Societe Generale Bank & Enron

by Charles Young, Rebel Traders | February 4, 2008

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Societe Generale Bank.. remember them? It was just weeks ago that they announced substantial losses and claimed that the losses were the result of a "rogue trader." This rogue trader had allegedly over extended the banks money by huge amounts, and lost. When the story broke, I remember commenting here on our site that I felt there was more to the story than we were being told. I even mentioned the possibility that Societe Generale was on the brink of becoming insolvent, and that they had used the "rogue trader" story as a way to avoid divulging that the bank suffered huge losses. Losses resulting from activities in which they were in full control. Now, the story that Societe Generale Bank told the world may indeed be true and accurate. But in the world of big business you always need a slight bit of a suspicious nature in order to survive. On January 27th I wrote: 

Some speculate that the bank was on the brink of becoming insolvent and this was a way of explaining their losses without it looking like a bank failure. Sounds farfetched, but so did some of the accusations being raised about Enron. And they were later found to be true.

I knew I heard this term "rogue trader" before. And, then, I remembered from where it came. It came from Enron. In the book "The Smartest Guys in the Room" by Bethany McLean and Peter Elkind, which details the rise and fall of Enron, there was a story of another "rogue trader".

In 1987, Enron began to trade heavily in Oil Futures. Enron Oil, the division which was doing the trading, was betting heavily on oil declining in price… but oil kept rising. Instead of closing out their trades and taking a small loss, Enron continued to pour money into the trade thinking they were going to be right. But on October 9th, 1987, an Enron executive from Houston met with an Enron Oil executive at a restaurant in New York. The Enron Oil executive, Louis Borget, told the Houston executive that their trades on oil were so far in the hole, that it actually put Enron’s total net worth at less than zero. The losses were so substantial that Enron, on paper, was broke. After a panic meeting back in Houston, and a slight turn down in the oil prices, Enron was able to wiggle their way out of the trades over the next few weeks. The losses were not as severe as they had originally looked, but the losses were still large. 

Now mind you, according to details outlined in the book, the Enron executives were fully aware of the trading activities of Enron Oil from the beginning. They just were not aware of how deeply in the hole they had become. When all was said and done, Enron announced their losses to the public and to the SEC. They blamed it on "losses from unauthorized trading activities by two employees in its international crude oil trading subsidiary". In other words, Enron, fully aware of the trading activities, decided to explain their losses as just a couple of unauthorized transactions, instead of divulging that the company was at risk of being insolvent. And so they blamed it on a couple of ‘rouge traders’. Enron later went on to file charges against the subsidiary and the traders for their actions.

Now let's come back to present day. Societe Generale Bank claims that their substantial losses were a result of a "rogue trader" who had made "unauthorized transactions", and have filed charges against the trader. Now you can understand why I said that I felt there was more to the story than the public was being told. Time will tell if the story Societe Generale Bank has told everyone is true or not. But it is interesting how this has happened before, and that it was used as a cover up for the real story.

Copyright © 2008 Charles Young
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Charles Young | Rebel Traders | Palmyra, NJ USA | Email | Website

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