Month: February 2022

Quick review on the most famous trading frauds ever…

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Louis DETALLE

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) reviews on the most famous trading frauds ever…

Jerôme Kerviel and Société Générale

In 2008, the French bank Société Générale announced having been defrauded by one of its traders, Jérôme Kerviel whom you might have heard about. This fraud cost Société Générale € 4,9 billion and Jérôme Kerviel was accused by the bank of having held positions up to € 50 billion on financial markets without permission. Jérôme Kerviel, on the other hand, accused the bank of having known about his practices since the beginning and of confronting him about them only because he had lost a lot of money. As a consequence, Société Générale’s share lost nearly half his value when the issue was brought to light and the trial is still ongoing…

JP Morgan and Bruno Iksil: The whale

Bruno Iksil joined JP Morgan Chase in 2005 after a short time at Natixis. This French trader got his nickname because of his risky multi-million-dollar bets on credit default swaps (CDS), insurance contracts designed to protect against a country or company default.

In April 2012, the Wall Street Journal and Bloomberg were alerted by brokers on “huge” and “very risky” positions taken in the credit market. A trader had bet on the good health of American companies and sold, in very large quantities (several tens of billions of dollars), insurance contracts to cover themselves against their bankruptcy.

His bets were all the riskier since the US economy was showing major signs of slowdown. Other investors and banks, attracted by this opportunity, did not hesitate to take Iksil on, which quickly created an untenable situation for JP Morgan. The losses generated by the “whale” positions amounted to 6.2 billion dollars for JP Morgan.

As a result, the bank’s quarterly results were down by 660 million dollars, while its share price fell by 20% on the New York Stock Exchange.

Nick Leeson & the Barings Bank

Nick Leeson was a 28-year-old trader who had made a name for himself at Barings, England’s oldest investment bank. He became the head of the bank’s Singapore subsidiary by making high-risk, speculative bets. Nick Leeson took advantage of a loophole in the bank’s trading system to conceal his financial activities.

Unfortunately, Nick Leeson’s luck ran out and he suffered huge losses. Nick Leeson took advantage of a loophole in the bank’s trading records to hide his losses. With each trade, Nick Leeson hoped to mop up the previous losses to the point of no return. One evening, Leeson placed a trade betting that the Nikkei exchange rate would remain stable overnight. This seemingly low-risk trade turned out to be a disaster as an earthquake in Kobe caused the Nikkei and all Asian markets to collapse.

As a result of the massive losses, management realized that Leeson had been hiding a lot of money, and Barings, which had lost more than a billion dollars, more than twice its capital, went bankrupt.

Related posts on the SimTrade blog

   ▶ Louis DETALLE What happened between Iksil & JP Morgan

   ▶ Louis DETALLE The incredible story of Nick Leeson & the Barings Bank

   ▶ Marie POFF Film analysis: Rogue Trader

About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Quick review of the most famous investments frauds ever…

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Quick review of the most famous investments frauds ever…

Louis DETALLE

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what a tax specialist works on, on a daily basis.

The most famous amongst all frauds ever: Charles Ponzi

Born in 1882, this Italian man has built himself quite a reputation in the fraud industry due to his invention: the Ponzi Pyramid. That consisted of a financial business plan that promised a 50% interest rate within 45 days to the investors that picked his solution. You may wonder how it was possible to reach such rates, well it was possible because Charles Ponzi reimbursed the old investors their initial investment plus the interests with the money collected from newer investors and so on… In fact, Ponzi developed an idea that he encountered in the “Banca Zarossi” in Montreal, that relied on a similar principle that made it impossible to reimburse all the clients if they came altogether asking for their savings.

At the end of his fraud, in 1919, Charles Ponzi had managed to convince nearly 40 000 investors to commit to his business plan for $15 million which account for several dozens of current billion dollars. To this day, Ponzi is still considered the father of financial fraud and several others drew from his example.

