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