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Financial Engineering: The Evolution of a Profession by Cara M. Marshall, Tanya Beder

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Chapter 19

Derivatives Case Studies: SocGen, Barings, and Allied Irish/Allfirst

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CASE STUDY ONE: SOCIéTé GéNéRALE1

Event Summary

In what the Wall Street Journal (1/24/2008) called a “singular feat in the world of finance,” Société Générale (SocGen) announced a €4.9 billion (US$7.2 billion) loss on January 24, 2008, as a result of the misdeeds of a single rogue trader. The bank characterized the largest rogue trading event to date as the result of “elaborate fictitious transactions” that allowed the 31-year-old trader to circumvent a series of internal controls. The trades in question involved the arbitrage of plain vanilla stock index futures.

The trader previously worked in a back office function for the bank and gained knowledge of how to circumvent the bank's systems through this prior position. He was initially characterized by the governor of the Bank of France as a “computer genius,” but over time came to be known as an unexceptional employee who worked very hard to conceal unauthorized trading positions. SocGen estimated that the value of Jérôme Kerviel's positions was €50 billion (US$73.26 billion). A report published by the French Finance Ministry said that Kerviel's rogue trading started in 2005; he was allegedly given a warning at the time concerning trading above set limits.

In addition to the €4.9 billion trading loss, the French Banking Commission levied a €4 million fine against Société Générale on July 4, 2008; this brings the total loss ...

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