Meet the Most Indebted Man in the World(theatlantic.com)
theatlantic.com
Meet the Most Indebted Man in the World
http://www.theatlantic.com/business/archive/2012/11/meet-the-most-indebted-man-in-the-world/264413/
13 comments
I wondered that too. I believe many of these traders who circumvent the rules are thinking of a freeroll: If they can pull it off, they are set for life. Otherwise they just have to find another 9~to-5, at worst in another industry.
Personal bankrupty is allowed in France but only in the two previously German regions (Alsace and Lorraine). He would have to settle there first.
> Can't he just declare private insolvency?
He could propose to pay back 199 Euro per month.
He could propose to pay back 199 Euro per month.
The solution the article outlines is the obvious right way, and if governments want to reduce the risk of banks this is obviously what they need to do: create long-term consequences for reckless risk-taking.
Probably the biggest problem in this whole thing is the simple fact that someone can win the roulette one year and then get out of the game.
Simply require anyone in charge of huge sums of profit as a too-big-to-fail bank to be responsible for the continued health of the bank for the next 7 years. The fact the CEO can hang around for a couple of years, make a hundred million, and then go somewhere else is the root of the problem. If the bank loses billions because of a rogue trade, the CEO at the time, the current CEO, and everyone all the way down the chain of command down to the rogue trader for the intervening period should go to jail for economic crimes.
That will guarantee that banks are much more systematically cautious. Those guys don't want to go to jail.
Probably the biggest problem in this whole thing is the simple fact that someone can win the roulette one year and then get out of the game.
Simply require anyone in charge of huge sums of profit as a too-big-to-fail bank to be responsible for the continued health of the bank for the next 7 years. The fact the CEO can hang around for a couple of years, make a hundred million, and then go somewhere else is the root of the problem. If the bank loses billions because of a rogue trade, the CEO at the time, the current CEO, and everyone all the way down the chain of command down to the rogue trader for the intervening period should go to jail for economic crimes.
That will guarantee that banks are much more systematically cautious. Those guys don't want to go to jail.
> if governments want to reduce the risk of banks this is obviously what they need to do: create long-term consequences for reckless risk-taking.
And they know that. But the governments work for the banks, not for the people, and thus have NO incentive to do anything about the reckless risk taking, until things become bad enough that it might lead to an uprising.
And they know that. But the governments work for the banks, not for the people, and thus have NO incentive to do anything about the reckless risk taking, until things become bad enough that it might lead to an uprising.
"this is obviously what they need to do: create long-term consequences for reckless risk-taking."
Yeah, but not like this, you have to spread the culpability outward and not just lay the blame on one person at a time to "make an example". This isn't going to instill fear in any executive that encourages such behavior.
Yeah, but not like this, you have to spread the culpability outward and not just lay the blame on one person at a time to "make an example". This isn't going to instill fear in any executive that encourages such behavior.
>There are two possible answers for why this is. The first is just the sheer size of the big banks. These are large organizations and it's impossible to police everyone's conduct.
If large retail banks can figure out how to track and subsequently arrange a string of overdrafts to maximize "insufficient funds" fees for millions of personal banking customers, their investment arms can certainly track the transactions of thousands of employees.
>Now, there's a second way of looking at this problem. According to this story, senior bank managers are well aware of the risk of rogue trading, and have, in fact, set up the risk management systems in a way that makes at least some rogue trading expected and almost inevitable. The idea is they give their traders leeway.
As long as the bets are winning or not losing too bad, he's just a trader. When a big enough bet loses, he becomes a rogue.
The banks are complicit and these "rogue traders" are the fall guys.
If large retail banks can figure out how to track and subsequently arrange a string of overdrafts to maximize "insufficient funds" fees for millions of personal banking customers, their investment arms can certainly track the transactions of thousands of employees.
>Now, there's a second way of looking at this problem. According to this story, senior bank managers are well aware of the risk of rogue trading, and have, in fact, set up the risk management systems in a way that makes at least some rogue trading expected and almost inevitable. The idea is they give their traders leeway.
As long as the bets are winning or not losing too bad, he's just a trader. When a big enough bet loses, he becomes a rogue.
The banks are complicit and these "rogue traders" are the fall guys.
