How did he do it? That’s the question on everyone’s mind after French bank Société Générale acknowledged rogue trader Jerome Kerviel cost the bank €4.9 billion ($7.2 billion), and the most detailed official answer to date has come from French Finance Minister Christine Lagarde, whose report came after just eight days of digging. In it, she said that Kerviel’s activities began gingerly in 2005, growing in boldness until Eurex noticed the massive positions in November 2007. But she also revealed that French regulators had been waving red flags in the face of Soc Gen Chairman Daniel Bouton since at least March 2007, when auditors found the bank’s internal controls lacking.
Her conclusion: “The operations that led to a loss of €4.9bn ($7.2bn) for Société Générale’s market operations were the results of one lone operator. At the present time, there is nothing to indicate the contrary.”
But on Feb. 6, former SocGen internal investigator Maxime Legrand gave an interview to the French Press Agency (AFP) charging that Bouton created a mood at the bank where inspectors were overworked and under-appreciated, and that blind eyes were encouraged.
“We pretend to have an inspection just to please the banking commission,” he said. “That’s where the hypocrisy lies with Société Générale’s management: everyone knows about all of this.”
A spokesperson for the bank dismissed Legrand’s charges as “defamatory and of a personal nature,” but risk managers at other banks say the charges ring true.
The issue of willful blindness isn’t addressed by Lagarde, who nonetheless goes into great detail on how Kerviel managed to hide specific positions from specific auditors. He would, she says, hide his futures risk by listing it as being offset against other transactions that were either “pending” – which meant he didn’t have to list the counterparty – or as being offset against warrants, which are issuer-backed options that inexplicably don’t need to be confirmed until just before they expire. She also said that all traders manage money in multiple accounts, but always under their own user name. In a process that remains vague, she said the balance under each user name is checked at specific times each day. Kerviel, she says, knew when the checks were coming, and would close out positions just beforehand.
That Kerviel apparently tried to reduce his winnings to keep off the radar of higher-ups lends credence to her finding that Kerviel’s activities weren’t known at higher levels, but her chalking the whole thing up to incompetence and sloppy accounting just doesn’t wash with risk managers at other banks – or with Kerviel himself.
“I cannot believe that my superiors did not realize the amount I was risking,” he is quoted as saying in an English translation of transcripts posted in the French media. “It is impossible to generate such profit with small positions. That’s what leads me to say that while I was in the black, my supervisors closed their eyes on the methods I was using and the volumes I was trading. A trader can’t generate so much cash on a daily basis with standard activities.”
In another transcript, Kerviel said traders frequently posted trades using each others’ user names, while supervisors have testified that Kerviel himself was protective of his own user name.
In another public statement to AFP, he conceded that he bore some responsibility, but also vowed not to become a scapegoat. If, as most observers suspect, a sort of passive collusion let Kerviel stray, his threats indicate that many others also took the bait. At press time, authorities announced they were speaking with another person, an employee of Fimat, the brokerage arm of Société Générale.
