Thursday, January 24, 2008

“Computer Genius,” $7.1 Billion Fraud

The New York Times is reporting that a fraud by a single employee has cost the French bank Société Générale 4.9 billion euros. The fraud was committed by a trader in charge of “plain vanilla” hedging on European index futures.

The trader’s actions were found to be a case of “isolated fraud,” the bank said, and officials said they were convinced the trader had acted alone.

Speaking at an afternoon press conference, Christian Noyer, governor of the French central bank, the Bank of France, described the trader as a computer “genius.”

“I am totally serene,” Mr. Noyer said. “I wouldn’t be if the bank wasn’t in a very solid situation...

Mr. Noyer also said the fraud had shown that new measures would have to be introduced to prevent a repeat and that the central bank would begin an investigation...

Howard Lutnick, chief executive of Cantor Fitzgerald, said that if one trader had managed to undertake fraud on this scale it revealed bigger weakness in the risk management system of the bank...
It does seem that the bank's serenity could use a bit of worry about its risk management procedures and controls.

It also appears that Jérôme Kerviel has set a new world record for financial trading fraud.
In 1995, Nick Leeson, a trader in Singapore, incurred a loss of $1.8 billion by making $27 billion of bad bets on Japanese markets, bringing down the venerable British bank, Barings, in the process.

In 1998, Yasuo Hamanaka, once the chief copper trader at the Sumitomo Corporation, was sentenced to eight years in prison after pleading guilty to hiding $2.6 billion in trading losses.

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