Prison For Tarnished Chinese Copper Trader

“Liu thought the price had peaked in early 2004 and would soon turn south. He reversed that call by selling short … He was wrong. Market prices continued to climb. He tried to solve the problem by running away. Liu fled soon after copper prices passed the benchmark US$3,000 per ton in early 2004. His supervisor, however, persuaded him to return to work.

Liu came back and tried to recover the losses. But like any desperate gambler, he chose to increase the stake … Copper shot up to US$3,700 per ton by October. Liu disappeared again. And SRB was left with short positions on 200,000 tons, holding a paper loss of US$606 million.

SRB formed a task force to tackle the crisis. A few months later, four auctions were launched to sell 80,000 tons of copper to Chinese companies … as the settlement date for most of positions approached, the task force shipped 66,000 tons of copper to LME’s transaction warehouses in Singapore and South Korea.

According to the court, all the short positions Liu built were closed by April 2007. To settle the deals, SRB released 133,000 tons of reserve copper for auctions and deliveries.

Chinese officials argued that the government was only responsible for half the debt to overseas securities firms that loaned money to Liu, since he had forged the loan documents.”

The numbers don’t add up, but it sounds like the foreign brokers were left on the hook for as much as 67,000 tons? Ouch.

– via niubi –

Related:

How to Lose Several Hundred Million Dollars, May 10, 2006
Copper, Phelps Dodge, and the Elusive Liu Qibing, January 28, 2006
Checking Up on the Liu Qibing Squeeze, December 1, 2005
The Squeeze Goes On (Sung to the Tune of The Beat Goes On), November 17, 2005

Great interview with a witty, informed, and articulate hedge fund manager:

“I really make a strong effort to be even-tempered on the trade floor because the enemy of intelligent trading is emotion. If you’re crazy with fear or with greed you’re gonna make bad decisions, and emotion is a communicable disease so you have to be calm. So the mood here is very calm.”

In my experience, you can never tell if good traders are making money or losing it — they generally have good poker faces. It would be interesting to know how Todd Harrison acted when he worked alongside the manic Jim Cramer. I bet Harrison is a guy who doesn’t show much emotion.

I mentioned to Trader Eyal in these comments that I thought the $100 a month Qcharts has a more beautiful user interface than the charting in the $1800 a month Bloomberg. One of the main reasons I said that is because in Qcharts you can load charts with a single click off of a linked quotesheet. You can’t do that with Bloomberg. For someone who likes to look through dozens of charts at a time (me), this is an important feature.

BUT I just learned that you can do something similar in Bloomberg’s LaunchPad. It isn’t a single click link, but you can link the chart to a quotesheet and then use arrows embedded into the chart to scroll through the symbols on that sheet.

Here’s how you do it. Go to the Properties tab on your chart and pick “Launchpad Monitor” under Settings as the Source for the charts. Then select the name of whatever quotesheet (”monitor”) you want to use.

I’ve chosen my SHSZ300 Index list as the Source.

Arrows will appear embedded in your chart and you can use them to scroll from one symbol to the next down your quote sheet.

It’s nice and it beats drag and drop (which I’ve been doing for a very long time — old dog, new tricks, etc.), but it still isn’t as good as Qcharts’ “single click” link.

How to Lose $7.2 Billion: A Trader’s Tale

Quite a few interesting details in this article, an excerpt:

Mr. Kerviel arrived at the bank around 7 p.m. on the night of Jan. 19 … At the beginning, he was questioned about a single trade that had been discovered the evening before and aroused concern: a transaction with a German brokerage house that had seemingly lost the bank €1.5 billion ($2.22 billion).

Grilled late into the night at Société Générale’s headquarters, Mr. Kerviel acknowledged that the trade with Deutsche Bank never existed and then revealed far more disturbing news: his books contained genuine trades that exposed the bank to a €50 billion risk.

