Tuesday, February 05, 2008

More information revealed about Societe Generale

Today International Herald Tribune has made some startling revelations about the trading fraud at Societe Generale. The article contains information related to warnings made to the bank in November 2007 by the surveillance office of Eurex one of the biggest European exchanges. Please find the informative article here.

Sunday, February 03, 2008

Societe Generale and Risk Management 101

The corporate world was in for a total surprise when Societe Generale uncovered the massive trading loss of EUR 4.9 billion (USD 7.2 Billion). This loss is termed as the largest such loss in the banking world.

If we put this figure into perspective, it would be interesting to observe that, the net income of the corporate and investment banking division of Societe Generale was only EUR 2.3 Billion and the banking revenue of the same unit was only EUR 6.9 Billion in 2006 (Click here for details accounts from the web site of the bank ). It is similarly interesting to note that this loss caused by a single trader dwarfed sub prime write offs announced by Societe Generale which was a “mere” EUR 2.05 Billion.

The biggest question is how a single rouge trader could have done such a damage unnoticed to the immediate supervisors or the top management of the corporate and investment banking unit of Societe Generale. Considering that this fraud has been going on for last 3 years, one would get a reasonable, doubt about the auditors who certified the financial records of past years as well.

However Societe Generale did have a bigger responsibility in its hand to prevent such losses by enforcing the needed system controls. Amid these developments one might think that more sophisticate software systems are needed to detect such frauds which apparently have involved fictitious companies/trades. However as an IT professional I believe that even a simple system control would have detected this fraud in the very beginning of it. In my opinion if the total volume or total amount of transactions that can be executed by a trader was restricted by the bank and if the supervisors had access to reports of individual traders’ performance, it would have been much more difficult for the rogue trader to carry on executing the fraudulent trades. However it is hard to imagine that the software used by Societe Generale did not have the above mentioned functionalities which are nowadays built into most financial transaction handling software. Although the investigations are underway, I would rather form the hypotheses that these controls were not strictly enforced by the bank authorities, which essentially is a fundamental human error. Although the bank has been using apparently sophisticated risk management software (See a related report here ) , it is surprising how they might have managed to neglect 101 of Risk Management.

While the investigations are going on related to the uncovered fraud, it would be a good idea for Societe Generale to re-evaluate the accuracy of write offs previously made with regard to the US sub prime exposure, and undertake a thorough investigation of all its futures and other trades which used similar management control systems. Hopefully this would help to avoid future surprises.