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