24 January 2008

Bringing a Bank to it's Knees

And with the whole recession and crisis in the financial markets, comes one (probably of many to come) disaster stories.

France's second biggest bank, Societe Generale has just announced a massive fraud case of $7.14 billion, performed single-handedly by one trader. The bombshell of a discovery happened during the weekend, as the bank uncovered positions the trader had taken, which have been declining in value since summer of last year. As soon as the bank discovered the fraud, they had to alert the market regulators and immediately close the positions, and with the world stock markets dropping sharply on Monday and Tuesday, they incurred a total loss of $7.14 billion.

The whole situation has destabilized a bank already heavily exposed to losses from the subprime mortgage crisis, with it's share prices losing almost half it's value over the past six months.

The trader supposedly acted alone, and kept his transactions undercover through his vast knowledge of the details of the bank's system. Through ficticious trades and misleading investors, he was trading unbelievably large amounts in futures. With the losses incurred last year, instead of closing the positions, he took even riskier positions to try and make up his losses, over and over until this weekend, when closing the positions resulted in the above loss, which is the largest ever by a single trader.

The trader, named Jerome Kerviel, has been with the bank since 2000, earning a measly salary of less than 100,000 Euros a year (incl. bonuses) which in the investment banking world, is peanuts.

So what does this mean to the current situation? Well, investor trust in banks and financial institutions is already stooping to a low, and with this, more doubt about their stability during this tough period appears. Keep an eye out for more and more difficult situations and shockers such as this emerge over the next few months.


Anonymous said...

Read about this yesterday. It's unsettling to know one person can screw the system like that.

..::Amu::.. said...

wow thats scary!!

Jay Cam said...

so he lost the bank 7 billion dollars? what a loser!

i was going to say that it would pretty cool if he stole that much... but he didnt!