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As the cliché goes, there are only two certainties in life: death and taxes. But, they're intertwined. When you go to the great beyond, the government generally wants its cut, which is just under half the size of your estate, provided it reaches a certain size. Yep: The government can be your biggest heir, whether you like it or not.
Every few years, the estate tax, also known as the death tax, flares up as an issue. On the one side, politicians say people with large estates should redistribute some of that wealth to the common good by giving it back to government coffers. Critics, though, charge that the government has no right to money accumulated--and, more importantly, taxed already--throughout a person's life.
It can make for some strange political bedfellows. Billionaires like Warren Buffett and Bill Gates are actually in favor of higher estate tax rates, even though they have the most to lose from it. On the other hand, several minority groups have pushed for a reduction in estate-tax rates, since it makes passing on neighborhood small businesses to their families financially prohibitive.
Home / Markets
Friday, January 25, 2008
Analysis
Lax Controls Costs French Bank $7.1B, Lone Trader Blamed
Ken Sweet
FOXBusiness
New York--
The French investment bank Societe Generale (SCGLY) had to lose $7.2 billion to realize something was very wrong.
But risk management experts said the story of a rogue trader at SocGen could happen at any investment bank. It's a simple story really: someone learns how to profit from lax company controls and chooses to act on it.It’s no different than a convenience store employee stealing a candy bar when the security camera is looking the other way, except this candy bar cost SocGen $7.2 billion.
“Everyone in organizations like these knows what could go wrong,” said Steven Minsky, chief executive of LogicManager, a risk management software consulting firm. "All you really need is one bad apple.”
In a news conference Wednesday in Paris, SocGen said 31-year-old Jerome Kerviel, who had worked at the firm for eight years both in the back offices and on the futures desk, took unauthorized bets in the European futures market - which all turned sour.
“Aided by his in-depth knowledge
of the control procedures resulting from his former employment in the middle-office, he managed to conceal these positions
through a scheme of elaborate fictitious transactions,” the company said in a statement.
The
story of the rouge trader is nothing new to Wall Street, experts said. They know how to handle these problems.
“This is a 15-year-old story, or more,” said Richard Cellini, vice president of Integrity Interactive. “Banks and lawyers are very backward looking. They have this happen to them over and over again and never learn how to fix it.”
In 2006, a Canadian energy futures trader named Brian Hunter cost the hedge fund Amaranth Advisors more than $6.6 billion on bad bets in the natural gas market.
In 1994, Singapore-based trader Nick Leeson cost British investment house Barings Bank more than $1.4 billion in bad bets on the Japanese and Asian stock markets – a blow that eventually killed the 200-year-old firm.
It's still unclear if Kerviel was acting alone or whether he gained anything
from the fraud. SocGen said the trader was “long,” or betting that a security or stock will rise in value, on futures contracts
of the European Stock indexes, like the FTSE 100,
When those indexes fell this month, Kerviel’s bad positions stood out.
There are indications that the financial scandal might have caused the massive market turmoil that occurred earlier this week. SocGen said it learned about the bad bets over the Jan. 18-19 weekend, and used Monday’s open European markets to unravel those bets.
As SocGen sold significant positions of European futures, the prices of those futures’ prices declined, which indicated to European investors that a big investing player was now bearish on European and global markets.
That might have caused the huge global sell
off, which threatened to spill into U.S. markets Tuesday until the Federal Reserve stepped in, lowering interest rates
by 0.75%.
The possibility that a lone individual cost one bank $7.2 billion and possibility cost global investors billions more underscores the need for internal controls for things like this, experts said.
“Societe Generale should have done something about internal controls years ago,” Cellini said. “It took this massive loss for them to realize that, and it’s really unfortunate.”
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