The
SocGen announcement
A junior employee was blamed last night for committing the biggest financial
fraud in history after gambling away £3.7 billion on the stock market.
To his banking colleagues Jérôme Kerviel, 31, was a lowly and unassuming
employee at Société Générale in Paris, getting by on a relatively modest
£74,000 alongside traders who earned millions. Yet he was the mastermind
behind the biggest scam banking has known, dwarfing the fraud committed by
Nick Leeson at Barings and making a mockery of the bank’s sophisticated
fraud detection systems.
“He was not one of our stars,” a senior board member, who declined to be
named, said. Another described him as “a fragile individual” who was
“without particular genius” and faced family problems. He is believed to
have suffered a recent family bereavement and been unable to take a holiday
for more than a year.
Last night it was unclear whether Mr Kerviel had pulled one final act of
audacity by eluding capture, with bank executives unable to say whether he
was in custody. His lawyer, Elisabeth Meyer, was quoted saying: “He is not
running away. He is at the disposal of the police.” SocGen defended itself
for failing to hand Mr Kerviel over to police after his alleged confession
during an all-night interview with executives on Saturday. “Perhaps we made
a mistake in that respect, but the authorities will pass judgment on it,”
Daniel Bouton, the chairman, said.
There was also intense speculation that Mr Kerviel was unlikely to have acted
alone. He used false client names and was apparently able to bypass SocGen’s
control systems after working in the back office of the bank’s trading
rooms, identifying flaws and weaknesses in a system that cost hundreds of
millions of euros to install. But it is thought he was caught out when he
forgot to override the bank’s alert system and the risk department noticed
an unfamiliar client.
The disclosure was a new blow to trust in a financial system already in
turmoil with the US sub-prime crisis. It also represents a severe blow to
President Sarkozy at a difficult time for his administration. SocGen, which
traces its origins back to Napoleon III, is a pillar of the French
Establishment with close links to the political elite in Paris. Many of the
bank’s senior executives are former civil servants. The fraud wiped out a
year’s worth of profit for France’s second bank, a Gallic flagship that was
state-owned for many years.
Mr Kerviel’s exploits were greeted with disbelief. For Christian Noyer,
governor of the Banque de France, it was “unimaginable” that one lowly
person could get away for a year with illicit dealing from his computer at
SocGen’s towers at La Defense, Paris.
Michel Marchet, a bank trade-union official, told The Times: “He didn’t cheat
for himself. It was a game. He wanted to pull off a big hit and score a fat
cheque. He was a clean-cut young man who apparently had difficulties in his
private life.”
Shareholders’ groups said that they were stunned that the bank, which is known
for its rigour, had failed to spot positions in futures trading that
amounted to about €30 billion.
The whereabouts of Mr Kerviel were unknown as police started a criminal
inquiry. SocGen sacked him and five of his superiors. It depicted his
actions as solitary, perverse, cunning and not aimed at personal gain.
The tale of Mr Kerviel’s alleged year of secret trading was related painfully
by Mr Bouton, the chairman and chief executive of SocGen for six years. Mr
Bouton, originally a member of the French civil service elite, offered his
resignation at a board meeting, but was asked to stay on.
He said that the bank’s chiefs were alerted last Friday to an anomaly in the
trader’s handling of futures contracts on European stock market indices.
Questioned over the weekend, Mr Kerviel confessed to running “a concealed
enterprise using the tools of Société Générale, with the intelligence to
escape all control procedures”.
After reporting to the authorities, the bank made no announcement while it
spent three days frantically selling off the misguided bets, worth billions
of euros, that the trader had taken on the rise of markets. Word of the
fraud could have sent the international market reeling, Mr Bouton said. “If
we had announced it on Monday morning, the loss [for the bank] would have
been ten times higher,” he said. “Its scale would have destabilised the
whole market.”
The bank suffered from a nightmare in timing because equities tumbled for two
days just as it was trying to close out the gamble on rising indexes, Mr
Bouton said. A member of Mr Bouton’s team said: “These have been the hardest
five days of our lives.”
