In my last post on this topic, Rogues
Versus Scapegoats, I argued that, while Kerviel is hardly the “pawn for profit” his lawyers
contend, Société Générale bears ultimate responsibility for failing to prevent
Kerviel’s massive losses. The bank
ignored major warning signs regarding the size and scope of Kerviel’s trades,
leading to a reasonable inference that at least some supervisory personnel
likely turned a blind eye to Kerviel’s trading irregularities.
At the trial
on Friday, Benôit Thaillieu, a former manager at Société Générale who left
the bank in 2006 and now heads an interior design company, reiterated this
point as a defense witness, arguing, “They could not have been totally unaware.”
A series of alerts, accounting and trading procedures, would
have made Mr Kerviel’s supervisors aware of the risks he was taking, said Mr
Thaillieu, who left his position as supervisor of the Delta One trading desk
before Mr Kerviel joined the unit. “For me, it’s a certainty,” he said.
Mr Kerviel’s trading profits were extraordinarily high and
would have indicated that he was dealing outside his official remit, he said.
A little background information will help put this testimony
into perspective. One of the most important warning signs ignored by Société
Générale involved Kerviel’s earnings, which grew six-fold between 2006 and 2007
to constitute a substantial percentage of total desk (59%) and division (27%)
earnings. These levels should have
prompted further inquiry at Société Générale, particularly given Kerviel’s low
seniority and experience, as well as his authorized trading strategy.
Indeed, Kerviel’s authorized trading activity could not possibly have accounted for
such large profits. To illustrate, Kerviel claimed profits in 2007 of EUR 43
million—EUR 25 million from proprietary trading (turbo warrant arbitrage) and
EUR 18 million from client trading.
However, Kerviel’s authorized trading activity can explain only EUR 3 million
in proprietary trading profits. As
explained in the General Inspection Department (“Mission Green”) report:
We have reconstituted, trade by trade, the earnings generated
by arbitrage on competitors’ turbo warrants carried out by JK [Jerome Kerviel]
and another trader from DLP. In total, these earnings are valued at EUR 5.5
million, including approximately EUR 3.1 million attributable to JK and EUR 2.3
million attributable to the other trader (according to the most likely case
scenario.)
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. In other words,
in 2007 when Kerviel made money, he was not a rogue. In 2008, when he lost money, he was a rogue.
This failure to inquire into unusual growth in profits,
risk, or trading volume—particularly when that growth is inconsistent with the
trader’s experience level, prior performance, or authorized trading strategy—is
a common unifier of financial institutions damaged by rogue employees. As I’ll illustrate in my next post,
this pattern is shared by rogue traders John Rusnak at Allied Irish Banks,
Nicholas Leeson at Barings Bank, and Joseph Jett at Kidder Peabody, among
others.
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