Mr. Mustier entrusted one of his best traders with the task of unwinding the bets. The result, by the time the information was released to the public on Jan. 24, was a loss of $7.2 billion — the largest single trading hit in banking history.”

Bingo! Minus 4,900,000,000 euros. The trader given the task of exiting that monster with minimal damage has my utmost sympathy — from one bald man to another: Mes condoléances.

Inner Life of Jerome Kerviel, Accidental Rogue, by Michael Lewis

“Jerome once thought of himself as having a way with the ladies but sex is the furthest thing from his mind. He’s ceasing to be French. He’s becoming American.

Now come these weird, false, fleeting sensations of total freedom. His ordinary mind cannot fully accept the reality of his situation and so it works overtime to generate fantasies. He fantasizes about dying before anyone finds out. He fantasizes that terrorists blow up Societe Generale before anyone finds out.

He walks home one night and there is something about the durability and grandeur of Paris. It gets him thinking. He is long $60 BILLION in equities. That’s more than the market value of the entire freaking bank. And no one knows! Maybe no one will ever know! Maybe he can just keep losing billions, in private.”

I can tell by certain word choices and phrasing that Michael Lewis reads my site regularly, but unlike me, he writes well and gets paid for it. :)

Here are the daily and weekly charts for the Euro Stoxx 50 futures (front month) from the beautiful volume-at-price perspective. The SocGen traders turned a $2 billion loss into a $7 billion loss by hitting the market so hard, mainly selling the Euro Stoxx 50, but they really had no choice — they had to get out as quickly and quietly as possible, every trader who has ever found himself “accidentally” stuck on the wrong side understands this in his bones.

“The Dow Jones EURO STOXX 50 (Price) Index is a capitalization-weighted index of 50 European blue-chip stocks from those countries participating in the EMU. The equities use free float shares in the index calculation. The index was developed with a base value of 1000 as of December 31, 1991. This index uses float shares.”

The Euro Stoxx 50 futures are by far the most actively traded equity index futures in Europe. The FTSE and the CAC are the next most active, but don’t really compare. Interestingly, the Swiss market futures are more active than the DAX, I believe. (Update: I’m wrong about this… see the comments section.)

Click to enlarge (Euro Stoxx 50, Daily)

Click to enlarge (Euro Stoxx 50, Weekly)

Kerviel Felt Out of His League

“… if clawing your way up from the mailroom wins you a badge of honor in the U.S., not so within in the rigid class system that defines the upper ranks of French finance. Mr. Kerviel’s effort to impress his colleagues now appears to be a motivating factor behind his disastrous trading spree.

‘I cannot believe that my superiors did not realize the amount I was risking,’ Kerviel said in the interrogation. ‘It is impossible to generate such profit with small positions. That’s what leads me to say that while I was [in the black], my supervisors closed their eyes on the methods I was using and the volumes I was trading.’”

I call bullshit, Jerome. If you’ve got other SocGen traders killing themselves after being so harshly reprimanded for losing a lousy €9 million in unauthorized trades (”He took his bag, left Société Générale and jumped off a bridge” [I loved that line, lol]), there’s no way management would look the other way when you’re making multi-billion euro one-way bets.

Wall Street firms have a mix of PSHs (”poor, smart, hungry”) and RDLs (”rich, dumb, lazy”). The latter (about half of new hires) tend to be somebody’s nephew/niece, or very good looking, or both.

Back in the early 1990s, I talked with a top headhunter in Hong Kong about working for a bank as a trader, and she said, “Forget about it, they only hire pretty girls, and you’re neither pretty nor a girl.”

Funniest thing I’ve read (so far) this morning (emphasis mine):

“… a French lawyer acting for 100 small shareholders said he had sued Société Générale over the way it had unwound Kerviel’s fraudulent share deals last week, Reuters reported.

The lawyer, Frederik-Karel Canoy, said the bank should have informed markets about its pending losses before embarking on a selling spree from Jan. 21 through Jan. 23 to unwind the €50 billion of risk exposure built up by Kerviel.”

