Chip Bierbaum $353 Million Loser

Chip Bierbaum the Calyon trader fired last month for alleged unauthorized trading that led to $353 million of losses said his bosses knew what he was doing and considered him a “golden child” of the new York office.Chip Bierbaum says he reported his positions on a daily basis. It did not blow up. I expect there were some losses but nowhere near the amounts they are discussing. Five of Chip Bierbaum’s superiors were also dismissed, so no doubt that Chip Bierbaum was not alone and that Chip Bierbaum had indeed notified of his positions.

Chip Bierbaum said he invested in indexes linked to credit default swaps that would profit if the Federal Reserve cut interest rates, causing investor perception of credit quality to improve. Chip Bierbaum declined to provide details of the trades.

Chip Bierbaum said he sent reports on his position every day to his supervisors and Calyon’s risk management department. Chip Bierbaum also said the trade had made a profit of about $100 million before he was placed on administrative leave. Chip Bierbaum couldn’t explain how that turned into a $353 million loss.

``There was nothing deceptive or rogue,'' Richard ``Chip'' Bierbaum, 26, said in an interview. ``My positions were reported on a daily basis. It did not blow up. I expect there were some losses but nowhere near the amounts they are discussing. I was the golden child of credit trading in New York.''

Calyon, the investment banking unit of Paris-based Credit Agricole SA, France's second-largest bank, said on Sept. 18 that it had an ``unusually large market position'' that was ``above the authorized limit'' and would cause third-quarter profit to fall ``sharply.'' While Calyon didn't identify the people involved, Bierbaum, whose stepfather is a descendent of John Jay, the first chief justice of the U.S., said he was fired and blamed for the trades on indexes linked to derivatives.

The losses would be the biggest from unauthorized trading since John Rusnak's currency bets cost Dublin-based Allied Irish Banks Plc $691 million in 2002. Management failures to oversee derivatives traders allowed Nick Leeson to bankrupt Barings Plc and Yasuo Hamanaka to hide $2.6 billion of losses from copper futures at Tokyo-based Sumitomo Corp. while their employers remained ignorant.

`Isolated Incident'

``The bank maintains that this is an isolated incident and the work of an individual trader who did not respect our risk procedures and who breached our trading limits,'' Calyon spokeswoman Anne Robert said in an interview last week in Paris. ``The losses were the result of the cost to unwind these unauthorized positions.''

Five of Bierbaum's superiors were also dismissed, according to people with direct knowledge of the situation who declined to be identified because the information wasn't publicly disclosed.

Calyon ousted Francois Pages, 50, the chief executive officer of the U.S. unit, and Loic Fery, 33, global head of credit markets, according to the people familiar with the situation. Zain Abdullah, 37, Calyon's head of credit markets and collateralized debt obligations in the U.S.; Jerome Le Jamtel, 40, head of the credit and debt markets division of Calyon Americas, and Thierry Hasse, 45, head of proprietary trading in New York, also left the firm, the people said.

Fery, Le Jamtel and Abdullah declined to comment. Hasse and Pages didn't return calls seeking comment. Calyon's Robert said the bank ``has taken the relevant disciplinary measures linked to the non-authorized transactions.''

Credit-Default Swaps

Bierbaum said he invested in indexes linked to credit- default swaps that would profit if the Federal Reserve cut interest rates, causing investor perception of credit quality to improve. He declined to provide details of the trades.

Credit-default swaps are derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Traders use the contracts to speculate on the ability of companies to repay debt. The contracts pay the buyer face value of a bond or loan in exchange for the underlying securities should the company default.

On Aug. 17, the Fed lowered the so-called discount interest rate that it charges banks by 0.5 percentage point, to 5.75 percent.

The move reduced the cost of credit-default swaps included in the CDX North America Investment Grade Index to 60.51 basis points on Aug. 24 from 78.33 on Aug. 16, showing that investor perception of risk had diminished.

Credit Agricole

Credit Agricole said at the end of the month that a decline in the value of fixed-income securities sparked by record U.S. subprime mortgage foreclosures was having a ``limited impact'' on its business.

The index then switched direction and rose to 67.525 basis points on Sept. 4, the day that Calyon said it discovered the trade, according to prices from CMA Datavision in London. A new version of the index is now at 44.75.

