Le Figaro
Thursday 24 January 2008
Jérôme Kerviel Kerviel, who created a 4.9 billion euro loss for Société Générale, has vanished. Tale of a high-stakes swindle.
"He's absconded, but he won't be rehired by any bank, believe me," declared Bank of France Governor Christian Noyer. So Jérôme Kerviel Kerviel has taken flight, becoming the most sought-after man in France within the last few hours. We must admit that his actions remain incomprehensible. As of this morning still, the entire management of Société Générale remained puzzled about what motivated one of their employees to indulge in a fraud of enormous scope, concluding in a 4.9 billion euro loss. According to the first elements of information available, the person presumed responsible "does not seem to have received any remuneration, direct or indirect, from these operations."
An Unblemished Background
Jérôme Kerviel Kerviel, the man who took these short-sighted positions, joined the bank in 2000. Initially, he worked in the bank's back office, which comprises all the management and accounting activities covering operations effected in the trading room, as well as supervision of its administration. His mission for five years consisted in tracking suspect procedures, in which he became expert. Then, in 2005, he was authorized to make his own trades. From then on, he belonged to the trading desk. Thirty-one years old, he did not, however, figure among Société Générale's star traders. He is described as a "plain vanilla broker in the trading room." He was paid "less than 100,000 euros, bonus included." In spite of his new posting, he maintained his contacts with the control staff. He demonstrated a keen interest in the development of their procedures.
Thanks to his expertise in control systems, he was able to stage a wide-ranging fraud without detection. From 2006 on, he had begun to take positions off Société Générale's books. He bet on positions that followed European indexes. He invested on both the upswing and the downturn of these futures, committing huge sums each time. To cover up this parallel activity, he offset his gains by fictitious losses and vice versa. The operations cancelled each other out and consequently did not appear in the bank's accounts. "He shifted his fictitious cover at every audit, the schedules of which he knew, with extraordinary talent. He had to effect complete monitoring of his operations in real time. He had constructed a veritable hidden company by using Société Générale's tools," one manager noted. According to their internal inquiry, the man acted alone. For months, his strategy fooled the some 2,000 colleagues responsible for risk management at Société Générale.
A Breakdown in His Expertise
However, control procedures are regular and varied. They are collected through "five or six different sectors." Nothing ever appeared on the "market value at risk" side. He also passed through the "gross result" and "market exposure" screens. From having practiced the control procedures for years, he was aware of their shortcomings. But he had not mastered the procedure for counterparty risks, and that ignorance doomed his undertaking.
Saturday night, that control procedure uncovered a slight incoherence - the tip of the iceberg the mass of which remained unknown. At 10 p.m., a team of experts met to study the problem. "It was impossible at that point to determine the nature of the problem." Then the incriminated trader was identified. He was interrogated all night to understand the tenor of his activities. Little by little, the scope of the fraud became clear. "At 11 a.m. Sunday, we knew what our risk was."
At that point, Société Générale's management decided to liquidate the clandestine positions without delay. "That's what all position management manuals advocate. We were not going to maintain his hidden positions, hoping to cover them with future gains. We are not speculators." Consequently, the bank sold the entirety of those positions between Monday and Tuesday, while the markets were collapsing. "Unfortunately, the market context was unfavorable, and the sale was consequently effected with an enormous loss. But luckily, investor panic created a large number of trades. So the Société Générale's did not seem to be particularly significant." The bank could not announce its intention to close out the position for fear of seeing its share price collapse. "The position was so colossal that had we revealed it before it was covered, the whole bank would have been exposed to an enormous external shock. And that announcement would have distorted the markets." Out of these concerns about discretion, Société Générale kept silent until this Thursday. It has only now brought suit, while its inept employee has skedaddled.
Société Générale: Learn to Bounce Back Like Nick Leeson
By Guillemette Faure
Rue89
Thursday 24 January 2008
For Jérôme Kerviel Kerviel, accused of making Société Générale lose 4.9 billion euros: Don't run away, your future is not washed up. Take heart from the comeback example provided by Brit Nick Leeson.
The former trader precipitated the bankruptcy of Barings Bank by speculating with clients' funds to recover the banks' losses: he kept borrowing more while the market continued to collapse. Accused by the Singapore legal system of fraud and signature forgery, he was condemned to six and a half years of prison and served three and a half.
So I called him. I wanted to know what he thought of the Société Générale affair, which, if a fraud is proven, will prove to have been four times bigger than his switcheroos.
An Interview? Pay 1,350 Euros.
His assistant Chris called us back. An interview? Why not! Are we ready to pay? I was surprised. He explained that, given the demand, media interviews were payable: we'd be looking at about 1,000 pounds (1,350 euros). Thanks for making an offer.
