dowjonesstockmarket1.jpgOkey, here we go again.

I was just reading the story of how Nick Leeson brought down Barings Bank in fraudulent derivatives trading way back in 1995. Well, I am not into trading so i wouldn’t know wtf is a derivative. But it looks like it is something that can make you lose your balls if you make the wrong bet.

That Barings collapse was said to have triggered the Asian financial crisis. So here again is the so-called ‘rouge trader’ causing havoc on worldwide financial transactions. Ahhh, money, money, money….

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THE NEWS

Did SocGen trades trigger market rout, Fed cut?

By Sitaraman Shankar and Blaise Robinson2 hours, 35 minutes ago

REUTERS. – Societe Generale’s shock disclosure of a fraud that lost it $7 billion has left investors wondering about a link between the fiasco and Monday’s European stock market rout.

The sharp fall, which was followed by an emergency U.S. rate cut, came as SocGen tried to close out positions built up by one of its traders.

SocGen, France’s second biggest bank, said on Thursday that it had been the victim of a massive and “exceptional” fraud by a junior trader resulting in losses of 4.9 billion euros, and announced a large capital increase.

SocGen said the trader, responsible for futures hedging on European equity market indexes, had taken massive fraudulent positions in 2007 and 2008 beyond his authority.

The bank said it had decided to close the positions as quickly as practicable after they were discovered on the weekend of Jan 19 and 20.

This has brought under the microscope the massive declines in European shares on Monday, January 21, when over $350 billion was wiped off the value of top British, German and French shares — an amount equal to the combined gross domestic product of Hungary and Greece.

The FTSEurofirst 300, a pan-European stock market benchmark, fell nearly 6 percent on that day, its biggest one-day fall since the attacks of September 11, 2001.

And the U.S. Federal Reserve served up a surprise 75 basis-point interest rate cut on Tuesday, a move that managed to limit declines in U.S. stocks when they resumed trading after Monday’s Martin Luther King Day holiday.

“The huge amount of futures selling could be one reason why markets fell off a cliff on Monday, and maybe that was an ingredient in forcing the Fed to bring forward a part of its interest rate cuts,” said Andrew Bell, European strategist at Rensburg Sheppard.

A Fed source later said the central bank had not known about the SocGen fraud when it made its rate decision on Monday.

The stock slide on Monday has contributed to making January the worst month in more than five years on European bourses, and European shares have lost 12 percent so far this month, compared to a 3 percent gain at this time last year.

This was even after a sharp increase on Thursday, as hopes for a rescue package for monoline bond insurers in the United States, and strong results from handset maker Nokia offset any impact SocGen’s announcement might have had.

HUGE VOLUMES

stock-market.jpgReuters data showed that the volume on DAX futures on Monday, Tuesday and Wednesday were the highest in at least five years and twice the average for the month, despite the United States holiday on Monday.

Talk swirled on Wednesday of a huge writedown at SocGen, and traders said it was possible that this was due to the bank unwinding massive positions.

Trader Rik Zwaneveld at AFS Brokers in Amsterdam said: “On Wednesday there was talk of a 40 billion euro writedown at SocGen. With the news today, a 5-billion-euro loss on 40 billion euros of positions is possible,” he said.

L’Autorite des Marches Financiers (AMF), France’s market watchdog, declined to comment on SocGen’s unwinding of bad positions.

TRIGGER FOR RATE MOVE?

The U.S. Federal Reserve cut its discount rate, or the rate at which it lends directly to banks, in August, soon after BNP Paribas, another French bank, spooked investors worldwide by freezing 1.6 billion euros worth of funds due to problems in the U.S. subprime mortgage sector.

Traders speculated that this time round, the travails at SocGen had played a similar catalytic role in the Fed’s move.

Said a credit trader in Germany: “It kind of begs the question now, did the Fed cut rates courtesy of a rogue trader at SocGen having to close out a massive position and sending the stock market into turmoil?”

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SocGen and previous major trading scandals
societe_generale.jpg (Reuters) – French bank Societe Generale said fraud by a single trader had caused it a 4.9 billion euro (3.7 billion pound) loss and that it would seek emergency funds as a result, shocking battered markets.

Here is a list of some of the major financial markets trading frauds in recent years:

November 1989 – Michael Milken, known as the junk bond king when he headed bond operations at U.S. investment bank Drexel Burnham Lambert, was sentenced to 10 years in jail for securities fraud. Drexel filed for bankruptcy after being fined $650 million in fines and restitution.

April 1992 – Indian banks and brokers were accused of colluding illegally to siphon $1.3 billion from the inter-bank securities market to fuel a boom on the Bombay Stock Exchange. Top broker Harshad Mehta, the main person accused in the scandal, died in jail during the trial.

February 1995 – One of Britain’s oldest investment banks, Barings Plc, collapsed after lone futures trader in Singapore, Nick Leeson, lost some $1.4 billion in derivatives trading. Leeson was jailed in Singapore. Barings was subsequently sold to Dutch bank ING (ING.AS) for one pound.

September 1995 – Japan’s Daiwa Bank suffered a $1.1 billion loss from unauthorised bond trading by Toshihide Iguchi, one of its executives in the United States. He was imprisoned in 1996.

June 1996 – Japan’s trading house Sumitomo Corp suffered a $2.6 billion loss over 10 years from unauthorised copper trades, primarily by chief copper trader Yasuo Hamanaka. Sumitomo fired Hamanaka, once dubbed “Mr Five Percent” because his trading team was believed to control five percent of the world’s copper trading. He was later jailed for eight years.

January 2001 – Former chief financial officer of the now-defunct Griffin Trading Co., Scott Szach, was charged with diverting more than $5.56 million from a company bank account to a brokerage trading account to fund unauthorised trading in the 18 months before the firm’s demise.

September 2001 – Merrill Lynch fired two senior executives for their failure to supervise a currency dealer who diverted profits on foreign exchange deals to favoured clients, leaving the bank facing a $10 million bill.

February 2002 – Ireland’s largest bank Allied Irish revealed a rogue U.S. trader John Rusnak had defrauded its U.S. subsidiary of up to $750 million. Rusnak was sentenced in January 2003 to 7-1/2 years in prison. He admitted devising a scheme that netted him $850,000 in salary and bonuses from 1997 to 2001.

March/April 2006 – Hedge fund Amaranth Advisors LLC and its former head trader, Brian Hunter, tried to manipulate gas futures contracts on the NYMEX in 2006. Amaranth racked up $6.4 billion in losses from the bad natural gas contracts before it folded in 2006. In July 2007 the Commodity Futures Trading Commission charged Amaranth and Brian Hunter, with trying to manipulate natural gas futures prices.

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