Calyon, created when Credit Agricole bought Paris-based Credit Lyonnais in 2003, said the position was mainly built during the ``last days of August, above the authorized limit and without the authority to engage the bank at the level of this trade.'' Credit Agricole's shares have lost 9 percent this year, compared with the 5.2 percent drop for the Bloomberg Europe Banks and Financial Services Index. The stock fell 0.39 euros, or 1.4 percent, to 28.14 euros at 1:20 p.m. in Paris. France's largest bank by assets is Paris-based BNP Paribas SA.

`Ludicrous'

Bierbaum said he sent reports on his position every day to his supervisors and Calyon's risk management department. He also said the trade had made a profit of about $100 million before he was placed on administrative leave. Bierbaum couldn't explain how that turned into a $353 million loss. Banks typically reverse bets that credit-default swaps will fall by purchasing the contracts.

Calyon said on Sept. 18 that the position was back ``within the normal trading activities.''

The statement that the trades were made without permission is ``ludicrous'' and getting fired was a ``complete shock,'' Bierbaum said. He said he hired a lawyer, though he wouldn't name the firm or provide more details.

``You would think that a bank would put limits on the aggregate amount a 26-year-old could have to trade,'' said John Coffee, professor of securities law at Columbia University in New York, who has served on advisory committees to the Nasdaq, New York Stock Exchange and NASD.

`Doubled Down'

Derivatives can be harder to monitor than other financial assets, such as stocks or currencies, because they trade privately, said Frank Partnoy, a former debt trader who is now a law professor at the University of San Diego.

``Typically, these losses involve a trader who has lost more money than he should and then doubled down,'' Coffee said. ``It's predictable. Like someone going to the race track, losing all day and then betting the rent money in the final race to make back losses.''

Leeson, whose currency derivatives caused Barings to collapse in 1995, said continued losses show that banks don't want to spend the money needed to prevent rogue trades.

``Over the last 10 years there have been several large financial scandals that have lost billions of dollars and yet people don't really have the systems and controls in place,'' he said in an interview in Dublin on Oct. 4. ``You have to ask yourself why.''

`Emotional Issues'

Bierbaum confirmed his mother is married to Henry T. Mortimer Jr. Bierbaum's stepfather is also descended from Henry Morgan Tilford, a former president of Standard Oil. Bierbaum grew up in New York and attended St. Bernard's School, a private boy's middle school in Manhattan.

During high school, he was sent to the Rocky Mountain Academy in Bonner Creek, Idaho. The academy catered to teenagers with ``behavioral and emotional issues'' before closing in 2005, according to Julia Andrick, the former marketing director at the school. She said the issues ranged from ``disrespecting parents'' to drug and alcohol abuse.

``It was a place to be for a couple of years relative to public school,'' said Bierbaum, declining to elaborate.

Bierbaum then attended Trinity College in Hartford, Connecticut. In 2001 he was arrested in Suffolk County, New York, for driving under the influence, according to records on the Financial Industry Regulatory Authority's Web site. The arresting officer found fake identification in Bierbaum's wallet. Bierbaum said he pleaded guilty to disorderly conduct.

``I was a sophomore in college,'' Bierbaum said. ``I wasn't aware of the consequences.''

LeFrak, Bear Stearns

After graduating from Trinity in 2003, Bierbaum spent four months at real estate and investment firm LeFrak Organization in Newport, New Jersey. His main job was to show apartments to potential renters.

``He was a good soldier,'' said Jamie LeFrak, a 33-year-old principal at the firm who is in a relationship with Bierbaum's sister, Caroline. ``Chip is an honest guy who would certainly check with his bosses,'' said LeFrak, grandson of the late real estate billionaire Samuel LeFrak.

Bierbaum joined New York-based Bear Stearns Cos. in October 2003, where he processed trades and eventually became a junior trader for one of the firm's hedge funds that collapsed in June because of bad bets on securities linked to subprime mortgages, his resume shows. Russell Sherman, a spokesman for the firm, didn't return a call seeking comment.

Bierbaum joined Calyon in March as a trader making bets with the firm's capital. He became a chartered financial analyst in May, according to Kathy Valentine, spokeswoman for the CFA Institute.

``I would like to get back into credit trading,'' said Bierbaum, who has remained in New York since being fired, reading the newspapers and sending out his resume. ``I worry about it,'' he said of the allegations that he was a rogue trader. ``It's my word against theirs.''