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It's funny.  Laugh. The Almighty Buck

How To Lose $7.2B With Just a Few Basic Skills 234

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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How To Lose $7.2B With Just a Few Basic Skills

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  • by gedhrel ( 241953 ) on Friday February 01, 2008 @11:48AM (#22261738)
    This - very entertaining book - explains the process better. The characterisation of traders who blow up is particularly damning.

    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.
  • Read: (Score:2, Interesting)

    by StargateSteve ( 1054492 ) on Friday February 01, 2008 @11:58AM (#22261886)
    "The author freely admits that his story is not based on hard sources, but his experience in the banking industry lends plausibility." Read: "This guy has no proof, evidence, or accounts of what happened, but this sounds good, so lets blame MS" I'm on board with that. This is /.!
  • Re:Seriously? (Score:5, Interesting)

    by Corporate Troll ( 537873 ) on Friday February 01, 2008 @12:03PM (#22261962) Homepage Journal
    It is? I have worked in IT at financial institutions in the last 10 years. Nothing what he said sounds even remotely improbable. If you knew the stuff, I have seen, you can be happy that a simple wire tranfer doesn't fuck up every time.
  • Bad banks (Score:5, Interesting)

    by Anonymous Coward on Friday February 01, 2008 @12:16PM (#22262152)
    I interviewed for a senior IT management position at a fairly decent size bank several years ago. Maybe this bank is within the top 25 in the USA.

    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.
  • by Anonymous Coward on Friday February 01, 2008 @12:17PM (#22262162)
    Check your facts : they guy was not losing actually. The loss was the result of the SocGen liquidating all those fraudulous position at the worst time possible (during the mini krash from last week). They of course could hardly maintain such positions which represented more than five times the capital of the bank, but the positions were beneficiary.
  • by i-neo ( 176120 ) on Friday February 01, 2008 @12:24PM (#22262286)
    Here in France someone is not guilty until it has been proven.
    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 ;)
  • Re:Seriously? (Score:5, Interesting)

    by jdigital ( 84195 ) on Friday February 01, 2008 @12:34PM (#22262452) Homepage
    Maybe you haven't spent enough years to recognize the author of the article Dominic Connor - a highly regarded individual in these circles.

    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.
  • Generally, the economy works better when money circulates...When it has "velocity", which is another one of those words like "multiplier" which I'm going to assume you understand. By dumping surplus money into commodities rather than banks, you're effectively hiding your money under your bed, and dampening the flow of money through the economy. People did this for a long time until a smart guy named Adam Smith pointed out that hoarding gold didn't make anyone especially wealthy; it was trade that built wealth, and that meant the movement of money and goods.

    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
  • Re:Seriously? (Score:4, Interesting)

    by Amouth ( 879122 ) on Friday February 01, 2008 @01:09PM (#22263090)
    it amazes me how banks are suposted to be secure.. and think they do everything perfect.. then i see the reality..

    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 .. they had printed it out with in a week of handing it to me.. after seeing that.. there was no way we would ever hire them..
  • Re:Stupid? (Score:2, Interesting)

    by robertjw ( 728654 ) on Friday February 01, 2008 @01:45PM (#22263676) Homepage
    So, bottom line is the bank blamed the trader for the $7bn loss when they actually created it themselves. The newbie trader was smarter than they guys that went in to clean up after him.

    Sounds to me like they deserved to lose that money.
  • Not quite right (Score:5, Interesting)

    by Anonymous Coward on Friday February 01, 2008 @02:11PM (#22264096)

    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:

    1. Instead of making his trades in mutually canceling pairs as described above, he'd leave out one trade in the pair, and hide this by producing fake evidence that he'd made that counteracting trade.
    2. Taking on very huge positions, and also concealing them by similar methods. (Faking counteracting trades is a way of concealing them, too, because what the bank really cares about is not the absolute size of the trades, but rather, the risk exposure of the trades. Two very large trades that mostly cancel each other out will have small risk, taken together.)

    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.

  • Re:Stupid? (Score:3, Interesting)

    by jafac ( 1449 ) on Friday February 01, 2008 @03:16PM (#22265158) Homepage
    He did not just "sneak past controls".

    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.
  • by Anonymous Coward on Friday February 01, 2008 @07:04PM (#22268128)
    intuitively I think you're correct; the CPI is way understated. Offhand, do you have a link to a price index (or something in that vein) that would fit the bill for "TRUE price increases"? I'm not at all being skeptical, I'm just hoping for a shortcut.

    Thanks in advance!
  • by PAKnightPA ( 955602 ) on Friday February 01, 2008 @07:18PM (#22268284)
    I think your point is valid if we accept the statement that CPI and Price Level figures are fundamentally off by huge margins. However, you say Subtract TRUE price increases over that time (don't use the ignorant and embarassingly fake CPI figures) from that GDP. So where are you getting your figures for inflation from? I really would like an answer, this is not a rhetorical question. How do your generate your figures for inflation, and what makes your figures better than the CPI?

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