t generate so much cash on a daily basis with standard activities.”
Indeed….
When overseas markets began to tank last Monday it provided a call to action to the Federal Reserve Bank. Fed Chief Ben Bernanke had already commented that he was prepared for bolder action to support the economy. In testimony before the Congressional budget committee on Jan. 17, Bernanke stated, “we stand ready to take substantive additional action as needed to support growth.”
But when the weakened U.S. equity markets appeared to be forcing global equities down, the situation seemed critical. With opening market calls of 400 to 500 points lower in the Dow Jones Industrial Average on Tuesday following the Martin Luther King Jr. holiday, the Fed decided that it couldn’t wait until this week’s meeting and cut the Federal Funds rate by 75 basis points. It was the largest move in recent memory and the first time since the immediate aftermath of 9/11 that the Fed adjusted that rate outside of the regularly scheduled Open Markets Committee meeting.
Reading tea leaves is a dangerous game but it wouldn’t be a stretch to think that the European weakness pushed the Fed to go with a 75 basis point cut instead of 50 basis point and do it immediately rather than wait a week for the FOMC meeting.
The latest news on the Société Générale “rogue trader” debacle doesn’t make the bosses look too sharp. French prosecutors said in court on Monday that Eurex had queried SocGen about Jérôme Kerviel’s massive position back in November, and that Kerviel was able to explain it away…
Kerviel, for his part, also told prosecutors that lots of traders exceeded their limits, but it doesn’t look like they went to the extent he did to cover their trails.
Interestingly, Kerviel now says he had a huge profit in the account — to big to conceal at bonus time — and wanted to reduce it so as to avert suspicion.
More and more, this looks like a case of willfully blind eyes on the part of some supervisors, combined with just plain incompetence and more than a dash of greed. Same old recipe, new mixing bowl…
CME Group announced today it has successfully migrated e-cbot interest rate futures and options on futures to its CME Globex electronic trading platform. The bigger news of the day, however, was preliminary acquisition discussions between CME Group and Nymex. CME Group confirmed that the two organizations have agreed to a 30-day exclusive negotiating period. Under the terms being discussed, shareholders of Nymex would receive $36 in cash and 0.1323 of a share of CME Group’s common stock (the exchange ratio), in exchange for each Nymex share.CME Group and Nasdaq held a panel discussion today on global trading trends, but did not mention the Nymex talks at the panel. Panelists, including CME CEO Craig Donohue, Nasdaq CEO Bob Greifeld, Matt Andresen, co-head of Citadel, and Kevin Davis, CEO of MF Global, instead discussed various economic issues, including the falling dollar, the importance of speed in electronic trading in their respective organizations and the growth of business in the BRIC region (Brazil, Russia, India, and China). Davis touted MF Global’s growth in China and India in particular, while Donohue mentioned CME’s recent agreement to acquire a 10% stake in the Brazilian exchange. After the panel discussion, journalists mobbed Donohue for information on the possible Nymex deal, but he had no comment beyond CME’s previously released statement.
Société Générale bosses now say they know how accused rogue trader Jérôme Kerviel managed to hide what they now say was a position with a notional value of more than $70 billion: he simply balanced his futures positions against fake forward positions, they say. It worked, they claim, because forwards don’t require margin money be posted to an exchange. This meant that Kerviel (who surrendered himself to police on Saturday and remains in custody Monday morning) could incur margin calls on Eurex and Euronext, and the bank would pay them, because his books showed the positions balanced in forwards… which don’t require margin calls?
Huh???
SocGen is a leading provider of retail-oriented forward products, such as certificates and contracts for difference, and the implication is that Kerviel balanced his myriad long futures positions with hundreds of small fake forward positions — possibly listed as belonging to retail clients. But such forwards ARE subject to margin, albeit from the customer, who should have put it on deposit at SocGen itself.
That means that even before the positions turned against Kerviel, the bank would have had a mismatch between margin paid out to hold the futures positions and margin taken in to cover the forward positions — or at least margin on deposit to cover futures and margin on deposit to cover short forwards.
Seems two officers of the CMEGroup cashed in some stock options in January, prior to a short term drop in CMEGroup prices. On Jan. 15, Bryan Durkin, managing director and chief operating officer exercised options and then sold 1,500 shares of CME Group stock at $616.75, for a cool $925,125. Phupinder Gill, CME Group president sold 1,000 shares of stock at $607.25 for a total of $607,250. Today’s price closed at $629.
Nick Leeson, the original Rogue Trader and the man we all wanted to interview yesterday, popped up on Irish radio station RTE Thursday night offering his insight into the state of mind of 31-year-old Jerome Kerviel, dubbed by French daily le Parisien “the man who blew up the bank”. (Ah, if he’d been American, we ALL know what daredevil name the press would have given him…)
“I would imagine as well that yesterday morning there would have been a perverse sense of relief, because he has not been able to bring it to an end himself,” Leeson said.
Beyond that, it’s difficult to get straight answers from anybody over here — the most honest (and anonymous) offered so far being, “There but for the grace of God…”
Soc Gen co-chief executive Philippe Citerne told the Wall Street Journal
that Kerviel learned how to circumvent risk controls by working in the back office, and that red flags went up after he “changed his tactics” and triggered a margin call.
So, what had he been doing? Offsetting his positions against naked shorts from another account, creating the impression of a hedge? That would require changing ownership of funds, which is theoretically impossible… And what did he have to gain? Was he planning to shift the winnings to another account and then disappear?
In the end, these questions may be better suited for psychologists than for risk managers — and risk managers may be well-advised to consult psychologists when devising their foolproof plans.
We have pointed out on several occasions in recent months how the Federal Reserve Bank has perhaps been too in tune to the moves of the market. When the market (represented in these cases by analysts from the major investment banks) has not gotten as aggressive of a rate hike as they would have liked it has reacted as a spoiled child not getting a toy by what has been called protest sell-offs. Well the Fed got real worried this past week and did something it has not done in recent memory, dropped the Fed funds rate by 75 basis points in one shot. And they did it outside of the Federal Open Markets Committee (FOMC) meeting. The last time the Fed adjusted the funds rate outside of the regularly scheduled FOMC meeting was in the aftermath of 9/11. That tells us the economy is in serious trouble, though yesterday various administration officials said the opposite. But if this is just a soft spot in the economy, surely a 25 basis point cut would do and the Fed could have certainly waited the week until the FOMC met.
Right as French bank Société Générale is unveiling the new futures brokerage unit, NewEdge, the result of a merger between Soc Gen’s futures broker Fimat with Calyon Financial, it was rocked with massive trading scandal. The bank announced Thursday in a letter from Chairman Daniel Bouton that a massive fraud undertaken by a bank employee has led to huge losses. Numerous news outlets have reported that one rogue trader has caused a €4.9 billion ($7.1 billion) loss for the French bank.
The Financial News Online reported that SG stated, “one trader, responsible for plain vanilla futures hedging on European equity market indices, had taken massive fraudulent directional positions in 2007 and 2008 beyond his limited authority”.
That the Federal Reserve Bank lowered the Fed funds and discount window rates this morning is old news; but now UBS has officially changed its outlook today and is predicting a U.S. recession.
“The ball started rolling with the recession-like rise in unemployment in December,” says Jim O’Sullivan, UBS chief U.S. economist, adding that last month’s decline in the CEO confidence index, combined with a slipping stock market and weak jobs report have tipped the balance. “It’s just the sense that businesses and consumers are getting more cautious. And the down turn in housing is starting to feed on itself,” he says, adding that he anticipates recovery in the second half of 2008.