The Great Bernard Madoff

Bernard Madoff was a New York hedge fund manager who promised the most experienced investors his hedge fund would provide a 7% annual growth whatever the economic conjuncture. His fund relied on the same principle as the Ponzi system that Bernard Madoff hid successfully thanks to his fame in the finance sector. In fact, his renown made all this fraud possible and explains how institutions such as HSBC, Santander, BNP Paribas or Nomura got played. In 2008, when the trick was no longer viable, a 65 billion dollar fraud was unveiled…

The unviable mechanism behind this type of fraud: the Ponzi pyramid

A Ponzi pyramid is a fraudulent financial scheme that enables its creator to offer investors unusually high rates for very limited risk. The offer may seduce lots of investors which will only see their money back if newer investors contribute later. The scam is named after its inventor, Charles Ponzi, has been repeated several times.

However, it must be stated that a Ponzi scheme cannot last… Indeed, let’s consider the following example: Investor A invests 10 euros. The fraud promises to pay back twice as much two months later. Two months later, the company approaches new investors with the same promise. Investors B & C invest 10 euros. Their money is used to pay back the 20 euros promised to Customer A and so on…

In the example, for each round of new investors which corresponds to the maturity of the round of investments, the fraud must convince twice as many investors to invest as during the last row, in order to multiply the funds by 2 (so that the previous row of investors be reimbursed). In the following example, after 20 rounds of investors, the fraud will have to gather 10 485 760 € in order to reimburse the 19th round of investors. As you can see, the scheme had already exceeded its viable size due to an exponential growth which can only cause the loss of the last round of investors and the dreadful financial consequences that comes with it.

Related posts on the SimTrade blog

   ▶ Louis DETALLE Quick review on the most famous trading frauds ever…

   ▶ Louis DETALLE The 3 biggest corporate frauds of the 21st century

   ▶ Louis DETALLE The incredible story of Nick Leeson and the Barings Bank

   ▶ Louis DETALLE Wirecard: At the heart of the biggest German financial scandal of the 21st century

About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Ethics in finance

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Ethics in finance

Louis DETALLE

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) talks about ethics in finance.

With huge sums of money at our fingertips, the temptation to manipulate a few euros in order to put them in our pockets is great. Thus, the question of ethics in finance takes on its full meaning insofar as the human mind and its faculty of discernment are put to a severe test.

Definitions of ethics

Ethics comes from the Greek “ethikos” which means moral. Ethics is a branch of Philosophy that reflects on the aims and values of existence, on the conditions for a happy life, on the notion of “good” or on questions of morality.

Ethics can also be defined as a reflection on the behaviour to be adopted in order to make the world humanly habitable. In this sense, ethics is a search for the ideal of society and the conduct of life.

Difference between ethics and law

Ethics is a human science concerned with the behaviour of individuals in society. Law refers to the regulation of behaviour by written law, whereas ethics refers more broadly to the moral distinction between right and wrong, to what we should do independently of our purely legal obligations.

As a result, corporate ethics has developed

Indeed, given the stakes of which companies are the actors, and given that the diversity of profiles that constitute these companies is colossal, it seems clear that the question of corporate ethics arises. Let’s take shareholders for example, a shareholder holds part of a company through his share portfolio and therefore has an interest in seeing the companies of his portfolio succeed. This goes even further: in the event of bankruptcy, for example, the shareholder is only reimbursed after the creditors, if there are any funds left… The shareholder therefore has a strong incentive to do everything possible to ensure that the company in which he or she holds shares is successful in the long term.

Control and regulation mechanisms have been put in place so that the temptation to behave unethically is increasingly reduced, given the difficulties of circumventing the procedures. The banking sector, for example, has undergone an explosion of regulations over the last 20 years. Banks for example, have been struck by a wave of KYC “Know your customer” which consists in long questionnaires aiming at analyzing who are the people behind every financial actor. By doing that, banks prevent the financial actors such as companies from financing terrorism or companies sanctioned by international authorities. Other measures that lower the risks exist such as the ALM measures (“Anti-Laundering Money measures”) that identify precisely the source of capitals in order to make sure that the funds are not illegal.

