SocGen Trading Losses Greater than Amaranth

Jan 24, 2008: 10:29 AM CST

The magazine and news site Trader Daily reports that Societe Generale, France’s second-largest bank by market capitalization, reported a trading loss today of $7.1 billion dollars, topping last year’s stunning $6 billion loss in the energy markets by Amaranth.

SocGen’s loss stemmed from potentially deceptive exotic derivatives positions and over-exposure to the sub-prime market.

Also, the magazine reports that in a twist of irony, Risk Magazine named Societe Generale “Equity Derivities House of the Year” due to their ability to sidestep major losses from declining equities markets.

Andrew Hurst of Reuters reports that this style of fraud could strike hedge funds again, but larger in the future. Hurst writes that the loss was “blamed on a single employee, is a stark reminder that rogue traders can elude the most sophisticated security systems until it is too late.”

Treasury Secretary Henry Paulson, as chairman of Goldman Sachs (GS), once stated that “fraud could never be eliminated because big banks were the size of small towns.”

There were a number of hedge funds (some from banks) that were closed in 2007, and it is possible that a larger number may close as a result of over-leveraged, over-exposed trading activities in 2008 as the markets roil with increased volatility as of late.

While hedge funds and extremely large funds can amass extremely large profits for investors, they can also lose on their bets and empty the fund by a significant amount when their bets go awry.

To me, this is a lesson that things are much more difficult in the current financial markets than most people realize. It could pay to trade with extra caution and reduced positions sizes until the markets return to a more balanced, less volatile state.

2 Comments

2 Responses to “SocGen Trading Losses Greater than Amaranth”

  1. Charlie Says:

    I read that 1 person created this loss and he’s on the run now. Very serious stuff here.

  2. Corey Rosenbloom Says:

    That’s true. Usually, market news and scandals don’t unfold like soap operas, but this may very well happen here.

    It also seems he had precise knowledge of the bank’s security systems and carefully concealed his transactions so as not to be detected. He was in his mid-30s.