I wonder how many rougue traders are caught after making money? I would assume just as many that are losing. How would the firm handle these situations? My guess is that they would report it as gains from their trading desk and give the trader a slap on the wrist along with a huge bonus. I seem to recall a certain firm generating huge gains from their trading desks out of nowhere.
In my books the guy is a genious, he knew the systems and the risk management policy of one of the largest banks in the world so well that they couldn’t detect it for so long. They should have paid him more than 100K Euros
Here’s my guess/take on what happened. First, I highly doubt the guy is a computer genius. I’d bet that this is just a variation of what Joseph Jett did at Kidder Peabody in 1994. Basically this guy probably learned when he was a BOM that if a trader wanted to do business with a new counterparty a form is filled out, sent to credit, the counterparty is vetted a limit is approved, and then the BOM is given approval to set up the lmit in the system. The weakness in systems like this is that they are designed to make sure no trades are made in absence of limits, but not to make sure that no ifctitious clients/limits are established. The guy then sets up fake limits for a fake counterparty and books offsetting trades to this account equal to the losses with real clients. Or they could use real sounding names with fake addresses (ie ML Futures America c/o PO Box etc.). You set up very loose ISDA/CSA margin call requirements. Joey, there is almost no way that a risk manager would pick up on this because everything is marketed-to market and valued properly. By the way, I am NOT typing this from a jail cell and this is not meant to be career advice for anyone.
anybody can fraud a risk management system if they dedicated themselves to it. you can set up systems for checks, but if you know the insides of how to tweak the system, then you’re rich.
ha, wsj has the picture of the guy…i guess he is no longer employable in the industry…unless they make him a security expert of some kind like kevin m., after he does jail time of course…speaking of jail time how many years does a guy who lost 7.2 bn face? eternity?
In my experience the whole issue of getting rich is the problem with risk management systems - the systems are set up primarily to make sure no one can steal/extort money from the company, which is extremely difficult. Properly monitoring positions is then only a secondary consideration. Note that all of the major rogue traders were not stealing money outright, rather they were trying to hide their own bad trades.
just think of all the rogue traders that did not get caught. they have Mayweather money for sure.
Banks should hire this guy to back test their risk management systems, just as computer companies hire hackers to find security holes in their operating systems.
That is a nice idea, abacus! Afterall, this guy’s got a pitch that can’t be beat. Maybe he can find a place on the Streets afterall.
Super I Wrote: ------------------------------------------------------- > Here’s my guess/take on what happened. > > First, I highly doubt the guy is a computer > genius. I’d bet that this is just a variation of > what Joseph Jett did at Kidder Peabody in 1994. > > Basically this guy probably learned when he was a > BOM that if a trader wanted to do business with a > new counterparty a form is filled out, sent to > credit, the counterparty is vetted a limit is > approved, and then the BOM is given approval to > set up the lmit in the system. The weakness in > systems like this is that they are designed to > make sure no trades are made in absence of limits, > but not to make sure that no ifctitious > clients/limits are established. > > The guy then sets up fake limits for a fake > counterparty and books offsetting trades to this > account equal to the losses with real clients. Or > they could use real sounding names with fake > addresses (ie ML Futures America c/o PO Box > etc.). You set up very loose ISDA/CSA margin call > requirements. > > Joey, there is almost no way that a risk manager > would pick up on this because everything is > marketed-to market and valued properly. > > By the way, I am NOT typing this from a jail cell > and this is not meant to be career advice for > anyone. Previous role was in risk mgmt. for a short time and I agree with the above statement. Not sure about all the functions risk mgmt. provided, but for the most part, my previous group was mostly monitoring limits and quantifying how much risk was on the books. That’s it. P & L stuff was monitored with detail by product control, settlement by operations, and economic details of the trade recorded by documentation. This sounds like it’s more of operational risk. my 2c.
The risk manager for this book was a useless t!t, to use a technical term. Equity futures are marked to market, no?, so how did this guy hide 7bil so easily? No way you can explain this away. The irony is, apparently, the guys was massively in the money up until the end of December and only started bleeding profusely over the past two weeks. The CEO turned to be a useless t!t of equal proportions and told the guy to shut down the position right away, regardless of the cost. Had they played it in a more reasonable way they might have saved a few billion. But then again, people might have gotten wind of what was happening and squeeze them for a few billion more, so who knows?
