What is a callable CD ?

A callable CD is a certificate of deposit that can be called away from the investor after the call-protection period has expired, but before the CD matures. A five-year CD with a six-month call protection would be callable after the first six months.

Banks offer callable CDs to shift interest-rate risk to the depositor. Because the depositor is taking on this interest-rate risk, a callable CD will have a higher yield than the same maturity CD without a call provision. The additional yield is partial compensation for the depositor accepting the interest-rate risk.

Interest-rate risk is the risk that interest rates move against you during the period that you hold the investment.

For the bank, interest-rate risk means the risk that interest rates go lower and by waiting they could have issued CDs at lower rates. For the depositor, it means that interest rates go higher and by waiting they could have bought CDs at higher rates. Neither side wants to be long and wrong -- that is, to commit to lending (borrowing) long-term as interest rates trend higher (lower).

Banks are managing their interest-rate exposure by selling callable CDs. They employ complex option pricing models to determine how much they are willing to pay the depositor to purchase a callable CD versus a non-callable CD. They do the analysis because they are managing the interest-rate exposure of their loan portfolio against the interest-rate exposure on their deposits.

The bank is hedging their interest-rate risk. It's the depositor who is speculating with a callable CD. The typical investor just eyeballs the difference in the two rates and decides whether its worth their while to invest in a callable CD.

Here's what is undesireable about consumers buying callable CDs: If interest rates go lower, the CD gets called away and the investor has to reinvest in a lower interest rate environment.

Société Générale - Jérôme Kerviel: Rogue trader turned film star?

As the old showbiz adage goes, there's no such thing as bad publicity. Kerviel may be under the cosh now, but better times may lay ahead.

While it's fair to say Jérôme Kerviel probably isn't having the best of times at the moment, what with a criminal investigation and international infamy hanging over him, significantly better times could lay ahead.

If the case of Nick Leeson, the original 'rogue trader' who brought Barings bank down, is anything to go by, mega-bucks could be awaiting Mr Kerviel in the form of a book and film deal.

If the shy, junior trader at the heart of a €5bn scandal at France's second biggest bank chooses to speak out, he could be forever immortalised on the big screen and achieve the wealth and status in his personal life that he seemingly craved at Société Générale.

And even if he doesn't write a book and sell the rights, there are other ways a film production company could tell the extraordinary tale, although not any time soon.

As Douglas Rae, managing director and executive producer of Ecosse Films, explains, a film company could commission a journalist to follow the court case and write a script off the back of that.

"It would be 18 months before you could hope to have a story though," says Mr Rae. "There is nothing to stop you basing it on a fictional episode, following a rogue trader in New York who defrauds a bank out of $4bn."

In 1995 while serving a jail sentence in Singapore, Nick Leeson signed the film rights to his book over to Sir David Frost who had interviewed him. The film was made while Mr Leeson was still in prison, and released one month before his own release.

Since being released from prison he has also made money by doing the rounds on the after-dinner speech circuit and writing a second book on coping with stress. Kerviel could be next to step up to the role of rogue trader turned celebrity...

Société Générale - Jerome Kerviel: In His Own Words

The rogue trader tells prosecutors about his motivations, modus operandi, and Societe Generale's security shortcomings




In 2005, Jérôme Kerviel got something he had long coveted: the opportunity to become a trader for Société Générale (SOGN.PA). He had joined the Paris-based bank five years earlier, but as a graduate of a second-tier French business school, he was relegated to a job in its middle office, processing and overseeing transactions by traders whose jobs were far more glamorous and better-paid than his.


Determined to break into trading, Kerviel grabbed the first job that came his way, an opening on SocGen's so-called Delta One trading desk, which handles generally low-risk futures hedging on European stock market indexes.