Takeaway quote from the article:
"If you were to go out and start a meth lab in your house, what's the probability that you would ultimately end up doing jail time? It's going to be a lot higher than if you massively defraud a financial institution. It's an endemic problem within the justice system now."
"If you were to go out and start a meth lab in your house, what's the probability that you would ultimately end up doing jail time? It's going to be a lot higher than if you massively defraud a financial institution. It's an endemic problem within the justice system now."
I wonder if Société Générale puts this 6 billion judgement as an asset in their books. and if they do, do they show another 6 billion loss when the guy inevitably Never pays?
>In plain English, arbitrage just means taking advantage of discrepancies when things should have the same price, but don't. The idea is to buy the cheaper one, sell the more expensive one, and then wait for them to converge. The beauty is it doesn't matter whether markets go up or down -- you're both long and short -- just that the prices actually converge.
I'm familiar with arbitrage (or "arbing") in other contexts (mainly gambling). However, I really didn't follow this explanation.
If you buy an asset at a cheaper price and sell it at a more expensive price, why do you then need to "wait for them to converge"? In what way are you "both long and short"? Aren't you just buying assets from one agent and selling them to another?
I'm familiar with arbitrage (or "arbing") in other contexts (mainly gambling). However, I really didn't follow this explanation.
If you buy an asset at a cheaper price and sell it at a more expensive price, why do you then need to "wait for them to converge"? In what way are you "both long and short"? Aren't you just buying assets from one agent and selling them to another?
In the context they're referring to, the idea is to enter two positions simultaneously (not to enter and exit one position - in that case you'd have to predict which direction the market is going)
1. You buy and sell at the opportunity price (two positions, not one).
2. Prices converge.
3. You close out your positions in #1 and make a profit regardless of which direction the market went.
1. You buy and sell at the opportunity price (two positions, not one).
2. Prices converge.
3. You close out your positions in #1 and make a profit regardless of which direction the market went.
Ah, I see, thank you. I assume my mistake was thinking of assets in an old-world fungible sort of way, where if you buy an asset in one market you can sell it to someone else in a different market, rather than a new-world sort of way with highly complex financial products that you perform complex transactions with. Is that the explanation for why you can't buy the asset at the cheaper price and sell it at the more expensive price immediately, rather than waiting for the prices to converge? Or is it that by performing two independent transactions you can do both simultaneously and so expose yourself to less risk?
If it is true arbitrage (that is, no price risk), it is very rarely in the same market.
e.g, let's say you can buy 1 EUR by paying 1.2 USD, buy 1 GBP by paying 1 EUR and buy 1.3 USD by paying 1 GBP, you would be left with 0.1 USD with no risk - in this case you've made an arbitrage profit of 10 cents, and you're likely to be able to do that "in the same market", and won't have to do more than one thing simultaneously.
However, everyone is looking out for these, so if such an opportunity presents itself, everyone tries to take advantage of it, thereby changing the price; These opportunities last milliseconds or even microseconds these days, the profit that can be extracted is very small, and you need to be very well positioned (technically) to be able to make it.
Another form of (mostly true) arbitrage is when the same thing gets traded in multiple venues - e.g. Gold in NY, London and Asian markets. In this case, you CAN'T buy a bar in one place and sell in the other place at the same time, because you need time&money to transfer the metal. So you go long in one place, go short in the other place, and then wait for the prices to converge WITHOUT trying to move physical gold around, and do the reverse transactions. There is no real price risk here (if the prices never converge, you CAN move the gold bar around for a small cost), but there's a lot of procedural and counter party risk.
There's what's known as "stat arb" (statistical arbitrage), which is all statistics and no arbitrage; Let's say Gold and Silver tend to both move together (when Gold moves up or down by 1%, silver tends to move in the same direction by 1%). Now, you see Gold moved up 2%, but silver hasn't. You assume either gold will move down 2% back to silver, or silver will move up 2% to match gold, or gold will move down 1% and silver up 1%. The way to take advantage of that is to sell gold for an amount $X, buy $X of silver, and wait. Whatever scenario happens, your balance (when you sell your silver and buy back the gold), you will make money. Unless ... gold and silver stay divergent, which can happen. In which case, you'll lose money.
Thanks to financial wizardry, you can very often sell things you don't own, and "buy them back" later to make things whole again.
