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Just Shoot Me

Bala, 28, Gordon Gekko in the making, pseudo-intellectual, cynic, bibliophile, obsessive compulsive ranter...

I have a bridge to sell you..

January 28, 2008

When markets crashed last monday, a rumour started going around that some big bank has gone bust and was selling its positions in a firesale. Then another rumor came by that it was citibank and it was filing for bankruptcy.

Apparently it was due to the liquidation of jerome kerviel's positions by societe generale. Societe Generale is claiming that kerviel single handedly caused a $7 billion loss by taking up positions far larger than his trading limit. Apparently he managed to do this by his knowledge of the risk management systems and computer wizardry. If you believe that kerviel managed to fool the entire bank by doing a Nick Leeson then i have a bridge to sell you in Madurai. It is a prime piece of investment over vaigai, i assure you. For one thing risk management has come a long way from the days of the barings bank collapse, when they let Leeson settle and risk manage his own trades. While Leeson was doing some mildly complex option writing, Kerviel's position was nothing fancy - it was a simple long position in European indices: eurostoxx,DAX and FTSE with a non-existent hedge.

societe generale is claiming that a single trader took a $50 billion position without anyone finding out (which is incidentally worth more than the networth of societe generale itself!!). Even in a midsized indian brokerage house, there would be alarm bells ringing in the risk management division, if such a big position gets taken (if at all such a big position is allowed to be taken). The more i read on this, the more it looks like a badly scripted B movie.

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PS : This reuters article describes what supposedly happened. Go figure it out.

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posted by Bala, 6:28 PM

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