Juan Toro

Soc Gen reported today a 7 billion dollars write-down because of a rogue trader. Someone within the prop trading group of the bank disguised a trade that is going to cost the bank half its capitalization. This is a big number. A loss bigger than those accounted by LTCM and Amaranth when they got into troubled. We will soon know more details about the affair but generally the explanation of risk mismanagement is straightforward. Someone (this someone is later called a rogue trader) holds a trade with a risk profile that is unknown to the risk manager either because the latter does not follow the positions of his group correctly or because he does follow them closely, but does not understand their implications. This latter reason is explained in terms of sophisticated derivative positions. The final conclusion is that: the trader fooled the manager. This probably happens more often that reported, though it is only reported to the press when it ends up in huge losses.
Who else did the rogue trader fooled? It seems it fooled the Fed. Or so the street is saying and the market is confirming with a steep rise in the stock market. The story is that the Soc Gen debacle forced the Fed into an emergency move by making officials think it was a situation of a market crash. Officials at Soc Gen said that the firm “discovered this at the same time as the market was plummeting.. We really had to settle those positions as fast as we could and we did so during the three days crisis that you all witnessed”
It seems the rogue trader fooled a lot of people. Having said that, the economic numbers are still there.

Posted on 24 Enero 2008 in Financial Markets

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