It’s The Stupid Culture

In my last post, It’s The Culture, Stupid, I noted that 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. 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. 

These two features – internal control problems and a culture of noncompliance -- are common to other large rogue trading scandals.  For example, internal controls that fail to keep pace with rapid business growth was identified as a factor contributing to the Nick Leeson rogue trading scandal at Barings.  As explained by John Dare, Director of Barings:

They [Leeson’s unit] were usually in a bit of a catching-up position because their business had gone through a few periods of quite rapid growth, when it is challenging, to say the least, to keep your controls on top of a business that is growing rapidly. There were times when I was aware that this was a strain; that the front office were marching faster than the back office.

Similarly, subsequent investigation points to the inexperience and understaffing of risk management and audit as a factor facilitating John Rusnak’s losses at AIB (previously discussed here and here).

In addition to internal control problems, an organizational culture that minimizes risk management is another common thread among institutions plagued with rogue trading scandals.  For example, according to the Ludwig report, the bullying and intimidation of AIB’s back-office staff by Rusnak and front-office supervisors (and management’s willingness to overlook such behavior) contributed to an environment in which back-office operations were perceived as pointless formalities and management was predicted to take the trader’s side in the event of any dispute, since trading was the moneymaking operation. 

PricewaterhouseCoopers was even more explicit about the role played by a corporate culture of non-compliance at NAB, where a group of four currency options traders regularly breached position and risk limits, and concealed their activity through the smoothing of profits and losses (previously discussed here):

Our investigations indicate that the culture fostered the environment that provided the opportunity for the Traders to incur losses, conceal them and escape detection despite ample warning signs. This enabled them to operate unchecked and flout the rules and standards of the National. Ultimately, the Board and the CEO must accept responsibility for the “tone at the top” and the culture that exists in certain parts of the National.

In sum, Jérôme Kerviel lost nearly EUR 5 billion at Société Générale and concealed those losses through a series fake trades, lies, and forged documents – the same strategy employed by most other rogue traders.  Yet, like other financial institutions that have suffered debilitating rogue trading losses, Société Générale ultimately enabled those losses through its poor internal controls, faulty risk management, and an organizational culture that tolerated, or even encouraged, such behavior.

Meanwhile, in the trial’s most dramatic moment so far, Daniel Bouton, the former chairman and chief executive of Société Générale, took the stand yesterday, stating, “I cannot believe for one second any of Jérôme Kerviel’s supervisors were aware [of his bets].” “I’m sorry, my dear fellow.” (Apparently, this last bit was said with heavy sarcasm) (See the NY Times and FT stories)

Bouton was the last witness in the three-week trial, which ends on Friday -- the final three days will be spent on closing arguments.  And that means that my series of posts on the trial are about to come to an end.  My plan is to begin wrapping up over the next few days, returning to some items in Bouton’s and other prosecution witness’s testimony, drawing some lessons from the incident, and reiterating why we should care about such debacles (remember the days when EUR 5 billion seemed like a big loss for a single bank?)

All facts, figures, and calculations used in this post, and the sources and citations from which they are derived, are detailed here.

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Related Posts:


It’s The Culture, Stupid

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