New challenges for a new form of ethics

However, new challenges are emerging for our societies and financial actors seem to be key players in meeting them. Questions of government stability, leadership, social and ecological issues have gained importance in the public debate in recent decades. And financial players, because of their almost unlimited power to act, want to be the driving force behind the major changes in contemporary society. ESG criteria, for example, have been introduced as new instruments for evaluating companies, which can no longer be satisfied with good economic results but must also fulfil a certain number of ethical obligations. Without these ethical obligations, their financing, promotion and activity would be simply made impossible.

The three circles : economic performance, law and ethics.
img_Business_Ethics_Law
Source: Harvard Global Collection.

Why should I be interested in this post?

If you are a business school or university undergraduate or graduate student, you may have heard about the ever-increasing ethical topics in finance. As such, one may not ignore these issues that will surely keep on gaining space in the field. Ethics is now a dimension in the way business is or should be conducted as evidenced by the ESG criteria that we mention in the article. In addition, the CFA emphasizes the ethical aspects in its series exams as a large part of the questions tackle these aspects.

Related posts on the SimTrade blog

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About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

My professional experience as a Credit Analyst at Société Générale

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My professional experience as a Credit Analyst at Société Générale

Louis DETALLE

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) relates his internship at Société Générale as a Credit Analyst.

Société Générale

Source: Wikipedia.

Quick presentation of the bank and its activities

Société Générale is one of the three main French banks and one of the oldest. Created in 1864, Société Générale is famous for both Investment Banking activities and Retail Banking. The business department I was a part of deals with the daily relationship between the bank and its clients whatever they need. That’s what made my internship so interesting because I was able to work on a huge variety of topics.

When was it?

My internship took place between July 2021 and December 2021. So it represented a 6-month internship which is the duration for which students with few professional experiences should aim for. Bear in mind that the longer the internship, the better for the recruiters you will encounter later: a long professional experience shows that you are able to work for a long time and that can be committed.

What were my missions during this internship?

As for what I was asked to do, my job consisted mainly of preparing credit analysis in order to facilitate the approval of the loan request. Indeed, as you may know, banks cannot agree on any credit demand the client asks, they must conduct a close and thorough analysis of the company: its business plan, its strategy, its past and above all, its financial health…

The commercial team I was involved with works hand-in-hand with the clients and cannot necessarily conduct the financial analysis as thoroughly as a person whose main job would be to do so. Therefore, my team would often provide me with some files concerning a company, explaining me what they had been asked to implement by the client and I would work on that topic for 2 or 3 days. Genuinely, I always started with some sector analysis, “has a watershed occurred recently and can it unsettle the client’s business and perhaps its ability to reimburse the credit it is asking for?”, then I had to work on the overall overview of the company, its history, its management, its strategy for the foreseeable future and what have the previous strategies yielded. Last but not least, I was asked to work on the financial analysis of the company that I always divided into 3 parts. First, I would analyze the P&L account and assess the profitability of the company over the past 3 years, “what is the core business?”, “how does the firm produce value?”, “how has the profitability evolved over the past 5 years and why?”… Second, I would check the global equilibrium of the firm balance sheet with a close look at the liabilities part. Hence, I would compute the financial ratios that you will learn in this course and study: 1) have they evolved significantly? 2) compared to other firms from the same sector, how do they look?

Finally, I would work on the cashflow statement which gives a key information to the bankers: the ability of the client to manage its cash and allocate its resources to the different expenditure items.

What skills have I acquired during this internship?

On the hard skills side, I developed strong analytical skills in financial analysis, accountancy and in terms of synthesis. On the soft skills side, I was able to develop my discussion skills through several meetings at C-level. In overall, I think the biggest advantage of my internship was that it helped me understand the functioning of a bank-credit approval.

Why should you be interested in this post?

If you are considering a career in finance, learning about one of your fellow alumni’s first internship in the finance industry can be of excellent help. In addition, you’ll learn what’s to be expected for your first internship, that you cannot skimp on !

