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How To Lose $7.2B With Just a Few Basic Skills
Posted by
kdawson
on Fri Feb 01, 2008 10:23 AM
from the l33t-skillz-not-required dept.
from the l33t-skillz-not-required dept.
Cityslacker recommends a Register piece speculating on how a lowly trader at the French bank SocGen was able to lose billions using only Excel VB. The author freely admits that his story is not based on hard sources, but his experience in the banking industry lends plausibility.
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it must be microsofts fault! (Score:5, Funny)
a common preception (Score:3, Informative)
Re: (Score:3, Funny)
Re:it must be microsofts fault! (Score:5, Funny)
<OK> <Cancel>
Parent
Re: (Score:3, Funny)
Seriously? (Score:3, Insightful)
One thing rings true! (Score:5, Informative)
While this really was a clueless trainee someone with the manager's password could authorise over-limit cash withdrawals, reverse transactions, see all sorts of files and make queries on customers that ordinary staff cannot do.
Parent
Re: (Score:3, Informative)
Re:Seriously? (Score:5, Interesting)
Parent
Re:Seriously? (Score:4, Interesting)
we had someone apply for a job here.. they where an ex bank data center admin.
in the profolio that they provided to show what they had worked on.. was a detailed layout of the data center and all the interconnects between servers and the branch offices.
looking through it even had detailed info on all the os and software and respective patch levels for each server in the data center.
sadly it was recent - ver recent
Parent
Re:Seriously? (Score:4, Informative)
Nothing what he said sounds even remotely improbable.
And it's not limited to the financial service sector. I worked at one mid-cap company using Excel linked spreadsheets to do all their quarterly numbers. A massive, bloated pile of VBA that would lumber through the reporting cycle every quarter. It was backed up by the auditors so it couldn't have been too far off. That was before SOX, not sure that audit trail would pass today.
I'm never surprised about what I find being done in Access or linked spreadsheets anymore.
Parent
Re:Seriously? (Score:4, Informative)
1) they didn't bother using shadow password files (this was around 2000-2001)
2) they did everything with Excel and VBA - my line manager had a box dedicated to running VBA macros on spreadsheets to calculate tons of Equity Derivatives data throughout the day
3) nobody cared that much about telling each other their passwords
This was 8 years ago so they may be using Java for everything now - that was the way things were slowly, slowly heading when I left. But I do think VBA is overused and abused in finance more than some other sectors.
Parent
Re:Seriously? (Score:5, Interesting)
I found $2.34x10^x dollars yesterday when I worked out that one of our manual data entry people forgot to put a minus sign in front of a trade. Happens all the time.
Parent
Re: (Score:3, Informative)
lemme try (Score:5, Funny)
Stupid? (Score:3, Informative)
Re:Stupid? (Score:5, Informative)
Of course there are many speculation about all that he could have done by bypassing usual controls.
Parent
Re: (Score:3, Informative)
He would then use any profit from the hidden account to make his "official" portfolio look like it was performing well, and he would get bonuses from his employer. However, since Dec 07, the markets have been in a down slide, and the value of the hidden account went n
Not quite right (Score:5, Interesting)
Better summary: he was a financial derivatives trader at a big French investment bank. Derivatives traders don't buy and sell stocks, but rather, more exotic financial instruments, whose value is tied to stocks. His job was to find mispriced trades when they momentarily occurred, and jump in quickly to make the bank a small profit of them. In general, the way this works is that you have two investments, A and B, whose prices are supposed to stay in the same relation regardless of whether they go up or down; if the prices of A and B are spread too far apart from each other, for example, his job was to spot this, and to simultaneously short sell the overpriced one and buy the underpriced one. This is a form of what's called "arbitrage," because it's supposed to be riskless; if the market goes down, the buy loses money, but the short sale makes you money, and vice-versa. The amounts of the transactions in the pair are set up so that if A and B move the same amount, the losses and gains cancel each other out exactly; you only make money in that example when the prices move relatively closer to each other.