Yet even at Delta One, Kerviel was dogged by his lack of credentials—a reflection of France's rigidly hierarchical education system, in which top students who gain admission to a handful of grandes écoles easily find prestigious jobs in government and business, while those who attend more ordinary schools find it far more difficult to advance. That frustration, and a desire to prove that he could play in the big leagues, led Kerviel to begin making unauthorized trades almost immediately upon joining Delta One. It was a decision that ultimately led to a $7.1 billion loss that could topple one of Europe's biggest banks.

A transcript of Kerviel's interrogation by the Paris prosecutor's office, posted on the newspaper Le Monde's Web site late on Jan. 29 and independently confirmed by BusinessWeek, offers a fascinating look into the mind of a rogue trader.

Following are excerpts:

On his hiring by SocGen in 2000: "I had no illusions. I knew perfectly well that I would be less well-paid than on other desks, that I would not be paid according to market standards, but that did not lessen my motivation."

On his advancement to the Delta One trading desk in 2005: "I was aware, starting from my first meeting in 2005, that I was less well-considered than the others, as regarded my university degree and my professional and personal background. I had not come directly to the front office, but had passed through the middle office, and I was the only [trader] to have done that."

On how his rogue trading began: "My first experience in this direction was in 2005. I took a position on Allianz (AZ) stock, betting on a fall in the market. Soon after this, the market fell, following the [terrorist] attacks in London, and we had a jackpot of €500,000 [now about $730,000].…I had already had the idea of a 'deal' to cover my position. I had mixed feelings because I was proud of the result but surprised at the same time. That produced a desire to continue, there was a snowball effect."

On how he took secret pride in his results, even as his trading spun out of control: "As of Dec. 31, 2007, my gains had reached €1.4 billion ($2 billion), which I had not declared to the bank. At that point I had been overtaken by events and didn't know how to present this to the bank. It represented undeclared cash of €1.4 billion. No one else had ever realized such a sum, which represented 50% of the total result of the equity-index division of SocGen. I didn't know how to deal with it, I was happy and proud of myself, but I didn't know how to justify it. Thus I decided not to declare it, and to hide the sum, I created an opposite fictional operation."

On the techniques he used to hide his trading: "I furnished false documents on these operations, false e-mails. I created a false e-mail and used features of our internal e-mail system—in particular, a function that allowed me to re-use the heading of an e-mail that had been sent to me, changing the content of the message. Then I could retype the text that I wanted, and the e-mail looked just like an original."

On his belief that superiors tacitly encouraged his activity: "In July, 2007, I suggested we should bet on a fall in the market, but he [my superior] did not want to. My bet proved a winner, a cash generator.…I had taken a [trading] position anyway with the consent—or at least not contested by—my No. 1 [apparently a higher-level supervisor] who helped record the transaction.…The transaction proved fruitful, and thus it was authorized, indeed supported by the hierarchy. After that, I had to take positions every day. Even during my vacation, my manager was calling me to ask what position to take. The incentive to take positions was at a maximum."

On why he thinks his superiors knew he was exceeding authorized limits: "I can't believe that my superiors weren't aware of the sums I was trading. It's impossible to generate such profits by taking small positions. This leads me to say that, as long as my results were positive, my superiors closed their eyes to the methods and the sums involved. A trader engaging in normal activity could not generate so much cash."

On the bank's lax supervision: "The simple fact that I didn't take days off in 2007 [he took only four days off] should have alerted the management. It's one of the primary rules of internal control: A trader who doesn't take vacation is a trader who doesn't want to let anyone else look at his book. I regularly received risk messages, alerting me that I had greatly exceeded my nominal cover. A few minutes later [during which he would create a fictitious transaction to mask the risk], a counter-message would be sent. The frequency of these alerts did not worry them. Because I was generating cash, the signals didn't worry them."

Read more at:

http://www.businessweek.com/globalbiz/content/jan2008/gb20080130_886902.htm

Société Générale - Pressure Mounts for Resignation at French Bank

PARIS — Senior politicians here increased calls for the resignation of top executives at Société Générale, ahead of the board’s regular meeting, scheduled for early Wednesday.

