I just find this whole story hard to believe!

According to the official version of events, a single, undistinguished trader ran rings round SocGen's vast risk management system to take massive – and as it turns out, un-hedged – positions in European equity futures."

SG lets a junior trader handle that amount of money? Senior management should be shown the door and the authorities brought in to do an audit. Convenient to "claim" your trading losses dwarfed your credit losses. This whole story stinks like rotten Camembert!

Is my perception of this case wrong, do I have my facts wrong, can somebody help me clarify?

SOCIÉTÉ GÉNÉRALE'S $7.2-BILLION LOSS

Since then many senior traders at leading European banks expressed their doubts that this could happen the way it is described saying: "I am sorry but I have a hard time buying the fact that a trader was able to set up a 'secret trade' of €4.9 ($7.2) billion without anybody finding out." And another: "The most serious thing is that this puts into doubt the risk management systems at some banks. You can't suddenly announce from one day to the next a hit (loss) of $7 billion. And all in 12-13 trading day's?
and : ``I find it really improbable that this trader was not abetted by at the very least incompetence, if not assistance from others,'' said Joseph Mason, a risk-management researcher and professor of finance at Drexel University in Philadelphia. ``Ultimately, we're talking about a breakdown of fundamental operational controls.''

This case now looks like a page taken out of Nick Leesons book 'Roque Trader' (there was also a film based on the story). But there is a big difference beside the fact that the losses are more than four times the $1.4 billion of losses by Leeson that brought down Barings Plc in 1995. There are very obvious differences between these 'roque traders'.

Nick (Leeson) acted in multiple rolls as general manager, head trader and de facto head of the back office. This constituted a clear breach in segregation of duties as the idea behind segregation of duties is to prevent any one person abusing a position of authority enabling ultimate control and knowledge of specific operations at any one time. So without this oversight, Leeson was able to transact unauthorized derivatives (futures) at off-market prices and hide losses in an '88888 account' which he inherited and supposedly falsified.
When debts fell due and payable, he was similarly able to making misrepresentations to secure funds from companies within the Barings organization and mislead clients into lending funds.

In this environment, smaller losses of few tens of thousands can be easily recouped in as little as one to three days, hence small looses can be hidden in the larger gains. With the losses hidden, it's easy to reveal other another card hand that boasts gigantic profits adding an aura of unquestionably to a status as lead trader. This in turn affects the effectiveness of audits that are based on voluntary full financial disclosures by the Client. In a sense, Leeson was the end of the audit paper trail as far as decision making was concerned; effectively the whole process controlled by one person, the skies your limit.

Some speculate that Leeson was a most unlucky trader in history. chalking up a streak of accumulated losses of two billion dollars.

Afterward Nick stated: "I was astonished that nobody stopped me. People in London should have known that I was making up the numbers….. My numbers were hopelessly out of orbit, yet nobody stopped me." – p. 33, 177, Nick Leeson, 'Rogue Trader.'

Enter Jerome Kerviel, SG's junior trader creating $7.2 billion loss in less than 14 trading day's in 2008?
On the other hand, and although similar to Mr. Leeson's '88888' account, the trader, Jerome Kerviel, built his own virtual company (or '88888' account) within Societe Generale, bank officials said. He balanced each bet with a fictitious one for almost a year. On Friday, a routine check found a trade that exceeded the bank's limits. A call to the other party in the trade found the transaction didn't exist.

``He was running two books simultaneously, one real and one false,'' Bouton said at a press conference yesterday in Paris.

So, the trader, Jerome Kerviel, 31, built a virtual company within Societe Generale, bank officials said. He balanced each bet with a fictitious one for almost a year. On Friday, a routine check found a trade that exceeded the bank's limits. A call to the other party in the trade found the transaction didn't exist.
``He was running two books simultaneously, one real and one false,'' Bouton said at a press conference yesterday in Paris.

His approach was to balance each real trade with a fictitious one, and his ``intimate and perverse'' knowledge of the bank's controls allowed him to avoid detection, co-Chief Executive Officer Philippe Citerne told reporters. He rolled over his real trades before they reached maturity.
Yet, by the end of December, he was ``massively in the money,'' said Collas of SG. (Only) since the beginning of the year (2008) his trades became unprofitable! Meaning he lost all this money in 2008 (18 day's / < 5 trading day's) = 12-13 trading day's?
And according to SG, "The trades first came to management's attention on the evening of Jan. 18, when a compliance officer found a trade that exceeded the bank's limits, Mustier said. When Societe Generale called the counterparty, they were told the trade didn't exist".

Jerome Kerviel, the employee, who moved to the trading floor from the back office in 2006, helped with the investigations throughout the weekend, said Mustie. (and possibly worked him over [ed]?)
"The trader (Kerviel) didn't enrich himself from the fraudulent trades, which began in early 2007, and his motivations are unclear", Bouton said at the press conference.

Societe Generale's Mustier first got wind of the record trading fraud on the evening of Friday, Jan. 18.

So how is this scenario possible and how does one answer these obvious questions?

·In order to loose €4.9 ($7.2) billion in the futures market he would have to trade 10's of million future contracts by himself.

