The SocGen fraud story, which is flabbergasting the industry and providing a distraction from credit crunch woes and hand-wringing about the dangers of overly complex structured productios, is remarkable for a number of reasons.
The losses don't come from any exotic OTC dealings. Instead, the trader was dealing in plain vanilla futures on European stock market indices.
FT Alphaville points out that, with even the worst performing European equity markets off 20 per cent since the beginning of the year, to rack
up a €5bn loss, they would require a delta of at least €25bn. In reality, the position in question may have needed have been between €30bn to $40bn to generate such vast losses. How could such a huge position have been hidden?
According to the
bank's statement, the only reason the trader could hide the unfeasibly large positions they were losing on was because of their middle office experience and knowledge of the control systems in place.
Presumably before becoming a trader they had previously worked in the middle office - that relatively new function within banks that was created by many institutions in response to organisational weaknesses exposed by the Barings case. Ironic isn't it?