Nick Leeson and Jérôme Kerviel- a very brief comparison of billion-Euro rogue traders

The latest scandal to hit the financial news is a case of fraud at the French bank Société Générale involving sums of up to 4.9 billion Euros. The protagonist in the middle of this storm is Jérôme Kerviel, an equities derivatives trader.

This case immediately brings to mind the famed Nick Leeson, whose unauthorised speculative trades resulted in losses of 827 million Pounds and the collapse of Barings Bank in 1995.

So how does Kerviel compare against Leeson? The most straight-forward approach would be to compare the present value of the magnitude of their losses.

Leeson managed to lose 827m GBP 13 years ago. Arbitrarily assuming the average interest rate between 2005 and now to be 4% p.a., the present value of that sum is actually a staggering 1.4 billion Pounds.

827m * e^(0.04*13) = 1391m GBP

Kerviel, on the other hand, has managed to evaporate 4.9 billion Euros. However, there are reports suggesting Kerviel lost 1.5 billion; the other 3.4 billion Euros was the bank’s own (un)doing.

A rival investment banking executive said Mr Kerviel did not lose €4.9bn by trading futures on European share indices, as Soc.Gen. claims, but only €1.5bn – the deficit his trading had accumulated by the time he was caught.

"The board of SocGen lost the other €3.4bn," said the rival banker. But the bank defended its actions, saying it could not risk keeping the positions open.

source

Now, how does Kerviel’s 1.5 billion Euros compare to Leeson’s present value of 1.4 billion Pounds?

Using today’s exchange rate of 0.74 Pounds to the Euro, Kerviel’s losses of 1.5 billion Euros is equivalent to 1.11 billion Pounds. Given the very rough estimation methods in this assessment, this figure of 1.11 billion Pounds is not remarkably different to what Leeson managed (1.4 billion Pounds).


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Like the title already says, "very brief." Visit the Financial Times for a more details.

RIP: can consumers make economics work in their favour?

Yesterday, another bus accident happened, this time taking the lives of three passengers. At the time of the incident, the driver was suspected of speeding in the rain while typing text messages on his phone.

This is not the first time we have heard of bus crashes; the safety standards of inter-state bus service companies have been questioned before, and the issue is again being raised.

The first reaction to this is to call for the vengeance of the authority- for the driver at fault to be arrested, a witch hunt through the transport authorities to find out why a driver with 13 outstanding traffic infringements is allowed on the road, for the bus company to be shut down, for more speed traps, etc etc.

The basis for these reactions is similar- by exercising a severe punishment, it will send a signal to other drivers/operators that offenders will be prosecuted. And also allows a measure of revenge to be exercised.

However, I believe there are fundamental flaws in this approach- it relies on regulatory enforcement. Given that the resources of the government is finite (if all personnel are stationed along the highways and bus terminals, there would be none leftover to man the immigration department, patrol the borders and censor our movies), the all-seeing regulatory approach is not feasible.

The use of data-loggers, GPS devices, speed governors are more sophisticated methods to regulatory approach, and rely on disciplined enforcement.


Perhaps another approach is to ask why drivers speed, and why bus companies allow such drivers to be on their pay roll.


If one of the fundamental axioms of economics is true, then firms exist to make a profit.

Fast drivers allow journeys to be completed in a shorter time, and thus require fewer buses to complete the same number of trips in one day. Thus, fast drivers provide better profit.

With the current level of enforcement, bus companies find that the profit gained from speeding offsets the costs of the occasional speeding tickets. Drivers need employment, or their family members starve. Drivers that do not speed will find that it will be difficult to retain employment.

Given the lackadaisical policing we have in Malaysia, it is not likely that clampdowns and vows for stricter enforcement will have any long term benefit.


To provide a safer bus service (with bus drivers who obey the highway code), no doubt additional costs will be involved. Firstly, by not speeding, the bus company will require more vehicles to provide the same volume of service. Secondly, the training to be provided to drivers requires both time and money.

From the consumer’s point of view, is a longer bus journey acceptable for the reduced risk of accidents? It’s not a trivial matter, and should be considered carefully before shouting, ‘YES.’ A 400 km journey will take 4.5 hours if a bus travels at the speed limit of 90 km/h, but the travel time can be dramatically reduced to 3 hours if driven at 130 km/h.

If the consumers themselves favour fast service over safe service, there is nothing the government can do to stop this carnage. The forces of economics will continuously drive the market equilibrium back to where we are now- fast journeys sprinkled with morbid accidents every now and then.

However, if consumers are willing to pay for safe travel (after all, the companies can no longer skimp on driver training and the number of vehicles in service), operators must be made aware of it. A market opportunity exists here, and the operator that can satisfy demand for safe travel will profit.

If we are indeed in favour of safe travel and willing to pay the premium, we need to use the power of economics to drive the market to a condition which provides safe transport services:
-Refuse to do business with companies with questionable safety standards.
-Lodge reports against drivers who act irresponsibly, so that the operators are aware that they have drivers that compromise their business plan to provide safe travel

This will send a clear signal to operators that money lies in safe travel, not high-speed time-trails between Penang and Kuala Lumpur.

In the face of money, ethics do not exist. The consumers must utilise the flow of money to change the market into one which has a semblance of having ethics. Vote with your business, and unethical companies will either adopt ethical practices or drop out of the market.



Rest in peace, and condolences.

