

Meet the Most Indebted Man in the World - dsr12
http://www.theatlantic.com/business/archive/2012/11/meet-the-most-indebted-man-in-the-world/264413/

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sek
Why has this guy a better suit than me? :D

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.

~~~
mrich
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.

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swombat
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.

~~~
beagle3
> 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.

------
incision
>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.

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pchivers
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."

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codeonfire
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?

~~~
sek
In general you have to include the probability of a payment in your balance
sheet, but banks are capable of stuff like that in not so obvious cases....

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gabemart
>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?

~~~
lusr
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.

~~~
gabemart
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?

~~~
beagle3
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")

------
jsilence
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.

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shinratdr
> 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.

------
confluence
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.

------
fleitz
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.

~~~
lusr
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>

~~~
fleitz
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.

~~~
skriticos2
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.

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nacker
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-money-
madness-at-the-imf/)

~~~
beagle3
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.

------
bravoyankee
When I clicked on the link, I was worried it might be me.

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xk_id
I wonder – how can you be so greedy? what a loser.

~~~
ovi256
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.

~~~
xk_id
I didn't know – thanks for bringing this up.