So now, essentially, what he's accused of doing is two things:
One further thing is needed to understand this: derivatives allow one to take huge positions with very little money down, because when you buy, say, a 3-month futures contract to buy on GOOG for $600 (more or less randomly picked number), you don't have to put in $600 for that contract; you only need to put in a fraction of it, as decided by the broker (this is called a "margin requirement"). For the sake of argument, let's say 10%; then with $600, you could buy one share of GOOG, or you could use that as a margin to buy 10 futures contracts on GOOG, that give you, over 3 months, the return of $6,000 worth of GOOG stock. If GOOG goes up, you make 10x as much with the futures contracts; if it goes down, you lost 10x as much.
This is relevant to this case because Kerviel's job was a futures trader. To take positions worth $50 billion USD, he didn't need to procure that much money from the bank; he only needed to obtain much less.
Parent
Re: (Score:3, Interesting)
The higher ups were somewhat aware of what he was doing.
RISK Magazine awarded them Equity Derivatives House of the Year award for 2007, for their performance, largely due to the $73 Billion in profits this guy leveraged on his $7 Billion. (The award issue was published 2 days before the news of this guy went public, heh).
It was only when his trades started losing the bank money that they raised a stink.
Re:Stupid? (Score:4, Informative)
What he actually did was buy at normal price, and hope that the price would go up.
What then happened was that he bought at normal price, but the price went down.
To compound the issue, he was playing with more money than he was allowed to. e.g. He was allowed to play with [currency of your choice]100,000, but he was actually playing with [currency]10,000,000.
TFA suggests that he had been promoted out of the "lowly lowly trader" position, but was still playing with those accounts (that he shouldn't have had access to).
The IT angle was that he was using "creative" processes within Excel to hide this - devs hardcoding admin passwords into the spreadsheets.
Parent
Easy! (Score:5, Funny)
How to make a small fortune. (Score:5, Funny)
A: Start with a large fortune.
thankyouverymuch. Don't forget to tip the waiter. No stock tips, please.
Parent
Re: (Score:3, Insightful)
Honestly it's easier to get rich playing Texas Hold-em at a casino than on stocks. at least at the casino you can get tanked and oogle the scantily clad waitresses.
The code used (Score:5, Funny)
20 GOTO 10
Re: (Score:3, Funny)
*break* *break* *break*
*pulls power cord*
Insider knowledge (Score:5, Informative)
Since he knew the flow of information through all parts of the bank, he was able to cover his tracks and employ creative accounting. He knew what types of accounts and trades would not raise flags, so he would flow money though those routes.
This type of security risk can exist in practically any business. If you're a developer or IT person, and suddenly find yourself working within the infrastructure you design and maintain, then guess what? You can most likely bend the system around some rules. The same type of rule applies for relatives and spouses. Most businesses will not let an employer be managed or supervised by a relative or spouse for the same reason. They can cover each other's tracks, and have more complete knowledge of the system.
Dan East
Re:Insider knowledge (Score:4, Funny)
Is that where they draw little faces out of the 0's and make 8's into eyes??
Parent
Re: (Score:3, Informative)
He was using inside knowledge of his employers trader monitoring procedures, to trade with his employers capital beyond his allowed limits.
"Fooled by Randomness" (Score:3, Interesting)
Curiously, Nick Leeson (the man who sank Barings Bank) supplied a soundbite saying how he didn't believe that the losses in this instance could have reached such a size. And that's the problem: he hasn't learned anything from his experience.
The difference between "trader" and "rogue trader" is simply one of the amount of luck the lucky idiot has.
what he did/how he did it (Score:5, Informative)
What he did
Basically the guy was "gambling" on stocks and losing - then making bigger bets trying to catch up. He claimed that he was simply trying to get a big bonus and didn't have any malicious intent.
how he did it
He went largely "unsupervised" because he was considered unimportant (and hadn't taken a vacation in a long time - so he covered his own tracks until the whole thing collapsed).