(And finally, there's something known as "risk arbitrage" - it is all risk, no arbitrage, but it sounds like you're not just gambling if you call it "risk arbitrage")
e.g, let's say you can buy 1 EUR by paying 1.2 USD, buy 1 GBP by paying 1 EUR and buy 1.3 USD by paying 1 GBP, you would be left with 0.1 USD with no risk - in this case you've made an arbitrage profit of 10 cents, and you're likely to be able to do that "in the same market", and won't have to do more than one thing simultaneously.
However, everyone is looking out for these, so if such an opportunity presents itself, everyone tries to take advantage of it, thereby changing the price; These opportunities last milliseconds or even microseconds these days, the profit that can be extracted is very small, and you need to be very well positioned (technically) to be able to make it.
Another form of (mostly true) arbitrage is when the same thing gets traded in multiple venues - e.g. Gold in NY, London and Asian markets. In this case, you CAN'T buy a bar in one place and sell in the other place at the same time, because you need time&money to transfer the metal. So you go long in one place, go short in the other place, and then wait for the prices to converge WITHOUT trying to move physical gold around, and do the reverse transactions. There is no real price risk here (if the prices never converge, you CAN move the gold bar around for a small cost), but there's a lot of procedural and counter party risk.
There's what's known as "stat arb" (statistical arbitrage), which is all statistics and no arbitrage; Let's say Gold and Silver tend to both move together (when Gold moves up or down by 1%, silver tends to move in the same direction by 1%). Now, you see Gold moved up 2%, but silver hasn't. You assume either gold will move down 2% back to silver, or silver will move up 2% to match gold, or gold will move down 1% and silver up 1%. The way to take advantage of that is to sell gold for an amount $X, buy $X of silver, and wait. Whatever scenario happens, your balance (when you sell your silver and buy back the gold), you will make money. Unless ... gold and silver stay divergent, which can happen. In which case, you'll lose money.
Thanks to financial wizardry, you can very often sell things you don't own, and "buy them back" later to make things whole again.
(And finally, there's something known as "risk arbitrage" - it is all risk, no arbitrage, but it sounds like you're not just gambling if you call it "risk arbitrage")
Well I'm no expert (only what I know from university 10 years ago and working in related areas of finance), but it's the latter.
One further piece of the story is that the positions are in different markets for related (or the same) financial instruments, e.g. if two different markets have different prices for e.g. USD/EUR you have a profitable arbitrage opportunity when the difference is large enough to cover finance/transaction costs.
In other words, we're talking about situations where two markets have priced the same thing differently and obviously both cannot be correct -- therein lies the opportunity for arbitrage, before the prices converge.
One further piece of the story is that the positions are in different markets for related (or the same) financial instruments, e.g. if two different markets have different prices for e.g. USD/EUR you have a profitable arbitrage opportunity when the difference is large enough to cover finance/transaction costs.
In other words, we're talking about situations where two markets have priced the same thing differently and obviously both cannot be correct -- therein lies the opportunity for arbitrage, before the prices converge.
I Germany you can declare yourself personally broke, just like a company would. After that anything you earn within a seven year period is used to pay off the debt. When the seven years are over, you are freed from the debt. Starting a zero.
> That's where vacation, or the lack thereof, comes in. That's another banking no-no, precisely to prevent this kind of chicanery.
One of the key embezzling rules from from Frank Abignale's The Art of The Steal: Any regular employee that refuses to ever take a paid vacation is robbing you.
Vacations should be forced if they aren't taken voluntarily, because schemes like this require daily maintenance and even a day off could ruin the whole thing. If you're trusting someone with your finances and they're doing a good job, then a week off shouldn't destroy everything.
One of the key embezzling rules from from Frank Abignale's The Art of The Steal: Any regular employee that refuses to ever take a paid vacation is robbing you.
Vacations should be forced if they aren't taken voluntarily, because schemes like this require daily maintenance and even a day off could ruin the whole thing. If you're trusting someone with your finances and they're doing a good job, then a week off shouldn't destroy everything.
Most traders/hedge funds/investors who say they are market neutral aren't. Market neutral is a farce because of the one thing all arbs use - leverage - lots and lots of leverage. If you use leverage - you must assume that anything that can blow up in your face will - usually at the worst possible moment. That includes all shorters, derivative sellers and leveraged net-long funds.