Nick Leeson's illuminating perspectives on life have become a business. As his Internet site explains, Nick Leeson is one of the "United Kingdom's most sought-after" paid dinner speakers: "The evening usually comprises a speech lasting up to half an hour and then a question and answer session that can be tailored to your requirements."
One may also buy his latest book (film rights to his first book, "Rogue Trader," were sold for $700,000), "Back from the Brink," co-written with a psychologist (and subtitled: "Coping with Stress") in which he explains how to climb back after bankrupting one's company, spending three years in prison, divorcing and suffering from cancer. His solution (obtaining a psychology degree and becoming a soccer club manager) is purely personal.
Leeson Fraud Now Looks Like Small Change
By Eric Reguly
The Globe and Mail
Thursday 24 January 2008
Rome - You could almost hear the glee spewing from London's bankers and traders.
Move aside Nick Leeson and Barings; France, the country they love to hate even if it makes decent cheese, is now responsible for the biggest bank fraud in history. Société Générale Thursday revealed a rogue trader piled up €4.9-billion ($7.1-billion) in losses.
This, of course, is bad news for Mr. Leeson, the trader who had dug a $1.4-billion hole in Barings' trading account by the time he fled the British bank's Singapore office in 1995. Since completing his four-year prison sentence, young Nick has made a living giving talks on the rubber-chicken circuit.
But who wants to listen to him now? His French counterpart, identified as Jerome Kerviel, 31, will have a better story to tell. How much could he charge to tell how he French fried the country's second-biggest bank, making Mr. Leeson's trades look like pocket change in the process?
It's too early to tell whether SocGen, as it is known, will suffer the same fate as Barings. Probably not, is the answer. At the same time it disclosed the toxic trades, which came on top of €2-billion in losses related to credit exposure to the U.S. mortgage market, SocGen announced it is raising €5.5-billion in new capital.
"The capital increase is fully guaranteed, and will offset the loss generated by the fraud," chairman and chief executive officer Daniel Bouton said in a letter to the bank's 22.5 million customers. "Société Générale's capacity to bounce back and renew with the profitable growth that has characterized the bank for many years remains intact."
Perhaps, but there is no doubt the bank's financial health has taken a big hit. Even before the fraud was discovered, the rumours said SocGen is more likely to be victim than victor as the European banks merge into a small number of supergiants. French bank industry leader BNP Paribas is one oft-mentioned potential buyer. Another is UniCredit, Italy's biggest bank.
The bigger hit is to SocGen's reputation, which means heads are bound to roll. The rogue trader and his bosses have already been sacked. Mr. Bouton offered his resignation on Wednesday, but the board talked him out of it.
Who knows how long he'll last. Until l'enfant terrible mucked things up, SocGen had a stellar reputation in the derivatives game. Recently both Risk Magazine and another magazine called The Banker lauded it with equity-derivatives-house of the year awards.
What must be doubly embarrassing to SocGen was the fact that Mr. Kerviel wasn't doing anything exotic in the derivatives market. By the bank's own admission, he was responsible for "plain-vanilla futures hedging" on European market indexes, such as the DAX in Frankfurt and the CAC in Paris. This meant he was employed to protect the bank's equity exposure through the use of index derivatives. Think of it as an insurance policy against equity losses. This sort of hedging is standard industry practice.
The problem, it appears, is that hedge boy wasn't just hedging. SocGen says he took "directional positions" last year and into January that went "beyond his limited authority." When the losses piled up he, like Nick Leeson, concealed them. The bank said he drew from his in-depth knowledge of control procedures to hide the losses through a "scheme of elaborate fictitious transactions."
The fraud was uncovered last week and the positions were unwound. SocGen executives called the trades "inexplicable" and said Mr. Kerviel, who has admitted to the cover-up, did not personally profit from the fraud. There were no other details.
What is astounding is the amount of money he would have had to invest to pile up losses of €4.9-billion. European indexes are down 15 per cent, give or take a couple of points, since the late autumn. This implies the face value of his positions must have been €30-billion or more. How could a single, young bank employee have built enormous positions without the risk gnomes knowing about it? The answer is obvious: There are serious flaws in SocGen's oversight and risk-management departments.
SocGen investors took the fraudulent trading losses and writedowns in stride. SocGen shares fell a mere 3.6 per cent, to €76.23, suggesting shareholders think the capital-raising exercise is enough to repair most of the damage. SocGen's woes did not spread to the rest of the market. The European indexes surged Thursday.
The story of the rogue trader could be a one-day wonder. Or it could be the opening salvo in a barrage of bad news. Official investigations are under way and could turn up some ugly information about SocGen's risk-management systems, or lack thereof. Executives could get fired and investor confidence in the bank's senior management could wane. Even before Thursday it was an open question whether SocGen could survive as an independent player. Today it seems more likely that it will not.
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