This Societe General thang in Paris has Bambi’s name written all over it. Shame.
hobbes928 Wrote: ------------------------------------------------------- > Previous role was in risk mgmt. for a short time > and I agree with the above statement. Not sure > about all the functions risk mgmt. provided, but > for the most part, my previous group was mostly > monitoring limits and quantifying how much risk > was on the books. That’s it. P & L stuff was > monitored with detail by product control, > settlement by operations, and economic details of > the trade recorded by documentation. This sounds > like it’s more of operational risk. my 2c. Risk management that just looks at limits and market risk is completely useless. Operational risk is hugely important part of risk management. How many huge disasters are due to operational problems, not market problems?
well a similar sort of stuff up happened where i used to work (the world’s largest bank)… I was in FX settlements, and it was around 10 minutes until close of settlement… a rather large order came through to myself (orders are supposed to be taken by dealers, but im guessing since it was urgent they sent the settlement instructions before placing any orders with our dealers)… anyway, i forwarded the message to one of our dealers to place this order… i didnt see the order go through, so i forwarded it to another dealer… still didnt go through, so i sent it to a third dealer (thinking they must have gone for the day)… a couple minutes before close, three orders went through… and we settled one of them… the next day, they closed out one of the orders, picking up the duplicate… i went on holidays for a couple weeks, yada yada yada, i come back, and my mate in confirmations (after a monthly rec) realises that one of the orders had been mistakenly open this whole time, and that the dollar had moved against us, and we were sitting on a rather large loss… anyway, sht hit the fan, yada yada yada, but a couple things to note: -the dealers did not consult each other or the client when placing the order. They simply took the word of a BO staff -when the error was eventually found out, there was talk amongst the big boys about hiding the trade by placing a dummy offsetting trade, and trying to ride out the loss, or possibly even doubling up so, i think it could and does happen all the time…
TJR Wrote: ------------------------------------------------------- > I wonder how many rougue traders are caught after > making money? I would assume just as many that > are losing. How would the firm handle these > situations? My guess is that they would report it > as gains from their trading desk and give the > trader a slap on the wrist along with a huge > bonus. > > I seem to recall a certain firm generating huge > gains from their trading desks out of nowhere. Enron?
FRM candidates will have one more case to study for their exams - theory is one thing, practice is entirely different business. Despite the most sophisticated models, systems, BASEL … and troops of professionals who are supposed to know what is going on, most major companies could still be caught in these subprime mortgages and monumental fiascos. What is needed is good business sense, common sense and independent thinking, not more model building, number crunching and blind herd instinct.
I echo all of the comments above in this thread and I would also add the fact that many risk related controls usually rely on the use of system generated “canned” reports or, in some cases, reports that are customized by in-house IT personnel, for which the tables are rarely examined/updated (not an expert, just what I have witnessed in my experience). Even further, some are created by outside consultants who eventually move on to other clients and no one at the company can figure out “what they did.” The article in the WSJ today stated that this guy had two IDs and passwords, one which sounded like an IT Admin access account. It also noted that the bank had a “complex” system, which can also signify that it was outdated or had so many customizations/patches, muddling its entire structure. If this guy had admin rights and knew the banks monitoring tools, etc., he could have easily moved his account codes off of certain tables that the system uses for reporting purposes only, but kept them attached to tables used for trading purposes. This is just a wild guess and it’s certainly only worth .02, but it does not take a “hacker” to do this kind of stuff. A few old dusty manuals sitting around in the office would have given him all the information he needed to mess around with the software, after hours when his supervisors were gone for the day.
Source at Société Générale: “He spent hours trying to explain his way out of this. He seems to have been some kind of Walter Mitty character who had managed to convince himself that he had come up with a great new trading strategy, and if he was given time it would make a lot of money for the bank.” - The Daily Telegraph although I’m with conspiracists and agree to this position: Gilles Glicenstein, chief executive at BNP Paribas Investment Partners: “There is still some information missing to understand what happened. Because the scale of the fraud is so large, there must be a complex explanation.”
Does anyone else find it interesting that about 3-4 people have suggested their own ways to beat a system? Probably suggests that: a, it’s not that tough, and b, these places need to keep a better eye on what their employees can access.