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Anna BARBERO Career in finance

   ▶ Alexandre VERLET Classic brain teasers from real-life interviews

   ▶ Jayati WALIA My experience as a credit analyst at Amundi Asset Management

Useful resources

Société Générale Website

About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

ESSEC Transaction

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ESSEC Transaction

Louis DETALLE

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) presents ESSEC Transaction, the first Student Finance Association in France.

What is ESSEC Transaction?

ESSEC Transaction is the leading student finance association in France and the official finance association of ESSEC Business School. Created in 1987, we organize unique, high added-value events for students interested in both corporate finance and market finance. Our student association consists of 45 active members each year, 7 of which lead the association, I personally am the Chief Editor.

Logo of ESSEC Transaction students’ association.

Logo de ESSEC Transaction

Source: ESSEC Transaction.

What are our missions?

The missions of ESSEC Transaction are defined around

  • Discover: Through the organization of a wide range of events, from workshops to conferences – including contests, networking breaks and visits – we help bridge the gap between theory and real-world experience.
  • Engage: ESSEC Transaction allows students to sharpen their skills and knowledge thanks to our quality content and events that approach finance from beginner to advance level.
  • Network: We provide students the opportunity to create and enlarge their network, as “we believe there is no better way to get true insights than through informal discussion with actual professionals” (Louis Villalta, current President).
  • Create: Because creation entails reflection, we encourage students to decrypt economic and financial news by giving them the opportunity to read, write, register and publish articles and podcasts on our website.

What events do we organize at ESSEC Transaction?

Each year, ESSEC Transaction offers a unique experience to nationwide students from top schools by organizing the largest financial events for students in France. We organize 3 kinds of events:

  • Flagship events: Perhaps the most famous one being the Paris M&A Summit, but also the Private Equity Summit, the Trade’XTrem, the Finance Discovery Month and the Women In Finance.
  • Theme-oriented events: The France-China investment conference, the Lawyers vs Bankers: who will shape the finance of tomorrow or the Fintech.
  • Discovery events: The Rothschild & Co tour or the Jefferies presentation for ESSEC Student, organized also by ESSEC Transaction.

Equipe de l’Association ESSEC Transaction (2021-2022).

Equipe de l’Association ESSEC Transaction

Source: ESSEC Transaction.

In a nutshell, “we aim at empowering students and helping them break into the world of Finance through workshops, competitions, conferences, visits, networking cocktails and a wide range of creative events” (Alrick Babilon, former President of ESSEC Transaction). Our members also enjoy the knowledge of their elder that thrive in the finance sector and can be of excellent help when it comes to preparing oneself for the job interviews.

Why should I be interested in this post?

If you are considering a career in finance, ESSEC Transaction must ring a bell. If you don’t want to miss any opportunities on our events, read this short post and you will have all there is to know about us!

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Barbero A. Career in finance

   ▶ Verlet A. Classic brain teasers from real-life interviews

Useful resources

ESSEC Transaction’s website

ESSEC Transaction’s Facebook Account

ESSEC Business School

About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

The financial rivalry between Abu Dhabi and Dubai

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The financial rivalry between Abu Dhabi and Dubai

Mayriem Meddah

In this article Mayriem MEDDAH (ESSEC Business School, Master in Strategy and Management of International Business, 2021-2022) analyzed the financial rivalry between Abu Dhabi and Dubai through their respective sovereign wealth fund.

This post is organized as followed: in a first part, the geographical and political context of Abu Dhabi and Dubai among the United Arab Emirates (UAE) will be described. This will enable the reader to understand the economic development of the two emirates. Then, we will go through the economic strategy of Abu Dhabi and Dubai. For that matter, the topic of sovereign wealth fund will be analyzed, discussed, and compared between Abu Dhabi and Dubai.

