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From: http://news.sky.com/skynews/article/0,,30400-1302192,00.html
The facts are still unclear about the rogue trader who cost one of France's biggest banks, Societe Generale, around £3.6bn. The bank itself said the trader had been carrying out "vanilla futures hedging" on European equity markets. In layman's terms, that means he (we are told it was a he) was betting on which way the markets were going - and got the bets wrong, therefore losing more and more. The trader took out
"massive fraudulent directional positions in 2007 and 2008 beyond his limited authority", said Societe Generale chairman Daniel Bouton."Aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle office, he managed to conceal these positions through a scheme of elaborate fictitious transactions. Once again, in simple terms, that means the trader was gambling much more than allowed and disguising his ever-increasing losses through fake transactions."
Other famous scandals are:
- Enron: 2001: $31.8 billion
- Parmalat: 2003: $17 billion
- BCCI: 1991: $16 billion
- Worldcom: 2002: $11bn
- Amaranth: 2006: $6.6 billion
- Long Term Capital Management: 1998: $4 billion
- Sumitomo Copper scandal: 1996: $2.6 billion
- Barings: 1995: $1.7 billion
- Allied Irish Bank: 2002: $691 million
- Refco: 2005: $430 million
It is clear that as the complexity of the global financial system increases, the number of scandals will increase in proportion. Just like terrorism is en inevitable consequence in a (global) society which has crossed the red line in terms of complexity, the same may be said of financial scandals. Excessively high complexity is very inviting to criminals for two reasons:
- It offers protection and makes it easier to hide
- It makes the system fragile, therefore vulnerable
The fact that the French rogue trader had got it wrong is not surprising. In the last few days the whole world got it wrong. If you add the human emotion component to a stochastic, non-linear, non-stationary, chaos-dominated, punctuated by bifurcations and non-ergodic dynamics of the global stock market, trading financial products of overwhelming complexity (so complex that many banks still don't know how much they have lost on the US sub-prime crisis - some banks might actually default even though they still don't know about it!) how can anyone get it right? Playing the stock market which interacts with a turbulent, hysteric and entropy-rich economy is definitely not an exercise of determinism.
But the point, however, is that it is only in such highly complex markets and extremely complex financial environments that similar fraudulent behaviour may be hidden for so long. Only an extremely complex environment is capable of hiding 5 billion Euros without anyone knowing. The magnitude of the fraud is surely in proportion to the complexity of the environment one operates in.
Complexity management!
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