They win a little every day - keeping their volatility in check - as if that fucking measures risks, and they do that year, after year, after year. 5 years later - BA BOOM! They blow themselves out of the water because during crises all correlations go to one and counterparty and liquidity risk get you killed as your convergence pairs blow themselves to smithereens.
Hell even the shorters can get perilously close to not getting paid. John Paulson made a ton of money, but only after his counterparties came through. They almost didn't pay up because the world was crashing around them and they had no cash on hand. Michael Burry also got himself into a similar situation. If you are betting for the end of the world, you should probably consider that no one will have enough cash to actually pay you and would rather default and see you squirm. Even when you bet for the end of the world - you're net long.
This is fundamentally what shorters don't seem to get - you can't bet for the end of the world - because if you do a) no one will pay you, or b) if they do, you won't be able to throw out your gigantic mounds of paper fast enough to get your hands on guns, food, water and shelter.
There is no such thing as risk-less arbitrage in the real world - just like there's no such thing as efficient markets, an economist who knows what he's doing, a finance major who knows how to invest or a hedge fund manager who is actually market neutral. Everyone is net long - always has been, always will be.
If you're running real money, and I'm talking billions - the only proven long term strategy is either a) statistical short term highly liquid front running (RenTech/Shaw) or b) long term value (Buffett) - owning companies that do well and not owning those who do badly (this is much more important).
Leverage in chaotic, short term, extremely path-dependent and correlated markets is just plain stupid.
They win a little every day - keeping their volatility in check - as if that fucking measures risks, and they do that year, after year, after year. 5 years later - BA BOOM! They blow themselves out of the water because during crises all correlations go to one and counterparty and liquidity risk get you killed as your convergence pairs blow themselves to smithereens.
Hell even the shorters can get perilously close to not getting paid. John Paulson made a ton of money, but only after his counterparties came through. They almost didn't pay up because the world was crashing around them and they had no cash on hand. Michael Burry also got himself into a similar situation. If you are betting for the end of the world, you should probably consider that no one will have enough cash to actually pay you and would rather default and see you squirm. Even when you bet for the end of the world - you're net long.
This is fundamentally what shorters don't seem to get - you can't bet for the end of the world - because if you do a) no one will pay you, or b) if they do, you won't be able to throw out your gigantic mounds of paper fast enough to get your hands on guns, food, water and shelter.
There is no such thing as risk-less arbitrage in the real world - just like there's no such thing as efficient markets, an economist who knows what he's doing, a finance major who knows how to invest or a hedge fund manager who is actually market neutral. Everyone is net long - always has been, always will be.
If you're running real money, and I'm talking billions - the only proven long term strategy is either a) statistical short term highly liquid front running (RenTech/Shaw) or b) long term value (Buffett) - owning companies that do well and not owning those who do badly (this is much more important).
Leverage in chaotic, short term, extremely path-dependent and correlated markets is just plain stupid.
This guy ain't paying that stupid fine. He's too smart. They shouldn't call it hacking they should call it cheaping out on progammers. A decent programmer would have created a system that wasn't so easily circumvented, but instead they cheap out like everyone in finance.
This guy just got unlucky. His fine might as well be eleventy trillion dollars.
Sure he did something wrong, but if this guy owes $6.3 billion, why don't banks owe us our economy back?
Like him I used to work compliance, the complete lack of enforcement is epic. The smart firms just hire lawyers, imagine having attorney client privilege with your broker.
This guy just got unlucky. His fine might as well be eleventy trillion dollars.
Sure he did something wrong, but if this guy owes $6.3 billion, why don't banks owe us our economy back?
Like him I used to work compliance, the complete lack of enforcement is epic. The smart firms just hire lawyers, imagine having attorney client privilege with your broker.