Geographical and political overview of the United Arab Emirates

Abu Dhabi and Dubai are the most famous and biggest emirates among the United Arab Emirates (UAE). The UAE gathers seven emirates: Abu Dhabi, Ajman, Dubai, Fujaïrah, Ras al-Khaïmah, Sharjah et Oumm al-Qaïwaïn. Each of these emirates is managed by an emir who possesses his own administration. Sultan bin Zayed Al Nahyan, Emir of Abu Dhabi, has been elected as President of the UAE whereas, Mohammed ben Rachid Al Maktoum, Emir of Dubai has been named as Vice President and Prime Minister. Abu Dhabi is the biggest oil producer among all emirates, that enables the UAE to be ranked as the world’s seventh biggest oil producer.

Figure 1. Map of the United Arab Emirates.

Map of the United Arab Emirates (UAE)

Source: World Atlas.

Economic development

The economic rivalry between the two brothers is and has always been an ongoing process. After the independence has been proclaimed in December 1971, Cheikh Zayed bin Sultan Al Nahyan, leader and founder of Abu Dhabi had the ambition of building a financial and political platform between the western world and the eastern world. From the very beginning, he knew how crucial the movement of material and immaterial goods was, in the sake of the prosperity of Abu Dhabi. Thanks to their black gold reserves, the two emirates had the financial resources to diversify their economy.

Economic strategy: the sovereign wealth fund

Sovereign wealth fund: definition and objectives

Since their formal entrance on the investment scene in the 2000s, sovereign wealth funds (SWF) have appeared to be major investors in corporate and real resources across the globe. SWFs aim at deploying dedicated stated owned pools of capital across global markets and assets classed in furtherance of a country’s strategic, economic, or social priorities. It is the opportunity for nations with high variance in public revenues to ensure a steady level of cash flows and provide resources for long-term investment. SWFs invest both in real and financial assets, ranging from stocks, bonds, real estate, precious metals, and hard infrastructure to alternative investments such as private equity, hedge funds, and venture funds.

Santiago Principles

The Santiago Principles consists of twenty-four generally accepted principles and practices voluntarily endorsed by IFSWF members. The objectives of the Santiago Principles are to help maintain a stable global financial system and free flow of capital and investment. Another goal of Santiago Principles is to comply with all applicable regulatory and disclosure requirements in the countries in which SWFs invest. It ensures that SWFs investment are based on economic considerations (expected returns and risks) and ensures that SWFs have in place a transparent and sound governance structure that provides adequate operational controls, risk management, and accountability.

The SWF in the world

There are between 40 and 70 different sovereign wealth funds run by political entities. Table 1 below gives the list of the 20 largest SWFs and estimates of their holdings. We can notice how heterogeneous the source of wealth is between countries. In many of the middle eastern countries, such as Abu Dhabi, Qatar or Kuwait, petroleum has been the main source of wealth.

Table 1. Leading Sovereign Wealth Funds in the world.

Leading Sovereign Wealth Funds in the world

Source: MIT.

The SWF in Abu Dhabi

Established in 1976, the Abu Dhabi Investment Authority (ADIA) is a globally diversified investment institution that prudently invests funds on behalf of the Government of Abu Dhabi through a strategy focused on long‑term value creation. The ADIA was ranked as the fourth-largest sovereign wealth fund in the world in 2021, with $650 billion in assets.

Governance

The governance of the allocation and transfer of funds remains quite obscure, which also explains why the ADIA fund is the least transparent SWF in the world. The governance has not disclosed rules or procedures for such distributions and decision among the allocation of assets. The ADIA fund is wholly owned by the Abu Dhabi Government. There is a separation of roles and responsibilities among the owner, the governing entity, and the management. According to the ADIA policy, the investments activities are conducted without reference to the Government of Abu Dhabi and has no visibility on the spending requirement. The only requirement made from the government is to generate sustainable long-term returns and to return funds to the government as needed. With lack of transparency, no official information regarding the external mangers is available.

Figure 2. The internal institutional reporting structure for ADIA.

The internal institutional reporting structure for ADIA

Source: ADIA.

