Rogue Trader loses $7 billion for French retail banking
giant's proprietary trading account, and the official explanation raises more questions than answers.
Lone "rogue trader" Jerome Kerviel stands accused of somehow
slipping massive long futures positions in the FTSE 100, Euro Stoxx 50, Germany's Xetra Dax and the French CAC40 onto the books of his employer, French bank Societe Generale (SocGen) and incurring losses of more than $7 million before bosses discovered the breach last weekend. As for how such a massive fraud could take place, SocGen co-chief executive Philippe Citerne claims Kerviel learned how to circumvent risk controls while working in the bank's back office, and that red flags went up after he "changed his tactics" and triggered a margin call last Friday.
The implication is that he had hidden the long futures position as, perhaps, a hedge against warrants and certificates – OTC products popular in Europe but not permissible in the United States. Such products are built by retail brokerages and hedged in-house, then marketed to the retail public as alternatives to futures. Such products offer the same leverage as futures, but in smaller increments. It's conceivable that Kerviel had hidden the long futures positions as a hedge against short positions taken by the bank's retail clientele, but that raises even more frightening questions than it answers.
"That position would have had a notional value of more than $40 billion," said one source familiar with the bank's risk management apparatus. "A position of that size could not exist without knowledge at board level, and even the most rudimentary check by management of P&Ls against margin would have revealed the discrepancy."
Furthermore, exchange sources say such a margin call would have been triggered much earlier than last Friday. "Even if he had managed to disguise the position as somehow hedged within SocGen – say against warrants or other instruments they deal in — it would have been seen as a straight futures position on the exchange," said a Euronext spokesperson. "The bank would have been getting margin calls all along."
Neither Eurex nor Euronext would comment on specific margin calls paid by SocGen, but the fact that margin calls would have been paid bring back memories of other failures past – most notably Barings. There, it emerged that Peter Barings had been warned that the margin flows to Singapore and Japan did not balance out, but in fact went the same way. Indeed, Nick Leeson himself, in his book Rogue Trader, painted a picture of collective willful ignorance of anything that might distort the year-end bonus picture.
Several of Kerviel's superiors have already been dismissed, and the matter has officially become a criminal investigation, in which Kerviel's lawyer says he is cooperating fully. But if the French government intervenes to force a merger between SocGen and BNP Paribas, as is being speculated now, we may find the details of that investigation slow to emerge.
