How to lose 7.2 billion?

Weekend reading from the WSJ:

http://online.wsj.com/article/SB120191910348337311.html?mod=hps_us_pageone

"By the evening of Friday, Jan. 18, previous gains had evaporated. Mr. Kerviel was sitting on a hole of around €1.5 billion."

Unwinding the position by the bank in an unprofessional manner: 3.3 billion Euros

Lesson learnt: PRICELESS

 

Sooo…What happened to the WS superior risk management??? Where were all these overpaid elitist quants and PhD’s ?
Taleb was right once again: Sharpe , Sortino , Monte Carlo and others are absolutely worthless tools unless of course you are on the receiving end of “ heads we win , tails you lose” industry.

 

Apparently SGs best trader was chargeed with unwinding the position! Hah, most of these traders at IBs would fall flat on their face if they faced the long odds that retail traders do.

Here's basically how they should have unwound the trade.

1. Bought a huge quantity of puts.
2. Let the world know they have some massive long position that needed to be unwound due to a rouge trader tanking the markets even more.
3. Start selling every rally, just crushing it (proably the opposite of what they dd)
4. When they were done selling close out the puts and buy calls.

Their HUGE edge was that they had a market moving position and only they knew when they were done unwinding it. So muh for the brilliant IB traders.

 

There is no way in hell they didn't establish a counter posistion before unloading the contracts. I imagine next quarter SG will report massive trading profits due to the quick thinking traders who dealt with the banks tragedy with competency and poise

 

Not to mention had they held the position for 2 more weeks they would be in the green right now....
Although it is debatable just how much of the first .75 points fed's rate drop was as a result of their unwinding...

But they should have been able to lock in the loss of 1.5 billion Euros...

 

I didn't realize that Kerviel was actually up big too at several points - in December he was actually up 1.4 billion Euros! Quel disastre....

 

But didn't someone make 7.2 billion from the other side of those trades? Or am I missing something.

 

Not someone... it was simply absorbed by other market participants.

 

Right .... and since it was just a transfer of wealth why should the market plunge? the 7 billion is still out there.

 

he only says that because he never made money outside of the sell-side