How to lose $7.2bn with just a few Basic skills
SocGen: it could've happened anywhere - and still might
Je pense que...
I used to be head of IT at a city firm, was director in charge of the British government's secure network to monitor investment banks, and have done time as a tactical developer in several banks, but not SocGen. So the rest of this piece is inference spiced with direct personal communications as a headhunter with people who discreetly shared unattributable insights over fine wine or shouted them across mediocre lager. Short version: This is informed guesswork.
There have been the inevitable articles on "warning signs" that should have been spotted, and it's hard to argue with that. But to put that into context, everyone who has worked in trading firms has seen position reports that imply that you've accidentally bought up Microsoft, swapping it for your stake in SCO and an option to buy a goat.
Kerviel could explain these signals away because he had worked in the mid office responsible for risk management. When asked why he apparently had a huge position, he would easily have been able to say "sorry, when we built that report, we got it wrong in the way we handle failed trades", and maybe even offer to fix it. For a given value of "fix", of course. Certainly he would have enough excuses to get over the head of a manager chosen on the golf course (you know who you are).
How many passwords would you like M. Kerviel?
SG's official statement claims he stole passwords, but this is highly unlikely to be entirely true. As a mid-office developer he'd be freely given a pile of passwords and access rights. I would actually be quite surprised if all of these were taken away when he was promoted; and as for the passwords of his colleagues, they are shared far more often than the security policy of any bank would permit. I have seen junior staff on trading floors told to log on as other people (no, I'm not saying where, but it's common). The way it works at most firms is that as his new job required more access, this would have been added to his profile, but no one would have asked whether he should be taken off the mid-office servers.
Many organisations deal with "permission creep" by randomly deleting access every year or so, and waiting for people to complain (yes really, it's not just your firm, happened to me more than once). But a common bad technique is to embed usernames and passwords into applications, especially Excel report sheets. These tend to be powerful administrator or developer accounts, granting unlimited access with little or no auditing. I have seen what happens when these accounts are deleted without asking the developer, and it is not pretty. Who, me? Would I do such a thing?
Of course this rarely happens to "important" people, and the food chain at most investment banks has even junior traders like Kerviel in the top tier, so I'd bet money no one even asked why he still had the old access rights. Realistically, being able to do extra useful things and sort out problems with "lower" areas would have made him a more valued member of the trading team, so anyone trying to take his access away would therefore have had a fight on their hands. Such is the menial position of IT in most firms, most would not even try.
Agree'd there are some *really* big players in the power industry that have appaling procedures for certain aspects and houses built on sand. The previous owner was no different and that one nearly went the same way as enron. probably the only reason it didnt was because it was just not found out.
i work at the station level and here we run a very tight ship but at the corporate level security is a joke, particularily within trading as they seem to think they are 'god' and tend to get away with whatever. the main trainin gpc's have postit notes with passwords on them stuck to the sides of monitors. we castrate people for doing that here but down there it's the norm to share and logon as others!
Could be you are right
Certainly Excel misuse is only part of the problem. Given his skillset it would have been in the mix, but you must be right that he used other tools. Indeed I think the access others PCs "helping" them with Excel may have been far more of a factor.
I hear what you say about entering the offsetting positions, but why weren't any cash flows noticed ? Certainly I stick to the point that either the reporting at SG is totally crap, or that he compromised it (or some combination of those two factors).
Over-emphasis on Excel/VBA
I doubt JK used VBA to hide his positions. More likely he entered false offsetting futures/forwards/swaps trades and/or made risk amendments (in my experience, risk systems allow you to manually "correct" your risk, which is intended for use where a position isn't feeding properly or a trade hasn't settled yet) to make his risk look overall flat. D1 traders' gross asset limits are often v.high (i.e. measured in the billions) - it's the delta (i.e. the sum of the net long/short positions) that's under far tighter limits - hence the name for this type of business, Delta One, which implies no risk.
To give an example, if I'm long £1bn worth of FTSE 100 stocks and short £995m worth of FTSE 100 futures, my gross asset value is £1.995bn but my net position is long £5m.
Rumour has it JK had taken large unauthorised index futures positions. To make himself look flat, risk-wise, all he had to do was make false entries in the opposite direction.
In my experience, Excel/VBA is more used for tactical risk modelling/calculation by traders/quants. The real risk management (i.e. what the controllers look at) are separate systems (either developed in-house or bought from a third-party vendor) which take dumps from the various position-keeping systems at the end of the day to compare against traders'/desks' risk limits and do the number-crunching necessary to calculate the company's overall VaR figure.
It's not at all surprising that a relatively intelligent individual who was both familiar with the risk systems and was determined to circumvent them, was able to do so.
-- The Accidental Trader
Great Article (and comments too)
Enjoyed this article, and it's good to see the author responding in comments too. I've been in banking quite a while and I agree, this could happen pretty much anywhere. What is surprising is that SocGen did not act on warnings from Eurex in Oct/Nov. Seems as though their award from Risk magazine went to their heads!
And I'd agree with The Pimp in stating that Investment Banking is full of very clever, very talented and very hard working people. It's just that some people use those talents in rather odd ways. And that the business demands simply don't tally with development reality.
Gweihir, a question...
Gewhir could you tell me how you teach your students to deal with senior staff telling them to break elementary security ?
I assume you teach social engineering, but what about advocacy skills ?