Most financial institutions require mandatory "vacations" so they can check up on people (this guy would have been caught much sooner if someone else had a chance to look at his "trading desk")
the funny part
what I love is that they haven't fired him yet, he has been told to not come to work and they aren't paying him, but France's labor laws require a "sit down" before they kick him out the door.
In the short term he is being looked at as a "Robin Hood" type figure by some people (who think he just ripped off the greedy bankers, not that he committed fraud and stole) - so mark this up as an unintended consequence of ridiculously strong labor unions
Those Silly Frogs (Score:3, Informative)
I'm not current on the French labor scene, but somehow I doubt that there's a union for financial analysts. The strong labor unions in France are more of an effect than a cause: French society is suffused with an us-versus-them mentality that makes Rush Limbaugh look like a Quaker.
Then again, Americans have their share of anti-business, pro-Robin Hood prejudice. One reason everything we do is so bound up in liability concerns
A New Low (Score:3, Insightful)
Re: (Score:3, Insightful)
The point of the article... (Score:4, Insightful)
Another interesting point is "Rights-creep". Often people are given acces rights as they move between functions, but these rights are never revoked when moving on to the next...
Bad banks (Score:5, Interesting)
I met with the CIO, and we had a great discussion in terms of where they were in terms of their systems. The CIO seemed to be an honest, straight-shooting guy. He was new to the bank - he started perhaps 8-12 months earlier.
He stated that the systems of the bank were in danger of total catastrophe. There were internally-built programs without source code. The divide between production, QA, and development environments broke down. Production runtime was manipulated by developers in real time. Some hardware was so old that it was running obsolete operating system software. If the machines failed, recovery would be extremely difficult, at best.
Coming from another class of institution, I found these statements shocking and disheartening. I liked the CIO - he was certainly fighting a huge, dangerous battle... and it was clear that he knew how much trouble he was in.
I ended up turning down the position offered, as their financial compensation wasn't nearly commensurate with the career risks I'd be taking stepping into such a huge minefield.
The CIO said he understood, but his budget was constrained - the bank was in severe cost-cutting mode, looking for a merger.
Nice.
Startanairline (Score:5, Funny)
How much do you trust your IT staff? (Score:3, Insightful)
Not guilty until proven (Score:5, Interesting)
Just let the justice do its work, we can then speak about it using some hopefully serious investigation to base our comments on.
Several things are unclear:
- Why and How can this man be responsible for a such thing ?
- What gives its employer the right to judge him ? (nothing according to French laws)
- Is it really a fraud or is it a professional mistake ? This point is still unclear according to the justice.
- How are the amount accounted ? According to the latest news the bank itself is responsible for the loss and it was determined by the bank strategy not the trader's.
I think this is a very complicated situation involving various interests (financial places, politics, justice...).
It is not obvious how things will be sorted out, speculating about it will not help.
I am giving up my karma on this one
Look at the guy's CV (Score:5, Insightful)
The real part of his hack is probably social engineering and stumbling upon oversights in the trading system. How many IT folks, even the dumb ones, can say "I could take this whole system down if I wanted!" - this guy actually did.
Goes to show that there's a difference between checking off boxes for auditors and actual security. Auditors can make sure the proper safeguards are in place; auditors can't tell if everyone in the department uses the same password.
SocGen Credit Briefing (Score:5, Informative)
This is what they said happened:
As is now well-publicized, JK was able to use his knowledge of SocGen's back office procedures and controls to subvert them. Somehow (SocGen still seems unsure how) he obtained the access passwords of 3 or 4 other middle/back office individuals; but not only that, because these are changed regularly, he obviously managed to keep "updated" with the changes; (*my theory is that he figured out that people use easy to remember passwords like MonthYear and change it every month).
