In
testimony yesterday, Eric Cordelle, Jérôme Kerviel's immediate supervisor
at Société Générale confirmed a point about which I’ve
previously blogged: the Delta One desk on which Jérôme Kerviel worked at
Société Générale exceeded trading limits "quite frequently." Cordelle claimed, however, “that this
was usually for technical reasons and he had not known of a trader
intentionally overstepping the mark.”
For reasons that I’ve already discussed, that seems unlikely. The sheer size and scope of Kerviel’s trades cast doubt on the claim. Recall that Kerviel’s earnings grew six-fold between 2006 and 2007 to constitute a substantial percentage of total desk (59%) and division (27%) earnings. Recall also that Kerviel’s authorized trading activity could not possibly have accounted for such large profits. This means that not only Kerviel’s now-infamous 2008 losses, but a significant portion of his 2007 profits, on which he was paid a substantial bonus, are attributable to his “rogue” trading.
Finally, recall the conclusion of PricewaterhourseCoopers in its subsequent review of the event:
Front office activities developed against the backdrop of a strong entrepreneurial culture based on trust. The surge in Delta One trading volumes and profits was accompanied by the emergence of unauthorised practices, with limits regularly exceeded and results smoothed or transferred between traders. (emphasis mine)
But there is one point from Cordelle’s testimony on which I want to elaborate: Cordelle said that “he was overworked and had neither the resources nor the tools to monitor individual traders' positions.” This is likely true, and is yet another reason why Société Générale bears ultimate blame for the trading losses.
A review of the Société Générale scandal reveals a familiar pattern of organizational and departmental change that stressed trading and oversight systems, followed by a failure to respond to common red flags and warning signals. Kerviel’s division had experienced strong, rapid growth (a common element in prior rogue trading scandals), with trading personnel expanding from four to twenty-three in two years. The risk management and compliance departments were unable to keep pace with these changes. Although the size of middle office personnel doubled, they suffered frequent departures and were chronically understaffed.
Moreover, despite a doubling in middle office staff size, many of the employees were new, undertrained, and lacking in sufficient experience. These problems were exacerbated by the weakness of Kerviel’s direct supervisor, his lack of supporting staff, and the initial tolerance of Kerviel’s unauthorized intraday positions, which created an environment that minimized the importance of internal controls.
But, rather than increasing their vigilance regarding potential employee misconduct in the wake of these business line and organizational changes, Société Générale ignored common warning signs of potential problems, breeding a culture of noncompliance. As I’ll demonstrate in my next post, It’s The Stupid Culture, this feature is common to other large rogue trading scandals.
All facts, figures, and calculations used in this post, and the sources and citations from which they are derived, are detailed here.
Related Posts:
Kerviel’s
Fake Trades: Genius Or Copy Cat?
Kerviel’s Fake Trades: The Anatomy of A
Cover-Up
On Warning Signs II: Follow The Money
On Warning Signs: You Can’t Get There From
Here
Rogues Versus Scapegoats
Kerviel Trial Opens to Fanfare
Société Générale: Back In The Saddle Again
Jérôme Kerviel to Société Générale: Stand By
Your Man
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