Updates

On some occasions when we look back at the history of our lives, we see little decisions that resulted in substantial changes in our lives. Perhaps one might be grateful for attending the New Year party at Zouk instead of the Ministry of Sound, because one met the spouse in Zouk.

It may be true that one met the joy of his/her life at the New Year party at Zouk, but one should not forget that the New Year Party at the Ministry of Sound might also have held some personalities of compatible nature.

At any rate, the course of human life is chaotic in nature: small changes in the initial conditions can lead to drastically different outcomes. (In this example, choosing a different party to attend will have led to a different married-life)


[ This was intended to be a handwaving discussion on the feasible short and long-term planning horizons available to a person However, I found some internal contradictions within my arguments, hence they will be scrapped. ]


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On another note, I am thoroughly fascinated with the following technique.



I tried a severely watered-down variant- a feint turning kick followed with a jumping reverse swing. Needs more work, but given sufficient practice it should open to the path for further developments in show-off techniques.



Click here for large size image
Hanimar 400mm f/6.3 exposed at f/11 or thereabouts

On yet another note, I will be leaving Melbourne in 10 days time, and not expected to return in the foreseeable future. The resignation is complete- my last day of work is the 7th of February. With my remaining leave days exercised, it brings my last day forward to the 30th of January.

After the New Year, I start work in Shanghai, China. My first year spent in fire safety engineering has been productive. As the de facto modeller, I have acquired a certain measure of 1337ness in numerical methods and modelling a variety of systems. These would come in useful someday.

Someday, when/if I need to do any financial modelling, this will be invaluable addition to my portfolio of abilities.

Straight lines

Harbour City shopping mall, Tsin Sha Tsui
Meyer-Optik Görlitz Lydith 30mm f/3.5




Click here for large size image
Jamin working a piano somewhere in the New Territories, Hong Kong SAR
Super-Takumar 50mm f/1.4




Click here for large size image
Charles and Keith, Singapore
Super-Takumar 50mm f/1.4




Marco Polo Hongkong Hotel
Meyer-Optik Görlitz Lydith 30mm f/3.5




Click here for large size image
Somewhere in the Wan Chai District, Hong Kong
Meyer-Optik Görlitz Lydith 30mm f/3.5

2007

My 2007 started in the dimly-lit cabin of a Boeing 767 on a flight from Beijing to Kuala Lumpur. From KL, I fluttered to Melbourne where I started work on my first professional job in fire engineering.




February was marked by my first New Year away from home. I also moved from a room in a low-cost flat to a townhouse shared with The Architect and The Chemist.




Much of March was whiled away playing Gran Tourismo 3, unfortunately.

I took a week off work to fly home for an aunt’s wedding in May, and also partly due to homesickness. Seeing my family, aunts and cousins gave me a much-needed revival.




In July, I started studying financial derivatives and investment planning, courtesy of several text books loaned by Jean.

August was dominated by a major push to revamp my CV and preposterously many dinners with a Jean, who was due to leave Melbourne at the end of the month.

A portion of October was dedicated to analysing air-fares for December between Melbourne and Kuala Lumpur.

November went by in a blur of differential equations as I independently derived the higher-order derivatives of the Black-Scholes prices of options. Joo Lee and her mother visited Melbourne; it was a few wonderful days with them.




December was marked with plenty of travelling, briefly summarised as:
Melbourne-Singapore-Melbourne-Kuala Lumpur-Singapore-Kuala Lumpur-Hong Kong-Shenzhen-Hong Kong-Macau-Hong Kong. Also repaid my parents a huge debt associated with various air fares and miscellaneous outlays, totalling a massive RM 10,000.




My 2007 ended at the Tsim Sa Tsui waterfront with the brothers and cousins.





Development for the year was concentrated in finance. No ground-breaking insights were made through mathematics. Physics took a back seat for most of the time except when I was flying. Advances in photography were in the use of microphotography, prime lenses and off-camera flash photography.



And in the near future, I will:
- resign from my position
- fly home (again!) for the New Year
- start work in Shanghai

Karting in the wet

We (Asyraf, the two brothers and myself) arrived at the track just in time to catch the start of a downpour.

When the rain slowed to a drizzle, we went onto the track on slick tyres. Grip was ridiculously low, allowing drifts, slides and spins to occur at non-hair raising speeds. After numerous spins, I was getting to grips with the track’s lack of grip.

Going at full throttle through a long downhill righthander into the back straight was cutting a bit close to the edge of stability. The chassis squirmed with slight oversteer, requiring twitchy steering corrections.

On one attempt, a bout of instability went uncaught and I spun down the back straight. As the world precessed around, I could see the small brother several seconds behind me. I came to a stop in the middle of the track; he moved to the side I was facing, an evil grin clearly visible behind the helmet’s Perspex visor.

He nudged the brakes and gave the wheel a slight yank in my direction. Pulling the wheel back around and returning to full throttle, he drifted across my field of vision, all four slick tyres sliding on the wet track. A hand was extended over his forehead, the thumb and index fingers resembling a large L for loser.

Running out of stability, he straightened out and went along his way to the next corner.

Remarkable what a 15 year old can learn from Playstation and GT.

Personal Effects

Click here for large size image
L-R: 1.00 USD, 51.10 AUD, passport, 8.60 SGD, 256.74 MYR, 755.50 HKD, 121 RMB
Super-Takumar 50mm f/1.4, with remotely operated Nikon SB-25 and Canon 420EX