Jérôme Kerviel, the shy Breton who almost broke France’s second bank with his
rogue trades, has confessed to police in Paris.
For two days and nights, Mr Kerviel, the son of a metal worker and a
hairdresser, poured out his tale, taking apparent pride in the secret deals
worth billions of euros that he carried out under the noses of the banking
establishment.
Mr Kerviel, 31, who is described as an introverted, average man, is expected
to be notified today of criminal charges over the €5 billion (£3.7 billion)
that his illicit dealing cost his employer, the Société Générale bank.
Daniel Bouton, its chairman, is also likely to be told in strong terms of
President Sarkozy’s consternation over the scandal and his anger over being
notified only three days after the rogue trader was discovered.
Jean-Michel Aldebert, the chief financial proescutor, said: “Things are going
well. The inquiry is proving extremely fruitful.” However, the “five-billion
euro man”, as France has dubbed its new celebrity, appeared to be having
trouble grasping the scale of the damage. He was said to be convinced that
he discovered a wheeze that was clever until it was rumbled on January 18,
when he put €50 billion of the bank’s money on the line.
New details of Mr Kerviel’s year-long juggling feat with the computers at
SocGen’s Paris headquarters were provided by the bank as experts and
politicians remained sceptical that he could have acted alone, undetected by
the dense security system at the bank.
Jean-Pierre Mustier, chief of SocGen’s investment arm, explained how alarms
rang on January 18 when their system detected a big suspect trade.
Inspectors found over that weekend that Mr Kerviel, who was not supposed to
risk more than a few hundred thousand euros, held €50 billion of exposure –
more than the whole of the bank’s capital, €36 billion.
He had a €30 billion bet on the upward movement of the Eurostoxx index, €18
billion on the Frankfurt Dax and €2 billion on the London FTSE. The trader
arrived at this point after devising a way of beating his bank’s security
system at the end of 2006, Mr Mustier told reporters from SocGen’s
headquarters.
He was supposed to be carrying out arbitrage operations in which he took out
balancing contracts on future movements of the three European stock market
indices.
Using codes from the bank’s own security controls, he was able to create
fictitious contracts. His operations balanced at the end of the year. He
knew how to beat the system, staying ahead of the checks, because he had
spent four years working in the “middle” and “back” monitoring offices.
He stole access codes for IT equipment that meant that he could cancel trades
without the risk department knowing. He forged documents that meant that he
could input details of fictitious trades on to the bank’s systems.
But the sheer size of his latest, and last, deal raised eyebrows in SocGen’s
risk department. The risk was “abnormal”, the bank said, and senior staff on
the trading desk were alerted.
“He was caught because he moved from what he knew to another realm,” SocGen
said, whilst maintaining that Mr Kerviel had acted alone.
He appeared to have behaved irrationally, taking positions that bet on a
turnaround in the sliding market in January. He was then sucked into trying
to restore losses by taking ever-steeper risks. The €50 billion position
resulted in the €5 billion loss after a secret sell-off over three days from
last Monday, ordered by Daniel Bouton, the SocGen chairman.
Mr Mustier and the bank said that they remained certain that Mr Kerviel had
acted alone and had not been seeking gain for himself. They said: “We have
made extensive checks on the transactions run by this trader; checks that
were made in terms of his own portfolio. It seems extremely unlikely that he
was not acting alone.”
The police want to confirm that Mr Kerviel was not part of a conspiracy. His
lawyers said that he had “committed no dishonest act, did not siphon off a
single cent, and did not profit in any way.”
President Sarkozy and the political world turned their anger on Mr Bouton, the
SocGen boss, and a financial culture that is being condemned as rotten. Mr
Sarkozy, back from a trip to India, said that the financial markets had
“gone mad”. He voiced incredulity that Mr Bouton, 57, had not lost his job.
“It is impossible that people will not be held responsible,” he said.
Mr Bouton justified staying in his job, saying that Mr Kerviel was a lone
rogue who, because of catastrophic bad timing, had “turned this sad affair
into a Greek tragedy”. He said: “What happened at Société Générale is
certainly not a disaster that resulted from our strategy. It is more like an
accidental fire which destroys a large factory at an industrial plant.”
Mr Sarkozy is to discuss controls on markets tomorrow with Gordon Brown and
Angela Merkel, the Chancellor of Germany.
Mr Kerviel surrendered to police on Saturday and was questioned through much
of the night and all day yesterday. Police found little of interest when
they searched his flat in Neuilly on Friday. “Just a regular guy’s flat,” a
source said. “Not grand. A bit of a mess and no smoking gun.”
An examining judge will notify Mr Kerviel today of likely charges and decide
whether to detain him further. Charges could include fraud, false
accounting, breach of trust and embezzlement. Jail terms could be eight
years.
Société Générale has filed a criminal complaint, but police said that the case
was so complex that they were still unclear of the nature of Mr Kerviel’s
offences. Executives from the bank were called in to help police to
understand how the trader masked thousands of transactions for about 13
months.
Few friends have spoken up for Mr Kerviel and most have removed themselves
from his Facebook entry. But his family rallied round him, depicting him as
a scapegoat. “He is quite simply incapable. He must have been manipulated,”
his aunt, Sylviane Le Goff, told Le Parisien newspaper. “Jérôme is carrying
the can for a fiddle that went over his head. He has always been very
serious. The last time I saw him, at Christmas, he was his usual self. He is
not a boy whose nature is to smile a lot, but he was thoughtful and helpful.
Nothing in his behaviour suggested that he had any problems.”
The bank made it known last week that Mr Kerviel had been depressed after the
death of his father two years ago and the departure of his girlfriend last
autumn.
Many financial specialists remained sceptical that a junior trader could
manage to risk such a monumental amount of his employer’s money. Philippe
Dessertine, finance professor at the Paris X University, said: “I just don’t
buy it. We are being asked to believe a scenario about a protagonist who was
half-mad, half-computer hacker. The perfect scapegoat.”
SocGen could be using him to mask losses on the US sub-prime lending market,
he said. Mr Bouton denied this widespread theory as absurd.
BIG NUMBERS
£26.5bn Société Générale’s market value
2.6% Drop in SocGen’s share price at the end of last week
£37.1bn Value of bets placed by Kerviel
4 Number of space shuttles that could have been bought with the amount
SocGen lost
Source: Agencies
I find this story very difficult to understand. Even if he had created rogue accounts and trades on the banks system to show them net flat, he would have still had open positions on the exchanges. These would have required margin payments from Soc Gen to finance them. Are we to believe that he also hacked the exchange computers too? For vanilla futures the clearing house is your counterparty and ensures all trades have a matched buyer and seller. There would have to had been a flow of capital to finance this.
Emma.b.jones, London, UK.
OK, so SocGen's loss must be someone else's gain. If he's betting on futures, who was it with and how much did they make?
Guess that will help them to offset some of their subprime losses - bizarre!
Mark Massetti, Newport Pagnell, England
This from an arts major with only a vague understanding of finance at this level: Did the money that SocGen "lost" disappear? If not, where did it go? It seems that Mr. Kerviel lost a bet, so didn't somebody else win that same bet and pocket the 5 billion?
Henrik Harr, Stockholm, Sweden
One good thing to come out of this - banks can no longer claim to have foolproof systems, as they always claim over phantom withdrawals.
Andy Dyer, London, UK,