Long-term policy portfolio by region

Abu Dhabi with far more oil reserves, following the ambition of the Cheikh Zayed Bin Sultan Al Nahyan, decided to invest in long lasting projects that include, education, science, art, finance with a sustainability dimension. Abu Dhabi financial resources have been placed and organized within different wealth funds owned by the Emirate. The most famous and powerful one is by far, the Abu Dhabi Investment and Authority (ADIA). This fund has been created by the founder of Abu Dhabi with the goal to invest its reserves in anything other than gold or short-term credit. With a highly diversified and long-term strategy portfolio, Abu Dhabi has been able to have a footprint in the world’s major markets.

Figure 3. ADIA long-term policy portfolio by region.

ADIA long-term policy portfolio by region

Source: IFSWF.

Long-term policy portfolio by asset class

With a flexible investment approach, the ADIA fund, made investments in various assets, from equities, real estate, to infrastructure.

Figure 4. ADIA long-term policy portfolio by asset class.

ADIA long-term policy portfolio by asset class

Source: Gulf News.

The SWF in Dubai

Established in 2006, the Investment Corporation of Dubai (ICD) is the Sovereign Wealth Fund (SWF) of the Government of Dubai. It has been established to manage the Dubai’s portfolio of commercial companies and investments. This fund is aiming to further Dubai’s presence globally and enhance Dubai’s economic power. ICD reported assets worth US$305 billion.

Governance

The governance of the ICD is made through the delegation of certain authorities including carious active committees that report and operate under the oversight of the Board of directors. There are five main committees. The investment committee comprises three Board members and is responsible, the audit committee, the remuneration committee, the management committee, and the risk management committee, which comprised of all department heads is responsible for recommending and overseeing the implementation of a sound risk management framework. The ICD parent is self-funding and does not typically receive funding or seek support from the Government of Dubai. ICD parent occasionally receives non-monetary contributions from the Government of Dubai such as ownership interests in companies.

Long-term policy portfolio by assets

ICD’s portfolio companies are selected from a variety of sectors to afford diversification and risk minimization. In its entirety, the portfolio is reflective of Dubai’s growth plan and strategic focus areas.

Figure 5. ICD long-term policy portfolio by asset class.

ICD policy portfolio by assert class

Source: ICD.

The financial competition

Table 2. ADIA and ICD comparison.

ADIA and ICD comparison

The financial competition between the two emirates, is largely won by Abu Dhabi. Indeed, the ADIA sovereign wealth fund is ranked number four among the SWFs in the world. Also, the Mubadala Investment company, another SWF owed by Abu Dhabi, manages around 230 billion USD of assets, and is ranked just behind Dubai. Those astronomic numbers, place Abu Dhabi as a key player on the financial scene not only in the Middle East but also across the world. Dubai’s struggle is still going even after the 2008 economic crisis. Indeed, with those outrageous real estate and infrastructure projects, Dubai had enrolled itself into a debt whole and could hardly get out of it. For that reason, Dubai asked the big brother, Abu Dhabi, for help. That is why, Abu Dhabi levered 5 billion USD to save Dubai. Why not letting the Dubai drown? Abu Dhabi always knew it is a small emirate with very few people, with yet a very strategic spot but surrounded by much bigger and reckless players like Kuwait, which is the third biggest SWF in the world with total assets worth of $737 billion or Qatar with total asset worth of $367 billion. What better ally than a brother? That is why, even though Abu Dhabi won the financial battle among the United Arab Emirates, unification, loyalty, and mutual support is a matter of survival for Abu Dhabi.

Why should I be interested in this post?

In a context of financial crisis due to the pandemic, nation’s role is undeniably crucial in maintaining world’s economic stability. For that matter, the sovereign wealth fund is an interesting tool that can enable countries into overcoming today’s challenges.

Useful resources

Abu Dhabi Investment Authority (ADIA)

Investment Corporation of Dubai (ICD)

Sovereign Wealth Fund Institute (SWFI)

International Forum of Sovereign Wealth Funds (IFSWF)

Gulf News (September 8, 2021) Abu Dhabi wealth fund’s returns surged in 2020 despite COVID

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About the author

The article was written in February 2022 by , Mayriem MEDDAH (ESSEC Business School, Master in Strategy and Management of International Business, 2021-2022).