The Société Générale executives Jean-Pierre Mustier, left, Philippe Citerne and Daniel Bouton, the chairman and chief executive.

“The pressure is very, very strong,” one of the bank’s directors said. “The politicians want a head to roll.” The director, who declined to be identified because of the delicacy of the situation, predicted that the bank’s chairman and chief executive, Daniel Bouton — and possibly one or two other senior managers — would be asked to step down as early as Wednesday. But he and other board members stopped short of saying that Mr. Bouton’s departure was a foregone conclusion.

Amid increasing political pressure on the bank’s management, employee groups revealed that three employees working on Société Générale’s trading desk had committed suicide in the last three years, at least partly because of stressful working conditions, the groups said.

On Monday the French president, Nicolas Sarkozy, said top executives should face “consequences” for the 4.8 billion euro loss, or $7.1 billion, tied to illicit trades by a junior trader. Then on Tuesday, Finance Minister Christine Lagarde said the bank was in “crisis” and its leaders needed to examine “whether they should change the captain.”

American-style option

A type of option that can be exercised at any time between the purchase date and the expiration date. Most options in the U.S. are of this type. This is the Opposite of a European-style option, which can only be exercised on the date of expiration. Since an American-style option provides an investor with a greater degree of flexibility than a European style option, the premium for an American style option is at least equal to or higher than the premium for a European-style option which otherwise has all the same features. Also known as American option.

Société Générale - Timeline of Fraud

A look at how Societe General's trading scandal unfolded:

- 2000: Jerome Kerviel joins Societe Generale, working in offices that monitor trades.

- 2005: Kerviel promoted to more glamorous arbitrage trading desk, where his job consisted of making profits from small differences in prices between different markets.

- Late 2006: Kerviel begins making transactions that the bank now says were apparent precursors to the alleged massive fraud.

- Jan. 18, 2008: Bank launches an emergency in-house investigation after Kerviel's transactions begin raising red flags.

- Jan. 19: Kerviel called to Societe Generale to explain. Bank says he eventually confirms fictitious trades.

- Jan. 20: Bank team works overnight to identify the exposure. CEO Daniel Bouton notifies Bank of France.

- Jan. 21: Bank starts quickly and quietly unwinding positions in European markets.

- Jan. 23: Position closed or hedged.

- Jan. 24: Societe Generale alleges the "massive" fraud cost 4.9 billion euros ($7.09 billion).

- Jan. 25: Bank apologizes to shareholders in newspaper ads. Police search Kerviel's apartment.

- Jan. 26: Police take Kerviel into custody.

- Jan. 27: The bank says Kerviel "combined several fraudulent methods" to cover his tracks, such as falsifying documents and swiping computer access codes. It says he bet 50 billion euros ($73.53 billion) - more than the bank's net worth - on futures contracts at three European equity indices. Defense attorney bank is making scapegoat of Kerviel to hide losses on U.S. mortgages.

- Jan. 28: Prosecutor requests preliminary charges of forgery, breach of trust and fraud against Kerviel, and says Kerviel could face up to seven years if convicted. Kerviel is released from custody on condition he remain in France.

Société Générale Outlines How Trader Hid His Activities

PARIS — Société Générale, facing persistent questions over how a lone, junior trader could have instigated more than $7 billion in losses, acknowledged on Sunday that his activities prompted questions from risk managers several times last year, but that the bank never began an investigation because his explanations defused any suspicions.

Société Générale said a junior trader who racked up more than $7 billion in losses misused computer access codes and falsified documents.

Read more at:
http://www.nytimes.com/2008/01/28/business/worldbusiness/28bank.html

Société Générale - Inquiry Raises New Questions

The Paris prosecutor, Jean-Claude Marin, center, speaks to journalists in Paris on Monday about the Societe Generale fraud case.


Jérôme Kerviel told prosecutors that his fictitious trading started a year earlier than Société Générale has said.

