Kerviel Trial Opens to Fanfare

 From the FT:

The three-week trial of Jérôme Kerviel opened with great fanfare in Paris on Tuesday. More than 90 different newspapers, TV and radio organisations and press agencies are covering the event, and the question on everybody’s mind – in France at least – is who really is on trial? . . .

So coming back to the original question of who is on trial, the answer is yes, Mr Kerviel, but also, for completely different reasons, SocGen for a corporate strategy that has strained and put the bank at risk.

As for the banking system, the popular jury has issued its guilty verdict long ago.

I have to admit that I’m somewhat astonished at the interest the trial is generating.  I’ve been anxiously awaiting the trial all year, but then my obsession is excused (at least in my mind) by two articles and a book chapter on rogue trading.  I plan to blog some more about the specifics of the Kerviel case as the trial unfolds, but the bit quoted above from the FT has prompted me to reflect at greater length about the intense interest in the trial. 

The rogue trader captured public attention in the 1990s — numerous popular books and movies memorialized infamous rogue traders of the decade, such as Nick Leeson and Joseph Jett.  But, thanks in part to Jérôme Kerviel, the image of the rogue trader has again returned to the spotlight. 

There are a few reasons for this, I think.  Obviously, the financial crisis has heightened public awareness of the fragility of the financial system and the potential for individual and firm-level risk taking to reverberate, with implications for other institutions, markets, governments, and taxpayers. 

Moreover, though the largest and most widely publicized rogue trading incident, Société Générale is not the only financial institution to announce large losses from unauthorized trading.  Market volatility stemming from the financial crisis has caused large losses at many financial institutions, bringing to light previously hidden unauthorized positions. As a result, a number of financial institutions, including Société Générale, disclosed large rogue trading losses around the same time period.

Finally, the rogue trader has become more prominent as a subset of risk management.  Specifically, domestic and international regulatory changes (which I detail here) have forced banks worldwide to focus more attention on operational risk, an important component of which is rogue trading. These changes have transformed, at least as a formal legal matter, what was once a residual risk category into a growing multi-billion dollar risk management industry.

Let me emphasize the phrase “as a formal legal matter.”   As I’ve argued at length in my research on rogue trading, of the many (admittedly imperfect) regulatory options for addressing operational risk available to the Basel Committee, it arguably chose the worst: an enforced self-regulatory regime that is unlikely to substantially alter the success with which financial institutions manage operational risk, and that carries with it the threats of high costs, a false sense of security, and perverse incentives.

As such, “the system” should be on trail in the Kerviel case, though probably not for the reasons that have galvanized the French press and populace.  That’s all I (and probably you) have time for today, but I’ll be back later with more.  I’m sure you can’t wait.

Image Source: Reuters

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
Société Générale: Back In The Saddle Again
Jérôme Kerviel to Société Générale: Stand By Your Man

Comments

[Joe]

I guess people were okay with "rogue traders" as long as there was no money being lost.

[Kim Krawiec]

I'm with you, Joe.

[Miriam A. Cherry]

Actually, I really can't wait and I'm not being sarcastic. I find this area fascinating and was intrigued by your article on rogue trading. (I had a case involving an allegation of rogue trading back when I was in practice, oh, seven years ago...) Keep up the good work!

[Kim Krawiec]

Ah, so *you're* the one who read it! Thanks for the kind words. Actually, I'm not that surprised that you'd be interested in the case, given your work on incentives and compensation in organizations. If you were here, we could have a Jerome Kerviel party -- what fun.