When $61bn Seemed Like Real Money

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).

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When $61bn Seemed Like Real Money

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