Read more at:

http://www.nytimes.com/2008/01/28/business/worldbusiness/28cnd-bank.html

Société Générale’s Sales May Have Incited Market Plunge

By NELSON D. SCHWARTZ and NICOLA CLARK

French police raided the apartment of rogue trader Jérôme Kerviel in a suburb of Paris Friday.

Unwinding Its Position

PARIS — As panic swept European markets on Monday, word spread that a big hedge fund was in trouble and dumping stocks.

Someone was selling, all right — Société Générale. The French bank was frantically unwinding an estimated $75 billion of bad bets on European stocks placed by a rogue trader, Jérôme Kerviel.

As the bank struggled on Friday to determine how Mr. Kerviel could have run up $7.2 billion in losses before anyone caught on, the scope — and global impact — of his fraud began to emerge.

From his desk in the middle of the trading floor on the sixth floor of Société Générale’s Alicante building in the La Défense business district outside Paris, Mr. Kerviel, 31, took huge bullish positions on the Dow Jones Euro Stoxx 50 index and the German DAX in particular,
according to a fellow trader still working there who insisted on anonymity.

Société Générale rushed to unwind those trades during Monday’s market plunge, and trading in those futures contracts soared to record levels. The bank’s abrupt reversal contributed to a decline that snowballed into an avalanche of sell orders around the world, some traders said. The ensuing turmoil helped prompt the Federal Reserve to orchestrate the surprise cut in interest rates announced Tuesday.

“I have little doubt that Société Générale’s unwinding of those positions absolutely pressured indexes worldwide,” said Barry L. Ritholtz, chief executive of FusionIQ, a New York-based investment research and money management firm. “And wouldn’t it be embarrassing if the Fed had to make one of the biggest emergency rate cuts ever because of some rogue trader?”

Granted, fears of a recession in the United States and continuing worries about the spread of the subprime mortgage collapse were also responsible for the market downdraft in the last 10 days. But Mr. Ritholtz argued the rapid move by Société Générale to close out tens of billions in futures positions might have been a major factor in pushing an already nervous market into an outright panic.

Mr. Ritholtz is not alone in his suspicions. “I definitely think there is a link,” said Byron R. Wien, chief investment strategist at Pequot Capital Management and a 40-year Wall Street veteran. “This precipitous unwinding created the negative momentum that spread around the world.” Mr. Wien also singled out the Federal Reserve chairman, Ben S. Bernanke, for criticism. “Bernanke has been reacting to events, rather than anticipating them,” he said.

On Monday afternoon, with United States markets closed for Martin Luther King’s Birthday, Mr. Ritholtz said, many Wall Streeters were struggling to figure out just why Europe and Asian markets were off so steeply. “Instant messages were lighting up, and people were saying ‘This looks like a big European hedge fund blew up.’ ” Indeed, there was little market-moving data before the plunge.

He was quick to add that the French bank’s rapid turnover of the positions assembled by Mr. Kerviel would not have been enough to push the German market down 7.2 percent Monday. But in today’s fast-paced markets, hedge funds and investment firms often pile on once the selling starts. “These things take on a momentum of their own,” he said.

On Tuesday, the volume on the DAX and Euro Stoxx 50 contracts was twice that of open futures contracts, suggesting that the bank was having to sell and then buy back contracts to cover leveraged positions. Ten percent of the volume on DAX futures on Tuesday alone was 9.2 billion euros.

On a typical day, the total open interest on the Dax futures market is roughly $50 billion, according to Hélyette Geman, a professor of mathematical finance at ESSEC business school in Paris. Although the exact positions are not known at this moment, she said, it was quite likely that Société Générale’s trades would have accounted for a major portion of DAX futures activity in recent weeks. She added that settling those positions might have created some downward pressure in the market.

The trader said that Mr. Kerviel, a member of Société Générale’s Delta One team, frequently worked late into the night after other members of the group had gone home. He added that it appeared the pace of Mr. Kerviel’s trading picked up toward the close of 2007. Many of the trades were placed on near-term futures contracts, the trader said.

