Societe Generale today announced a $7.1 billion fraud by a rogue trader.
Stand by for indignantly dull columns calling for tighter bank regulation. Regulation is supposed to stop banks from getting away with things, and if there's one thing banks aren't trying to get away with, it's having rogue traders commit $7.1 billion worth of the bank's capital in a futile attempt to corner the world's fur-bearing trout market.
Meanwhile, what does this say about internal bank checks? That it's impossible to stop all fraud, and also, that people get lazy the longer they go without having a problem. Banks will now tighten up their trading standards for a while, which is no doubt a good thing, though as this Wall Street Journal history illustrates, eventually we'll have another one of these anyway.
If you're wondering why this sort of bad news tends to cluster with other financial crises, it's because a rising tide is a good place to hide bodies. AOL, for example, played games with its expenses to turn a loss into a profit, but got away with it because eventually the profits materialized. MCI Worldcom wasn't so lucky. And big financial bets like this one are most likely to go bad when the financial markets are doing something thoroughly unexpected, like completely melting down.
If you're looking for a sunny side to this, the best I can do is a small laugh:
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.
One presumes that Jerome Kerviel is not going to be working in the lucrative derivatives trading field any time soon. At the salaries he will be able to command, and allowing for reasonable living expenses and high French taxation, the SG stockholders should get their money back in a few hundred thousand years.
meganmcardle.theatlantic.com |