JK was able to hide what would have been massive swings (because of the size of real gross positions he was taking, primarily on Eurex) in his P&L from SocGen's P&L and Risk Management systems;
An alternating pattern of 5 basic types of transactions was used. (I believe these were described in a press release last weekend);
One thing that JK was apparently doing (which gave us an instant "flashback" to Barings and the infamous 88888 account!), was that JK would fail to put the required broker reference on at least some of his transactions, which would cause them to go into an error or suspense account for subsequent reconciliation (i.e., not as part of the overnight routine), allowing JK the opportunity (presumably) to reverse out or cancel the trade before it was spotted and questioned;
JK was hiding a few fictitious transactions in the midst of a slew of real ones. When some of these were picked up by controllers, he was able to find excuses to allay suspicion- e.g., by saying that the size of transaction entered must be an error and he would rectify it
He would cancel forward starting transactions before SocGen's system generated the relevant Confirm; [If I understood JPM correctly, SocGen has stopped the practice of deferring sending these out];
SocGen has combed its books and it believes that it has found all the fictitious transactions; and does not believe there was anyone else acting with JK. JPM stated that the bank was "99% certain" that it knows the full extent of its losses;
There were clear weaknesses in trader management. The Delta One Desk was supposed to have small risk sensitivities and hence a modest net daily P&L movement. JK's superior "reconciled" the daily P&L on a net basis, but never appears to have looked at the gross positions- the clear inference from JPM was that, if he/she had the fact that something didn't add would/should have been spotted;
With regards to margin calls, most of these would have related to positions on Eurex. For administrative convenience, SocGen received a single consolidated account for the whole bank- i.e., no granularity. Given how big a player SocGen is on Eurex, this made it easy to miss individual movements {Altho' this begs the question about control over actual movement of cash/margin];
As JPM pointedly said, SocGen's Market Risk Management never failed, but its Operating Risk Management certainly did;
Boston Consulting Group is now helping SocGen with making changes to its controls and the bank has a number of immediate and short term fixes underway- including reviewing the use of biometric identity checks for at least key controls; looking at gross and not just net positions in reconciling daily P reconciling positions between internal counterparts daily (not monthly as before); tougher and more granular controls on deposit and margin calls and reporting; better enforcement of the holiday policy (e.g., JK was able to find an excuse not to take holiday last November);
As is public knowledge, when JK was found out, SocGen discovered that it had open positions on Eurex (EUR 30BN); DAX (18BN); and FTSE (EUR 2BN), aggregating EUR 50BN. JPM was adamant that SocGen had no choice but to close out those positions, while trying to avoid moving the market. In mitigation of the
Re:Reliable? (Score:5, Informative)
I think some people get the impression they are the online equivalent of National Enquirer but it's simply untrue.
Now excuse me, the BOFH is screaming for my blood..
Parent
Re:Reliable? (Score:4, Funny)
Parent
Re: (Score:3, Funny)
Re:Beyond trusting sources, don't trust the author (Score:5, Insightful)
So that's why banks exist, and why we allow things like the multiplier effect to run our economy. The granddaddy of all multipliers (the Fed) has been active for the past few weeks, trying to pump some money into the economy. Bush is hedging his bets, and backing Keynes at the same time with a stimulus package. Historically, these actions have added velocity to currency, and fast currency tends to stimulate the economy.
The reason for the FDIC, and SEC, and Social Security and Welfare, and every other similar system is to basically keep the money in people's pockets. This is important for the reasons above; cash circulating through the economy creates jobs and stimulates the economy. A bunch of people losing all their money (for example, when a bank fails) means you have a bunch of people who suddenly can't buy groceries. Grocery stores start laying people off, because they have to cut costs, which means MORE people can't afford groceries, and so forth. People like you pull their money in and convert it to commodities, instead of putting it into banks, which means banks can't make loans to support people who are trying to start businesses or buy houses, which, again, slows the economy and costs people their jobs.
Basically your thoughts on this stuff fly in the face of all mainstream economic thought for the last several hundred years. I'm assuming you're a Ron Paul guy, because echoing his "economic" beliefs, and Gosh, we'd sure like to move back to the gold standard. I'd almost like to see him get elected, just out of academic interest in the economic chaos that would ensue.
Anyway.