Yep, they should have shouted from the rooftops, hey! we’re stuck long $73 billion in the Eurostoxx, DAX, and FTSE; we’re already sitting on $2 billion in losses; do you guys wanna buy some from us? :)

Details on the exposure from this W$J article (emphasis mine):

“As of Jan. 18 — the day Mr. Kerviel’s ruse went astray — Société Générale had €18 billion of exposure to the DAX, €30 billion exposure to the DJ Euro Stoxx 50 and €2 billion to the FTSE 100 Index in London, according to Mr. Mustier. All of these exposures were established this year in a short period of time, he said.”

Presumably after Jerome received his insulting €1500 bonus.

Here’s a look at the Eurostoxx 50 futures, which apparently made up the biggest part of Monsieur Kerviel’s $73 billion position, during the three days of unwinding. This 30-minute candlevolume chart is good for showing blasts of volume. See those three massive down bars on Monday, the 21st? I’m guessing they’re probably the handiwork of the bald and perspiring young men at SocGen trying to cut Kerviel’s already massive losses that terrible morning. There’s no graceful way to exit $73 billion of anything quickly.

Click to enlarge

I read the statement from SocGen, “Explanatory note about the exceptional fraud,” closely and with interest. It’s not badly written, but reads at times like it was directly translated from French. I recommend that SocGen hire a native English proofreader tout suite, assuming they can still afford one.

“The unwinding of the fraudulent position

The equivalent nominal amount of the fraudulent position uncovered on Sunday January 20th was approximately 50 billion euros.

The priority was to unwind the fraudulent position as quickly as practicable, given the risk generated by its size.

The unwinding could only start on Monday, January 21st and in a measured fashion so as [to] keep volume levels under 10% [ed. They mean keeping SocGen’s share of trading volume under 10% of total trading volume], in order to respect the market’s integrity.

Conditions in the market were very unfavourable. In the afternoon of Friday January 18th, there had been a sharp downturn in the European markets. In the night of January 20th to January 21st, there was a significant drop in the Asian markets (Hang Seng -5.4%) before the European markets opened.

The position was unwound over three days in a controlled fashion, thus ensuring that Societe Generale did not exceed around 8% of volumes traded on the relevant futures indices (EUROSTOXX, the DAX and the FTSE).

The position was finally fully closed or hedged on the evening of January 23rd. Overall, movements in the market triggered by the sharp fall in the Asian markets during the night of January 20th to 21st resulted in a final total loss of 4.9 billion euros.”

It’s good that they’re trying to explain things clearly, but I’m not so sure about the “unwound in a controlled fashion” bit. The market had to smell something wrong to plunge like it did, and I’m not sure how the SocGen traders kept from tipping their hand on Monday morning. I’ll post the intraday charts of the EuroStoxx 50 and DAX futures when I get a chance.

Interesting details from the IHT article, emphasis mine:

“… a review of Kerviel’s trading records showed that he first began creating the fictitious trades in late 2006 and early 2007, but that these transactions were relatively small. The fake trading increased in frequency, and in size, during the course of the year, he said, but the largest fictitious trades - involving futures contracts on the Dow Jones Euro Stoxx 50, the DAX in Germany and the FTSE index in Britain - were entered in early January.

Mustier said that that volume [around 8% during the unwinding from Jan. 21 through 23] compared with Société Générale’s normal share of daily trading volume in those futures of 2 percent to 4 percent, though in the cash market, the bank’s trading frequently represented up to 10 percent of the daily volume.”

So if they were doing 7-8% of the volume in the Eurostoxx 50 and DAX on Monday and they normally did 2-4%, people would notice and take advantage, particularly if SocGen were just sellers — it would be nightmare to try to mask your intentions when you’ve got that much to sell, and sell quickly. I’m sure that the bald young traders at SocGen grew a little balder that day.