·If the loss on these contracts was 10% he would have (€49 billion) $72 billion at his disposal?

·The margin requirements necessary on the number of future contracts necessary to produce such a loss would come to about €400 million. Where did the money come from?

·European daily volume of futures only trade about 30% of that amount – that including all the bank's, not just SG.

·Moreover, if a single position becomes more than 10% of the open trades, it automatically becomes noticeable in the futures exchanges and sets of alarm bells with not just other traders but internal and external security. This didn't happen in this case?

·SG supposedly doubled their risk management personnel over the last few years to create an extremely sophisticated systems. How did he get around it?

·It's now claimed that Kerviel was a "computer genius" but his resume states that he 'has knowledge of Microsoft office suite' and majored in business at Lyon University He could be a genius, why not. But with all the other facts that don't add up, it almost defies credulity.

·SG has decided to prosecute him but on only very limited terms: document fraud and attacks on their internal control systems while not pursuing any monetary damages and saying that he did not attempt to profit from the trades. This will, of course, allow them to pursue him in the courts on a very focused case which reduces the risk that they will have to reveal any of their internal accounting

·He had to breach five levels of controls to get away with his trades, Bank of France Governor Christian Noyer said at a press conference yesterday

·His ``intimate and perverse'' knowledge of the bank's controls let him avoid detection, co-Chief Executive Officer Philippe Citerne told reporters.

Are the trading losses ascribed to Jerome Kerviel, vastly exaggerated, did the bank use this occasion to hide overall losses, is he going to be found dead soon?

Next: The rise and fall of a rogue trader Obituary?

Jérôme Kerviel blamed for SOCIÉTÉ GÉNÉRALE'S losses totaling $7.2-BILLION.

So who is Jérôme Kerviel?, Jan. 11 1977, from Port-l'Abbe in Brittany (now aged 31, a builders son (who died last year), studied finance at Nantes and later at the business University Lyon with a Masters degree in finance (organization and control of financial markets).

In Sept. 2000 he was hired by SG and spent his first years at Société Générale working in back office operations, learning the ins and outs of the bank's control systems.

In march 2004 He quietly takes up a small portfolio trading European equity indexes, disguising his trades using his computer acumen?
Getting bolder In the middle of last year, he began trading futures contracts, making unauthorized,
big bets that stock indexes would continue to rise.

Reckoning Last week, a bank official discovered the trades, by then massive money losers. Monday, (Martin L. King day) the bank unwinds the positions, erasing two years' profit.

In the meantime: Societe Generale said that it has already closed all the positions set up by the trader, who had used his experience working in the back office to hide his trades through fictitious transactions.
Societe Generale said it's taking 1.1 billion euros of writedowns linked to the U.S. residential real estate market, 550 million euros related to U.S. bond insurers, and 400 million euros on other unspecified risks.In the third quarter, the bank reported 375 million euros of write downs and trading losses linked to turmoil in financial markets. The world's biggest financial companies have announced more than $120 billion in write downs and credit losses as the U.S. housing slump rattles debt markets.
Jerome Kerviel, 31, was the trader responsible, the Paris- based bank said today. Societe Generale plans to raise 5.5 billion euros from shareholders after the loss and sub prime- related writedowns depleted capital.
The Bank of France, the country's banking regulator, is investigating the alleged fraud.
The trading loss wipes out almost two years of pretax profit at Societe Generale's investment-banking unit, run by Jean-Pierre Mustier. The company said it's suing the trader, who had a salary and bonus of less than 100,000 euros a year and worked at the bank since 2000.

But do remember: By the end of December, he was ``massively in the money,'' said Collas. (it's only) Since the beginning of the year his trades became unprofitable.

Other:
Societe Generale joins a list of at least five financial firms since the start of the 1990s to suffer losses from unauthorized trades, including Kidder Peabody, Barings, and Allied Irish Banks Plc.
Societe Generale's report of fraud comes four months after French competitor Credit Agricole SA said an unauthorized proprietary trade at its investment-banking unit in New York cost it 250 million euros.

In 1994, Kidder Peabody, then owned by General Electric Co., took a $210 million charge against first-quarter earnings to reflect what it said were false profits recorded by bond trader Joseph Jett. The allegations and unrelated bond losses led GE to sell most of Kidder to Paine Webber in 1995. UBS AG bought Paine Webber in 2000.

Sumitomo Corp. disclosed a $2.6 billion loss in 1996 on copper trades. The Japanese firm blamed unauthorized trades by its chief copper trader, Yasuo Hamanaka, who was known as ``Mr. Copper'' in the markets because of his aggressive trading. Hamanaka was sentenced to eight years in prison in 1998.

Allied Irish Banks Plc discovered in 2002 that John Rusnak, a trader at its Allfirst Financial Inc., had amassed and hidden $691 million of losses over more than five years before the company noticed any discrepancies. Rusnak was sentenced to 7 1/2 years in prison. Allied Irish sold the Baltimore-based unit to M&T Bank Corp.

At last account, according to a neighbor, police are entering his building in Neully to search Jérôme Kerviel's apartment.

All the elements of a classic genre "film Noire?" Hope it may have a happy ending!

See also: http://online.wsj.com/article/SB120115814649013033.html