Parent
Re:Beyond trusting sources, don't trust the author (Score:5, Interesting)
Yes, Adam Smith was correct, that wealth is built on trade. The problem with what you said is that there is a hidden effect from almost every transaction in said trade -- the profit made by the cartelized banks from each and every dollar that they create through the money multiplier effect. They don't actively "give" money out that they've created through the fraudulent fractional reserve banking standard, they loan it out. In fact, they loan out money based on previously loaned out and deposited money, so they're making money on nearly every loan transaction, even though the money doesn't physically exist. This hidden tax that only occurs with fiat money in a fractional reserve banking and monetary system is a form of wealth transfer from the economy as a whole to the cartelized banking institutions, and it actually causes a lag on the economy?
Don't believe me? Look at the GDP figures for the past, oh, 20 years. Subtract TRUE price increases over that time (don't use the ignorant and embarassingly fake CPI figures) from that GDP. We've been in a recession for 20 years, maybe 30 years, even though we may seem to have been strong for a few segments in that time. At almost no time in 30 years have we truly had GDP growth after subtracting the loss of the value of the dollar from the previous time-frame of GDP analysis. This means we're in a permanent recession, and the recession comes from the loss in value of the dollar, which is multiplied many times over due to the hidden tax the banking cartels have created from their money multiplier profit drain.
So that's why banks exist, and why we allow things like the multiplier effect to run our economy. The granddaddy of all multipliers (the Fed) has been active for the past few weeks, trying to pump some money into the economy. Bush is hedging his bets, and backing Keynes at the same time with a stimulus package. Historically, these actions have added velocity to currency, and fast currency tends to stimulate the economy.
No, it doesn't. That's a false statement, and one that a Keynesian spews regularly. Just because the economy may show growth in pure dollar totals, the value of the dollar is decreasing over that time, over and beyond any economic growth shown by more dollars spinning around. If the GDP grows from $10.00 to $10.75 in a year, but the dollar has lost 10% of its value, the actual growth in the economy in dollar terms is 7.5%, but the actual growth in value terms is -3.25%. This is a fact that is readily ignored by Keynesians and other pseudo-economists since these United States have withdrawn from backing the monetary notes with anything of current value. We are in a recession, and we've likely been in a permanent recession since Nixon's time.
The reason for the FDIC, and SEC, and Social Security and Welfare, and every other similar system is to basically keep the money in people's pockets. This is important for the reasons above; cash circulating through the economy creates jobs and stimulates the economy. A bunch of people losing all their money (for example, when a bank fails) means you have a bunch of people who suddenly can't buy groceries. Grocery stores start laying people off, because they have to cut costs, which means MORE people can't afford groceries, and so forth. People like you pull their money in and convert it to commodities, instead of putting it into banks, which means banks can't make loans to support people who are trying t
Parent
Re:Beyond trusting sources, don't trust the author (Score:5, Insightful)
I suggest however, that increases in our relative standard of living and the fact that our purchasing power has remained reasonably constant over the past three decades would suggest that we're not actually all secretly bankrupt, or, if we are, then the whole world is secretly bankrupt with us.
Parent
Re: (Score:3, Insightful)
That being said, we are all bankrupt. What is the average person's net value in the United States? No, don't just count your property and 401Ks, also add in the government's debt (local, state, and federal). Now you're bankrupt, unless you're worth at least $800,000 or so above and beyond your debt.
Our buying power might
Re:Beyond trusting sources, don't trust the author (Score:4, Insightful)
Parent
Re:Beyond trusting sources, don't trust the author (Score:4, Insightful)
Coming from a perspective of someone just entering the upper middle class, a good 90% of the people I have talked to about money are worth less than $0. This includes the people "wealthier" and "poorer" than me whom I have had discussions with. I have a very hard time believing that any significant portion of the economically lower class have greater financial worth than the middle class. So, while I cannot speak of the very wealthy, the middle class and poor are as a group bankrupt. That does not include, as your advisory points out, the debt that is held in trust by our government.
Parent