Following from our comments re Calyon yesterday, The FT reports today that Moodys are of the opinion that the rogue trading loss "did not reflect the group's usual cautious risk management style and was likely to be exceptional". It also "clearly indicated a breakdown in existing procedures and controls in place at Calyon's local US branch."
Er - yes. Thank goodness we have the rating agencies to present us with that observation.
The article also gives a little more detail on the episode - the trade was apparently related to "diversified credit market indices" (CDS index arbitrage, we wonder?). To lose $350 million means that the underlying notional value of the position must have been extremely large, yet this was, it would seem, not flagged by internal risk controls.
The purpose of our comments is not to pick on Calyon but to make two points which are prevalent in any trading environment:
- no-one is thanked for asking tough questions when everyone is making money (ask Amaranth's risk manager).
- some traders, faced with a loss, will always believe that the markets are just plan wrong, because they have a "good" trade. If only they can keep the loss under wraps for a couple of days / a month / six months, they will turn out to be heroes......
Things to think about for hedge fund investors, not just Calyon shareholders.
Comments