By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
It wasn't quite the Bin Laden trade we wrote about months ago, but at $7.14 billion, it was noteworthy.
We're referring, of course, to the trades taken by 31-year old trader Jerome Kerviel, former employee of Societe Generale SA (SCGLY). In recent months, he made nearly $73.5 billion in trades on bets he placed on European markets - including contracts on the Dax, Eurostoxx and FTSE indices.
The sad thing is that according to several anonymous sources, Kerviel, who assembled the massive trades while betting on declines in the markets during 2007, was making the right bets. In fact, one source suggested that he only took on fictitious losing positions to cover up the winners he'd built up. And those losing positions are what ultimately caused the $7.14 billion hit to SocGen's balance sheet.
Publicly, Societe Generale doesn't agree.
Chief Executive Officer Daniel Bouton stated that Kerviel set up a fictitious company, which fronted losing futures trades. Bouton also indicated that Kerviel hacked company computers and control procedures to elude detection. SocGen management is going above and beyond to make the results of the ongoing investigation public. More details will likely come out for days to come.
In a bizarre twist, those close to the investigation, speaking anonymously, say that it doesn't even appear Kerviel had or would have profited from his gains – something Bouton confirmed in statements last week. It seems Kerviel's motivation was fame, not money: He wanted to be a star trader and run with the big dogs, when he should have just stayed on the porch.
If all of this is correct, it stands in stark contrast to the $1.4 billion trade in 1995 that all but wiped Barings Bank from the face of the earth. Singapore-based trader, Nick Leeson, was badly upside down and losing money for his employer, while pocketing an estimated $35 million in his own personal accounts. Using loopholes so wide you could drive a truck through them, Leeson managed to run up massive trading losses that equaled Barings entire assets, forcing the long-standing bank into bankruptcy. [Incidentally, Barings, which literally funded the Napoleonic Wars, was subsequently sold to Dutch giant ING Greop N.V. (ING), for a single British pound, just $1.98 at today's exchange rates.]
It also runs contrary to a similar trading scandal in Japan in the late 1980s when trader Yasuo Hamanako, known as "Mr. Five Percent" because he was believed to control five percent of the global copper markets, blew through $2.6 billion of Sumitomo's assets while trying to corner the copper markets.
Or the $4 billion in losses at Long Term Capital Management which cratered spectacularly when Russia defaulted on government bonds in 1998 and forced interest rate differentials between risk free assets and other government paper to increase sharply.
Then, there was the $6.6 billion Amaranth debacle. Energy trader Brian Hunter got upside down on natural gas positions that triggered massive losses when the company had to cover them.
For now, Societe Generale has a large enough balance sheet to take the hit, but it's had to seek an $8 billion capital infusion in the process. Like Barings before it, the French bank is now vulnerable to takeovers, but as Bouton acknowledged, "It wouldn't be the first time."
Nor the last... at least not when it comes to the litany of spectacular financial blowouts.
Despite the fact that the world is now clamoring for more oversight and controls, we suggest that no amount of regulation will help. Clever traders will always find ways to game the system and their supervisors will unwittingly encourage this behavior by maintaining the outrageous bonus structures and payouts for which Wall Street is now synonymous.
The old adage, "where there's a will, there's a way" is unbelievably true when it comes to the financial markets.
We think regulation is a moot point: The markets will eventually sort this out on their own, with the winners and losers ultimately self-selecting in a form of financial Darwinism.
News and Related Story Links:
- Money Morning:
This $900 Million Bet Has Global Traders Talking
- Money Morning:
The '$900 Million Conspiracy' Trade That Wasn't?
- Money Morning:
Rogue Trader Costs Societe Generale $7.2 Billion
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.