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February 26, 2008
The Kerviel Profit Machine
I am burned out by the speculation around the SoGen matter. I do not want to beat a dead horse, but I do wonder whether or not the activities of this trader were, overall, unprofitable.
Granted, he was taking bets that were probably not approved. However, the press has had a tendency to ignore previous profits when reporting losses. For example, on the subprime fiasco, the media rarely reports how much was made on the CDO's, instead reporting how much was lost.
If I go to Las Vegas and wind $100 the first day, $100 the second day and then lose $100 on the third day, is it fair to say that I lost $100? I don't think so. I would say that I won $100.
If Kerviel is correct that he made billions prior to the loss, is it fair to count only the amount lost at the end of his activity? Similarly, I wonder if the entire subprime scandal truly resulted in a net loss. I don't have the numbers, so I can't say. However, I do doubt the methodology for calculating the loss.
Posted by beaumontv at February 26, 2008 08:27 PM
I agree with your reasoning. But what if i gain $100 in my previous quarter and the news has been digested by the market and i lose $100 now. Should the effect be the same?
Posted by: Raja at February 27, 2008 01:35 AM
Good point Beaumont. The media has a tendency to focus on the dramatic side of things, including financial losses. Your Vegas analogy is a good one, expect that on Wall Street the winners and the losers are not necessarily the same individuals, and hence the idea of a "net gain" may not be always applicable. In the case of the CDO debacle, it appears that Main Street is on the losing side, and I am not sure how much benefit they derived for the glory days of the CDO boom (we know how much Wall Street got paid in bonus!) Bank shareholders and investors, on the other hand should not complain: after all they pushed financial institutions into more risk taking activities by continuing to demand higher profits, quarter after quarter after quarter.
Posted by: Paul Diouri at February 27, 2008 12:43 PM
As we can learn from the public domain, on Jan. 24 the bank lost EUR6.3bn with Kerviel's position. After substracting his previously unknown EUR1.5bn profit for the year 2007, the final number came to EUR4.9bn,that was officially reported.
I agree with you, this is a zero sum game. The counterparties made EUR4.9bn on those positions. Good for them.
Posted by: Alexander Shipilov at February 29, 2008 08:23 AM
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