The chairman apologised to shareholders for “this terrifying accident” which
added to a ¤billion loss in the sub-prime collapse. He emphasised that the
fraud was an exception that stemmed from an employee who had learnt how to
disguise his actions from the bank’s rigorous monitoring system. He had
worked for his first five years in the “middle” and “back” offices, which
check transactions. “As a trader, he knew the system and stayed one step
ahead of the controls.” Mr Bouton said. He added that he would forgo six
months of his chairman’s salary in order to repair some of the damage.
The trader had no authority to carry out more than small hedging operations
with so-called “plain vanilla” futures. He had used highly sophisticated
techniques to multiply the volume of his transactions, Mr Bouton said.
Mr Bouton said that the existence of SocGen was not threatened by a fate
similar to Barings, which closed after Mr Leeson lost £800 million in 1995.
The bank will still report a profit of about €800 million for 2007, he said.
Jean-Pierre Mustier, chief of the bank’s corporate and investment banking,
said that that he had interviewed the trader and was convinced that Mr
Kerviel had acted alone.
The claim was greeted sceptically by shareholders’ groups. Frederick-Karel
Canoy, a lawyer who filed a suit on behalf of shareholders, said that Mr
Kerviel should be given a medal for ingenuity if he had acted alone. “There
was negligence by the firm. The trader is being made a scapegoat. There is a
lot of hypocrisy and connivance in that milieu,” he told The Times. “It is
not impossible that they have bought the trader’s silence.”
Gilles Glicenstein, president of asset management at BNP Paribas, SocGen’s
chief rival, stepped in with support. “It shows that we are in a very
troubled period for banks, and I think that it is in such troubled periods
that difficult things happen,” he said. His words did not dampen speculation
that SocGen could now be swallowed up in a takeover by BNP.
How to lose
1.You work for one of the world’s biggest investment banks, and spend
time in the unglamorous back office learning how to circumvent the risk
controls
2.You take out bets on the future movements of world stockmarkets
3.If you think that, for example, the FTSE 100 will rise you go to the
futures market and place a bet
4.Someone at another bank, who thinks the FTSE will fall, matches the
bet
5.The FTSE falls and you lose money; the FTSE rises and you win. It’s
an open-ended bet, so your wins and losses will fluctuate with the markets
6.If you start to lose, you hide your trades and double up your bets to
try to recover the losses
Jérôme’s bets
A. Jérôme Kerviel bets that in 2007 markets will fall and in
2008 they will rise
B. He can hide these bets because his former job in the bank taught him
how to avoid security systems designed to prevent workers from making
unathorised investments
C. On January 19 bank chiefs disciver the hidden bets
D. On January 21 the bank began to close the open bets. Most are that
stockmarkets will rise but on Monday global markets plunge, forcing the bank
to accept a £3.7bn loss
E. Other traders react to sudden market movements helping to foster
panic and trigger more selling in already nervous markets
F. The Fed takes fright at the market meltdown and responds with its
biggest emergency cut to base rates in
Buzz words
Financial instrument A tradable share in a company, a currency, a
standardised commodity, such as a barrel of oil or bushel of wheat, or any
financial product based on these
Plain vanilla Term given to the most basic or standard financial
instruments, such as a share
Derivatives Financial instrument, the price of which is derived from
the underlying value of something else, which can be as diverse as a share
market index or the price of wheat. Futures and options are types of
derivatives
Futures Financial contract that obliges the buyer to purchase an asset,
or the seller to sell an asset, at a set price at an agreed date in the
future
Option A financial derivative that gives the holder the right, but not
the obligation, to buy or sell a security or another financial asset at an
agreed price during a certain period of time or on a specific date. Traders
use options to speculate, which is a relatively risky practice. Hedgers use
options to reduce the risk of holding an asset
Going short Betting that the price of a financial asset will fall
Biggest losers
$2.6bn lost by Yasuo Hamanaka a Japanes copper trader in 1996
$1.4bn lost by Nick Leeson a trader with Barings Bank. The bank folds
as a result
$1.1bn lost over 11 years by Toshihide Iguchi, a bond trader at Daiwa
Bank
