Lipper HedgeWorld Staff, Chicago.
The last half of 2007 was a lousy one for hedge funds, thanks to the credit crunch. So far, 2008 hasn’t been much of a picnic, either.
Société Générale (SocGen), one of Europe’s largest financial groups with a worldwide staff of 120,000, revealed on 24 January that it uncovered a fraud that the firm said was ‘exceptional in its size and nature’. The fraud, which SocGen said would have a negative effect of €4.9 billion (US$7.18 billion) on pre-tax income for 2007, was perpetrated by a single Paris-based trader: 31-year-old Jérôme Kerviel, who was responsible for hedging plain-vanilla futures on European equities indexes.
It represented the biggest fraud ever committed by a rogue trader. According to a press release, Mr. Kerviel took ‘massive fraudulent directional positions in 2007 and 2008 beyond his limited authority’. He was able to conceal this fraud ‘through a scheme of elaborate fictitious transactions’ thanks to his knowledge of control procedures gleaned ‘from previous employment in the middle-office’, though it is not specified whether he held the position at SocGen. SocGen dismissed Mr. Kerviel and added that the trader’s managers would also leave the company.
Police later arrested another employee of Société Générale as part of its inquiry into the scandal. The Paris prosecutor’s office identified the person being held as a trader from a subsidiary of SocGen.
Following an internal review, Credit Suisse announced on 19 February it was reducing the value of some asset-backed positions by US$2.85 billion. The estimated hit on net income would be approximately US$1 billion, according to Credit Suisse. Market watchers had been perplexed by the apparent contrast in fortunes at rival banking institutions UBS AG and Credit Suisse over each bank’s mortgage-backed securities exposure. While UBS acknowledged large exposure and made equally large write-downs, Credit Suisse had emerged relatively unscathed. That led some market insiders to privately suggest that Credit Suisse had been less than forthcoming about its own mortgage-backed exposure.
That changed, at least in part, when Credit Suisse announced that ‘further to its commitment to provide transparency…’ it had ‘undertaken an internal review that has resulted in the re-pricing of certain asset-backed positions in its Structured Credit Trading business within Investment Banking.’ The reductions reflected ‘significant adverse first quarter 2008 market developments,’ the bank said.
Citigroup Inc. suspended investor withdrawals from a US$500 million credit hedge fund to give it a chance to ‘stabilise,’ a bank spokesman said on 15 February. The London-based fund, called CSO Partners (CSO), faced investor redemptions after a 10% loss in November, prompting its manager John Pickett to resign, according to Citigroup spokesman Jon Diat. The fund was up 27% since inception in August 2004 to 31 December 2007.