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Fraud in Societe Generale Equity linked Index futures!

Societe Generale (SG) has reported yesterday one of the biggest dealer frauds in the history of Banking. The fraud, as reported, is committed by a trader in European Equity Index Futures based out of Paris. The amount of loss estimated is USD7.2 billions. When compared to other reported frauds by traders, this stands apart on account of losses reported by SG. SG has reported that the trader has been suspended and his managers' have also been sacked. You can read the press report here.

This fraud exposes the need and importance of risk management and control in the banking industry. Over the last 3 years all banks and FI's are reported record profits and probably it has induced the banks to be lethargic on their risk management. One wonders how such a big loss has been allowed to happen in an established global bank and how the trader has managed to hide losses for quite sometime.

It is also been reported that the trader has moved from the Middle Office to the trading floor and he is aware of the various checks and controls in the middle office and the back office and has devised ingenious ways to circumvent them and not get noticed. I expect that the worst thing to happen is to have some banking regulation which prohibits people moving from back/middle office to the trading desk. This would be a significant thing considering the fact that many aspiring youngsters take up roles within the operations and support group as they try to enter the lucrative trading world. Under normal circumstances, persons with experience in the operations or support role are considered favourably but with the present situation, it may become difficult.

In addition to the loss of USD7.2 billions on account of fraud, SG has also reported a write off of Euro2.1 billion on account of derivative transacations on Collateralised Debt Obligations.
The sub-prime meltdown has so far resulted in a write off of USD133 billion dollars by various banks and financial institutions and on its way it has dethroned four Chief Executive Officers of various banks and Financial Institutions. We still need to wait and watch for more write-offs in the coming quarters.

1 comment:

adwait said...

The Soc Gen instance is another instance where it clearly indicates the risk management takes a back seat before greed and making the shareholders happy. Everyone partied when banks and institutions were making money in tons from the sub-prime lending. Now people who have nothing to do with residing in other parts of the world too have to fund the US Govt. to face the crisis. It will be wise that the regulators and institutions have a relook at the exisiting risk management processes and principles. The way stock market is oscillating, i will not be surprised if we produce one, notwithstanding the fact that the retail participation in the market vis-avis the population is very low !!