Kerviel appeal trial:The plot thickens

The Kerviel's trial got entertaining on its second day, as the French trader's lawyers tried to plant in the judge's mind the notion that a plot had been hatched against their client. Brandishing a piece of paper as evidence, David Koubbi, Kerviel's chief lawyer, said that the Société Générale had, in fact, hedged the former trader's €50 billion position on the Dax index. All that behind his back, while he himself only fictitiously hedged the same trades, to pretend he was not running huge potential risks. He was short and the market, despite the impending subprime crisis, was still going up at that point.

Mireille Filippini, head of the Paris Court of Appeal, could not believe her ears. “Why a new hedge?” she asked, adding quickly: “How feasible is it to report in central computer system two different hedging operations on the same trade, even if one is fictitious and the other real?” She clearly was baffled. “We will ask an expert from the regulating authority,” she concluded, thus cutting short the grand theory of a plot...

If you follow Kerviel's lawyer's rationale, Société Générale knew about the huge position (and its potential risk) taken by Kerviel on the Dax. The bank also knew about his fictitious hedges, or at least, suspected fraudulent hedging activities. Fearing a loss, Société Générale had hedged Kerviel's trades (on another desk, without Kerviel knowing....)  Still according to the defendant's theory, the bank also had other positions that could result in huge losses. Remember, the financial crisis was about to unfold.

This is where the plot thickens, with what the French call the “oil spill theory:”  Taking advantage of an oil spill, other tankers clean up too... Kerviel always criticized the way his trades were unwound, during the worst three days of the financial crisis, resulting in a €4.9 billion loss ($6.4 billion) for the second largest French bank in 2008. “The bank used what it says was ‘my’ loss to disguise other losses on other positions”, he explained.

“So, you are saying that you were targeted, early on, as a sacrificial lamb by Société Générale?” asked the judge.

“I don't know, answered Kerviel, meekly, but it sure looks like it”. The  judge sure did not seem to buy it...

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