After the London Whale and the JP Morgan trading loss, another Frenchman is — again — in the news: Former Société Générale trader Jerome Kerviel, who was at the heart of a trading adventure that resulted in the €4.9 billion loss ($6.4 billion) for the second largest French bank in 2008.
Kerviel had amassed €50 billion in unauthorized positions concealed with faked hedges. He was sued by his employer and on Oct. 5, 2010 found guilty of breach of trust, computer abuse and forgery. Kerviel was sentenced to a three-year prison term and ordered to repay the full amount of the loss that the bank incurred while unwinding the trades. His sentence has been suspended pending his appeal.
Alone or not?
Though the young trader (now 35) never denied that his trades and his actions to hide them were fraudulent, he claims that he didn't act alone. According to Kerviel, his superiors knew about what he says was “common practice at the bank.” The lower court judges rejected his arguments.
It remains to be seen if the new trial will bring Kerviel what he wants: A dismissal of his case and an apology from his former employer.
David Koubbi, his new lawyer – Kerviel has been through two already – promises new evidence, new witnesses, and new arguments during the appeal trial. So far, his main pitch for a reversal is still that his client didn't act alone. Koubbi also wants to at least recalculate the loss suffered by Société Générale, and underlines the fact that the bank got a tax credit of €1.7 billion for the €4.9 billion loss. “To start with, the way the loss was assessed is wrong,” he said. The bank already has hinted that it didn't expect the rogue trader to repay anything. Whatever the amount, the order to repay was symbolic, as are many other things in this scandal.
First, there is risk control in banks. Some skeptics wonder how the bank could have failed to detect these fraudulent trades for so long. Société Générale claims that it has learned from the disaster. Risk controls have been, it says, improved. But is it enough?
Two, while some heads fell at Société Générale after the whole affair was uncovered, some believe this is not enough. Others wonder why Kerviel was the only person tried. Was Kerviel chosen as a scapegoat, in a system chiefly based on good-old-boy camaraderie?
Three, particularly in France, where social mobility is difficult to achieve, was Kerviel, who didn't attend one of the elite schools, a victim of his desire to succeed in a world basically fordiden to him? This could explain why he took those risks and then tried to cover his losses. Is he also a victim of the elite (embodied not only by bankers but also by judges coming from the same background) seeking revenge not only for his actions but also for his will to climb the social ladder?
Four, why did Société Générale benefit from a tax credit after it reported a loss due to failed risk controls? Was there collusion between the bank and the tax office?
Some of these latter questions might not be answered during the appeal trial. Most likely, the court will stick to facts if it can ascertain them. Most likely, since the whole affair already has been paved with suits and counter suits (on defamation and other), it will at least entertain France, a country that loves to hate the financial world.