The media is filled with reports on the Societe Generale trader who lost more than $7 billion in equity derivatives, and hid the losses for up to a year.
While other traders have lost vast sums of money making authorized, planned trades in which they grossly misjudged the market (see Amaranth), previous instances of so-called "rogue" traders hiding losses through fake offsetting trades or some other device were limited to only a measly billion or so dollars (see Leeson, Nick).
The fact that a relatively low-level trader was able to rack up these huge losses for a year certainly says something about the risk controls, or lack thereof, in major trading organizations. Each time one of the rogues is discovered, hands are wrung, breasts beaten and declarations made that tighter risk management controls will be put in place.
But then, once the cameras are off, does it really happen? Risk control is not the sexiest side of the business. All risk management does is limit the amount of money a trader can make, and his bonus. Of course, it also limits the amount of money that can be lost.
The question is -- are controls as lax at other banks and large trading houses, or is this an anomaly?
And is the declaration of a huge loss once in a long while an acceptable risk when countered by many quarters of superb results, and a rising stock price that benefits all the senior executives and directors with stock options as part of their compensation?
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