31 January 2008
We don't yet know exactly how Jérôme Kerviel, the 31-year-old junior trader at the French bank Société Générale, managed to run up $7 billion in bad trades, but - and this is not good news - we suspect it did not take the evil genius that so great a sum suggests.
This is no Enron II, a tale of massive greed that leads to grand theft accomplished by the devious manipulation of complicated markets. Kerviel apparently did not intend to, and did not, make any money from his rogue trades. While the transactions for which he is blamed amount to a huge fraud, Kerviel, from what we've learned so far, was a nerdy kid who figured he could move into the big time faster by exploiting some cracks he discovered in the bank's internal systems.
And whatever blinded Société Générale to his actions, it does not seem to have been desire for a grand profit. At this point, it appears the bank will muddle through, since it remains in the black. Yet the very fact that minor machinations by a minor clerk led to so astronomical a loss - one that contributed to the stock market tumble last week around the globe - demands more than some sheepish mea culpas and a few fired heads.
It is imperative that French prosecutors and the French government compel Société Générale to strip away the opacity that continues to surround its behavior and explain exactly what happened and how. The problem here is not with faulty risk management or even with rogue traders. The problem is that today's sophisticated computer trading systems, vast volumes and ever more complex financial instruments can send even a modest scheme spiraling out of control before anyone spots it.
It is incumbent on the entire banking industry to revisit the question of alarms, controls and transparency, and for this Société Générale must tell the whole, embarrassing story of its failure.
It is also imperative that bankers institute better communications procedures. When and how must authorities be informed of such problems, and how exactly is the information disseminated? An incident like this can quickly escalate into a bigger problem, like a hedge fund meltdown, if the truth does not come out quickly.
In the end, no system of controls will ever be foolproof. A culture of honesty and accountability would help. Perhaps along with better controls and risk management, Société Générale should impress on its employees that trading is not a computer game.
http://www.iht.com/articles/2008/01/31/opinion/Edsociete.php
