MICHELE NORRIS, host:
A young European futures trader has pulled off one of the biggest bank frauds in history. The French bank Societe Generale says that a rogue trader admitted to pulling off the $7 billion scheme. His name is reportedly Jerome Kerviel and he was quickly fired. It's a mystery, though, why he did it. The trader seems to have gotten no personal financial gain from his efforts.
Jeff Cane has been following the story. He's a deputy news editor for Portfolio.com. While the bank hasn't released the name of that trader, Cane says, we do know a little about him.
Mr. JEFF CANE (Deputy News Editor, Portfolio.com): We know that he is 31 years old. He is a graduate of the University of Lyon. He has master's degree in finance. He joined the bank in 2000. And he appears to be a very low-level trader in the bank, not a star, not a big executive. He was someone who was engaged in a rather mundane world of equities trading, what the bank referred to as plain vanilla futures indexes. And how he did this was probably because he had previously worked with the bank, working in its back office, so he was very familiar with the bank's procedures, its controls. And somehow, you know, through his knowledge of computers and the systems, he was able to create large trading positions in ways that the bank did not detect until this past weekend.
NORRIS: Large trading positions? So how many of these transactions, these fraudulent transactions, did he have to put together to get to that $7 billion figure?
Mr. CANE: That's right. Well, when the bank first uncovered it this weekend, they said that they estimated that the position would represent a $1 billion loss. But on Monday and Tuesday, we had very sharp falls in stock markets. And that's how the loss ballooned to $7 billion as the bank tried to unwind or sell positions that this trader had created without any authorization.
NORRIS: Because this is a bank that is known for managing risk and for dealing in this - in trading in this complex derivatives, did that help this trader actually put together this scheme? I'm trying to understand the difference between, you know, betting on these derivatives and actually moving into, you know, the area of outright fraud.
Mr. CANE: Right. Well, I guess his genius was creating fictional countertrades that made it appear as if he was not actually making the bet but hedging it in some way. You know, you're making counter bet. But those trades were fake. I think his genius is in figuring out a way to make it appear that he was doing what he's supposed be doing, which was, essentially, mitigating risk, and instead taking on even more risk by a big trading position. So he was someone who knew what things that someone supervising the trading would look for. So he could create these fictional elements that would - to persuade them that everything was being done properly.
NORRIS: And on a trading floor where a certain degree of risk was the norm?
Mr. CANE: Exactly, yes.
NORRIS: And $7 billion - how do they make that up?
Mr. CANE: The bank is going to have to raise further 8$ billion in capital by selling securities to shareholders. The bank still managed to report a small profit for last year. It had been doing fairly well, but fraud is a real blow to it. Mainly a blow, though, to its reputation more than its finances. It's a bank that it known for its prowess in trading of equity derivatives. So the fact that one person was able to circumvent all the controls, given all the oversight they have - they have thousands of people who are doing nothing but, you know, checking their books, making sure everything is done properly, how he was able to circumvent that, the systems in place, is a real blow to their reputation.
NORRIS: This is said to be the biggest bank fraud in history. Put this into context for us. How big was this fraud as compared to others?
Mr. CANE: Sure. Sure. I think it's by far the biggest bank fraud ever. I mean, the only comparable bank fraud we've had in recent years has been 1995. Nicholas Leeson, a British trader in Singapore lost 1.4 billion for the British bank Bearings that wiped out the cash reserves at Bearings, forcing the bank to collapse. And this is more in the six themes that. We've had some bigger trading losses, but they have not involved banks or involved rogue traders. So this is really the record by far.
NORRIS: Jeffrey Kane, thanks so much for talking to us.
Mr. CANE: Thank you.
NORRIS: Jeffery Kane is a deputy news editor for Portfolio.com. He joined us from New York.
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