From the March 01, 2008 issue of Futures Magazine • Subscribe!

Many questions, few answers

Here is a view on the Société Générale rogue trader scandal from our Paris correspondent Irene Frat.

Why did he do it? You would think it was for the money that Jérôme Kerviel took highly risky positions at Société Générale. Though he was eager to get a big bonus, he was hoping for €300,000, not a paltry sum for a trader who made less than €100,000 a year, but he did not siphon the money he could have made on the markets at one point. Why? Perhaps Kerviel was more interested in being seen as one of the big boys than in the actual monetary rewards associated with that.

His behavior may be a result of France’s general attitude towards social classes. “I was aware, starting from my first meeting in 2005, that I was less well-considered than the others, [regarding] my university degree and my professional and personal background. I had passed through the middle office, and I was the only [trader] to have done that,” Kerviel said to investigators. Coming from a provincial, lower middle class background, Kerviel did manage to get a university degree; but not the “right” one. It is like graduating from Harvard as opposed to state university in the United States. Only graduates from prestigious schools, where selection ends up being made on money and background as much as on intellectual abilities, can land top jobs in government, banks and big corporations. So Kerviel wanted to prove that even if he came from the wrong background, had the wrong degree, he could make it to the top.

Who was in the loop?

When Société Générale found out on Saturday, Jan. 19, that unauthorized trades were putting the bank at great risk, SocGen’s CEO Daniel Bouton called Christian Noyer, the French central bank governor and France’s banks regulator, on Sunday to inform him. Noyer accepted SocGen’s strategy: the idea was to unwind the position immediately and in secret. The cost for the bank could have been even greater than the €4.82 billion loss SocGen had to take. According to SocGen and the French central bank, preserving the secret of the unwinding operation was necessary in order to preserve market stability. Other financial institutions could have taken the opportunity to pummel the bank. On Sunday, the French central banker called Michel Prada, the president of the French market regulator, the Autorité des Marchés Financiers (AMF). And he also called another Frenchman, Jean Claude Trichet, the European Central Bank governor, in case unwinding positions in European stock indexes would unsettle the European financial markets. He also called the Federal Reserve Bank of New York, which is the regulator for Soc Gen’s U.S. activities. But Noyer can obviously keep a secret: he did not call the French government or president until Wednesday, the day before the debacle was to be made public.

After SocGen went public with its losses, some ventured to say that if the U.S. Federal Reserve had known [it’s likely the New York Fed passed on the information to Chairman Ben Bernanke, but the French central bank said it called the New York Fed only], it would not have cut its rates by 75 basis points. This implies that unwinding SocGen’s positions did weigh on the markets. Though it could have contributed to the nose dive, SocGen’s activity, according to the authorities, never went over the 10% limit in overall trading in one day for the three days it unwound its positions.

In countries like the United States, other banks’ CEOs, like Chuck Prince at Citgroup and Stan O’Neal at Merrill Lynch, have lost their jobs due to such losses that were unrelated to fraud. Bouton did offer to resign, but in France, responsibilities are preferably laid with the middle ranks rather than the top management. However, after his initial mute reaction, French President Sarkozy did ask for Bouton’s scalp by saying: “When someone is very highly paid, even when it is probably justified, you can’t avoid responsibility when there is a major problem.”Bouton fought back. Firstly, because as a staunch free market supporter, he believes that the government has no right telling him what to do. Second, because he is deeply attached to “his” bank. Though he worked in the French government at the start of his career, he crossed over to join Société Générale in 1991 and became CEO in 1997. Totally devoted to his job, he feels married to Société Générale. Bouton secured his board’s backing. “The board is asking me to stay at the helm of the ship during the storm. I am a man of duty. I am not going to jump overboard”, said Bouton in his first television interview.

France’s worst nightmare would be that a sovereign fund comes and bails out Société Générale. “Société Générale’s recapitalization is at the top of the agenda for the moment,” French finance Minister Christine Lagarde said in an interview. “Once that is done, SocGen won’t have to link up with anyone at all.”

This protectionist attitude angers the European Commission. “Each potential buyer has to be treated in a non-discriminatory manner,” cautioned the spokesman for Charlie McCreevy, the European commissioner for internal market and services. Other European officials, like Jean Claude Juncker, president of the Eurogroup, which brings together the ministers of finance of the Eurozone member states, joined in, saying that banning an institution because it is not French was “an attitude of the past.” Takeover rumors, by another French bank, at least, are already going around. Indeed, BNP Paribas, France’s largest bank, confirmed that it is “thinking about a bid.” In 1999, BNP tried to buy Société Générale.

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