Wrote up my notes on John Gapper's excellent eBook "How to Be a Rogue Trader." The FT has a sad story of the aftermath for one. Jerome Kerviel is walking from Rome to Paris before his jail sentence starts.
It was after July 2007, when the financial crisis was starting to rout stock markets, that Kerviel’s initially modest gaming of the system started to get out of control. The economic situation was so bad, he thought, that the markets could only possibly go down from here, so why not bet big? He racked up a €28bn euro exposure in a few months, got the call right, and made the enormous sum of €1.4bn on his trading – although he declared only €55m as profit.
“At this point, no one was complaining,” he says. But hubris struck. At the start of 2008, he suddenly decided that the markets were set to rebound again, that the sell-off (which would last another year) was over. He built up a €50bn position, more than the value of the entire bank, this time betting stocks would rise. “I was confident, even though I was losing money, because I had always been right before,” he says.
In retrospect, he realises that at this point he had lost control. “It was just numbers on a screen. I was not even thinking in terms of money, just numbers of contracts . . . I had thousands, hundreds of thousands,
Giving that kind of leverage to a trader, to be able to build up positions bigger that the value of the bank, wow. Its not hard to see why leverage played a leading role in 2008 crisis.