Jean-Pierre Mustier, chief executive of Société Générale’s corporate and investment banking division, declined to identify which particular indexes formed the bulk of the specious trades, but insisted during an interview that closing the positions early in the week did not cause the steep plunge in markets across Europe.

Meanwhile, the legal noose appeared to tighten around Mr. Kerviel, as French police raided his apartment in the suburban Paris neighborhood of Neuilly-sur-Seine Friday evening.

A spokeswoman for the Paris prosecutor’s office, which on Friday opened a preliminary investigation into the case, declined to comment on the raid. “An investigation is under way,” said the spokeswoman, Isabelle Montagne. “We must let the police do their work.”

At the same time, French government authorities signaled growing frustration with Société Générale.

Indeed, Paris appeared to be putting pressure on Société Générale to come forward with a more detailed accounting of how Mr. Kerviel could have racked up the staggering losses by himself over the course of a year without raising any red flags among either his supervisors or the internal auditors of the bank.

François Fillon, the French prime minister, expressed frustration Friday at having been kept in the dark about the unfolding crisis until Wednesday — four days after Société Générale’s chief executive, Daniel Bouton, informed the governor of the country’s central bank, Christian Noyer.

Speaking to reporters at a briefing in Luxembourg, Mr. Fillon conceded that as a private bank, Société Générale was not obliged to inform the French government. He said, however: “It’s an affair of such an importance for the French financial system, that maybe the government could have been informed earlier.”

Mr. Fillon said that he had asked the finance minister, Christine Lagarde, to conduct a separate inquiry into the affair and report back to him within eight days.

A spokesman for Ms. Lagarde could not be reached for comment.

The bank, meanwhile, identified four other individuals, in addition to Mr. Kerviel, who had been dismissed in connection with the scandal and would face disciplinary action: Marc Breillout and Grégoire Varenne, co-heads of fixed-income trading; Christophe Mianné, global head of market activities; and Luc François, global head of equities and derivatives activities.

James Kanter contributed reporting.

This Day in Wall Street History - 1964: Poll tax is abolished

The 24th Amendment Ended the Poll Tax January 23, 1964

On this day, Americans waved good-bye to the poll tax, as the Twenty-Fourth Amendment to the Constitution was ratified by the South Dakota legislature, becoming the law of the land.

Many Southern states adopted a poll tax in the late 1800s. This meant that even though the 15th Amendment gave former slaves the right to vote, many poor people, both blacks and whites, did not have enough money to vote.

"Do you know I've never voted in my life, never been able to exercise my right as a citizen because of the poll tax?""Mr. Trout" to Mr. Pike, interviewer, Atlanta, Georgia. American Life Histories, 1936 - 1940.

More than 20 years after "Mr. Trout" spoke those words, the poll tax was abolished. At the ceremony in 1964 formalizing the 24th Amendment, President Lyndon Johnson noted that: "There can be no one too poor to vote." Thanks to the 24th Amendment, the right of all U.S. citizens to freely cast their votes has been secured.

Payment of the tax stood as a potent prerequisite, and sometimes outright barrier, to voting in national elections. And, for the Southern Democrats who designed and helped pass the tax in a number of Southern states during the 1880s and 1890s, this was precisely the point: the poll tax was a blunt tool for barring poverty-stricken African-Americans and whites from participating in the electoral process. As such, the tax was also a means for stemming the rise of the Populist Party, which had used a racially mixed coalition of poor and lower class voters to gain a place on the national stage. Attempts to roll back the poll tax were generally blocked in the Senate. However, in 1949, Senator Spessard L. Holland of Florida took up the cause of killing the tax forever via a constitutional amendment. When the Senate finally passed the Twenty-Fourth Amendment in 1962, the poll tax remained in effect in five Southern states: Virginia, Texas, Mississippi, Arkansas and Alabama. After 1964, it was constitutionally legal in none.

Source: www.history.com

Word Markets 21 Jan 1008