The Jérôme Kerviel three-week trial ended in Paris on
Friday, and that means that this post is my last in this series. Kerviel will have to wait until October
5, when the Court
has said that it will announce its decision, to find out whether he’ll
spend the next four years in jail and be ordered to repay the EUR 4.9 billion
he lost through unauthorized trading.
The highlight of the trial occurred when the final witness, Daniel Bouton (former chairman and chief executive of Société Générale) took the stand. Testified Bouton:
It is not the business of a bank to risk its very existence . . . I cannot believe for one second any of Jérôme Kerviel’s supervisors were aware. I’m sorry, my dear fellow.
Yeah, tell that to Bear Stearns or Lehman Brothers or any of the other financial institutions that either collapsed or were bailed out. The notion that Société Générale and other firms damaged by large rogue trading losses may have turned a blind eye to unauthorized trading meets with much less resistance today, post-crisis, than it did when I first raised it in 2000. Yet I continue to be puzzled by people who take as a given the need for plausible deniability in governments, armies, business organizations – indeed, almost any organized group imaginable . . . except financial institutions. (This strange tendency recently came up in an exchange with the Fourteenth Banker, in comments to a guest post at theParetoCommons). This blind spot is particularly ironic, given the extent to which Basel’s capital requirements create additional incentives for firms bent on the pursuit of trading profits to turn a blind eye to “unauthorized” trading.
Now, I don’t mean to suggest that Soc Gen consciously allowed Kerviel to nearly bankrupt the firm (and destabilize the very markets in which the bank operates), any more than Barings did. I suspect that they didn’t. But these things tend to spiral out of control once they get started – the trader has incentives to double down, rather than admit defeat, and supervisors, risk managers, and other compliance personnel accustomed to ignoring things that don’t look right have a tendency to . . . well, continue to ignore things that don’t look right, until funding problems make discovery inevitable.
Jérôme Kerviel is not the “pawn for profit” that his lawyers contend, nor should he escape blame. He lost nearly EUR 5 billion at Société Générale and concealed those losses through a series of fake trades, lies, and forged documents. But Soc Gen, rather than being the victim of fraud, as it has claimed in court, is actually complicit in that fraud.
At the start of the trial, Newsweek remarked “as Jérôme Kerviel goes on trial, the $5.9 billion he allegedly cost his bank in 2008 seems oddly insignificant.” And they are right. That France's second-biggest bank faced potential bankruptcy in January 2008 because of a single trader’s €50bn ($61bn) of unhedged positions, the unwinding of which impacted markets around the world, seems now to barely register outside of France (where Kerviel continues to command a cult-like Robin Hood status).
Before Fannie and Freddie and Bear Stearns and Lehman and Madoff and the $700 billion bailout, this seemed like real money. But now, much like Kerviel, who told investigators, “I was in a virtual world. The amounts didn’t make sense anymore. I was caught in a spiral,” and Nick Leeson, who once said, “You distance yourself somehow from the quantity of it. . . It tends to be numbers that come up on the screen—it does not have the real factor such as the money you have in your pocket,” the Kerviel incident seems small and unimportant, and risk-taking institutions that shift the blame (and costs) of failure onto others seem commonplace.
I’m going to remember that as I slog through the 2000-page costly farce also known as the Dodd-Frank bill (about which I will have much more later).
Related Posts:
Denial:
It Ain’t Just A River In Egypt
It’s
The Stupid Culture
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
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