You're conflating two things here:
1. A messed up culture of rewarded risk taking and management turning a blind eye, turning on their own people when things go wrong in this cut-throat environment; in this sense this guy didn't do anything special and could certainly be seen as a scapegoat
2. A guy who went far beyond these tacitly approved rules of engagement, while being well aware of the game [1]:
- he spent 5 years in compliance when he started his career, so he was not ignorant of ANY of this nor can he claim he was
- he exceeded his authority dramatically and his actions were purposely designed to conceal his behaviour (no doubt advantaged by his compliance experience); it took him 2 years to blow up after becoming a trader, the only reason he pushed so hard was greed
- "skeptics" say the bank's story doesn't make sense and bank management must have been complicit but the accused himself has not defended himself in this way other than to pretty much acknowledge everything
- everybody describes him as pretty much average, is it that hard to believe a greedy young man just plain screwed up?
This is kind of like saying Lance Armstrong should keep his titles, money and receive no fines because everybody else was cheating and he was just one of the guys that was caught. I don't agree with that logic.
[1] http://en.wikipedia.org/wiki/J%C3%A9r%C3%B4me_Kerviel
1. A messed up culture of rewarded risk taking and management turning a blind eye, turning on their own people when things go wrong in this cut-throat environment; in this sense this guy didn't do anything special and could certainly be seen as a scapegoat
2. A guy who went far beyond these tacitly approved rules of engagement, while being well aware of the game [1]:
- he spent 5 years in compliance when he started his career, so he was not ignorant of ANY of this nor can he claim he was
- he exceeded his authority dramatically and his actions were purposely designed to conceal his behaviour (no doubt advantaged by his compliance experience); it took him 2 years to blow up after becoming a trader, the only reason he pushed so hard was greed
- "skeptics" say the bank's story doesn't make sense and bank management must have been complicit but the accused himself has not defended himself in this way other than to pretty much acknowledge everything
- everybody describes him as pretty much average, is it that hard to believe a greedy young man just plain screwed up?
This is kind of like saying Lance Armstrong should keep his titles, money and receive no fines because everybody else was cheating and he was just one of the guys that was caught. I don't agree with that logic.
[1] http://en.wikipedia.org/wiki/J%C3%A9r%C3%B4me_Kerviel
You know what, someone steals $1000 bucks from you, I can understand you not knowing... but $6.3 billion? Haha, you must be kidding me that bankers didn't miss $6.3 billion, the whole euro crisis with Greece is only $80 billion.
The $80 billion is only the yearly interest Greece has to pay. Their total debt is $402 billion.
So this is in the 1-2% range compared to Greece's issues. That's still an incredible amount for a single person.
[deleted]
The entire financial system has been based on absurdity and lies for decades. It is only now becoming apparent to the man in the street, as the the whole thing is about to collapse over the next few years.
http://detlevschlichter.com/2012/11/all-power-to-the-state-m...
http://detlevschlichter.com/2012/11/all-power-to-the-state-m...
I suspect every single person who becomes aware of the absurdity and lies (and who is not an insider) things that the collapse is a couple of years away. Since (at least) 1971.
I'm not saying the collapse is NOT near (things are getting worse at a quicker rate and are becoming harder to hide), but it is a well known adage is that "markets can stay irrational much longer than you can stay solvent".
They've been irrational for somewhere between 30 and 80 years. I suspect the irrationality will continue much longer than one can rationally expect.
I'm not saying the collapse is NOT near (things are getting worse at a quicker rate and are becoming harder to hide), but it is a well known adage is that "markets can stay irrational much longer than you can stay solvent".
They've been irrational for somewhere between 30 and 80 years. I suspect the irrationality will continue much longer than one can rationally expect.
When I clicked on the link, I was worried it might be me.
I wonder – how can you be so greedy? what a loser.
The sentiment in France is that he was a scapegoat for his chain of command, who all knew what was going on. The CEO was "let go" in a very gentle way, but otherwise no one else was punished.
The lawsuits were just CYA and leverage to make him shut up, which he didn't, he spilled the beans on his managers, so they threw him under the bus.
The lawsuits were just CYA and leverage to make him shut up, which he didn't, he spilled the beans on his managers, so they threw him under the bus.
I didn't know – thanks for bringing this up.
Can't he just declare private insolvency? I don't know the French laws there, but in Germany it's 6 years where you have to give your debtors everything you earn over your minimum living standard (called "Wohlverhaltensphase"). After that you are back to zero.
Edit: I think there is an exception for a conviction fine... probably that's the case here.
Edit2: No not really, because it's not a fine from the court but the money he owes the bank.