In my last post, It’s
The Culture, Stupid, I noted that a review of the Société Générale
scandal reveals a familiar pattern of organizational and departmental change
that stressed trading and oversight systems, followed by a failure to respond
to common red flags and warning signals. But, rather than increasing their
vigilance regarding potential employee misconduct in the wake of these business
line and organizational changes, Société Générale ignored common warning signs
of potential problems, breeding a culture of noncompliance.
These two features – internal control problems and a culture
of noncompliance — are common to other large rogue trading scandals. For example, internal controls that
fail to keep pace with rapid business growth was
identified as a factor contributing to the Nick Leeson rogue trading scandal
at Barings. As explained by John
Dare, Director of Barings:
They [Leeson’s unit] were usually in a bit of a catching-up
position because their business had gone through a few periods of quite rapid
growth, when it is challenging, to say the least, to keep your controls on top
of a business that is growing rapidly. There were times when I was aware that
this was a strain; that the front office were marching faster than the back
office.
Similarly, subsequent investigation points to the
inexperience and understaffing of risk management and audit as a factor
facilitating John Rusnak’s losses at AIB (previously discussed here
and here).
In addition to internal control problems, an organizational
culture that minimizes risk management is another common thread among
institutions plagued with rogue trading scandals. For example, according to the Ludwig report, the bullying and
intimidation of AIB’s back-office staff by Rusnak and front-office supervisors
(and management’s willingness to overlook such behavior) contributed to an
environment in which back-office operations were perceived as pointless
formalities and management was predicted to take the trader’s side in the event
of any dispute, since trading was the moneymaking operation.
PricewaterhouseCoopers was even more explicit about the role
played by a corporate culture of non-compliance at NAB, where a group of four
currency options traders regularly breached position and risk limits, and
concealed their activity through the smoothing of profits and losses
(previously discussed here):
Our investigations indicate that the culture fostered the
environment that provided the opportunity for the Traders to incur losses,
conceal them and escape detection despite ample warning signs. This enabled
them to operate unchecked and flout the rules and standards of the National.
Ultimately, the Board and the CEO must accept responsibility for the “tone at
the top” and the culture that exists in certain parts of the National.
In sum, Jérôme Kerviel lost nearly EUR 5 billion at Société
Générale and concealed those losses through a series fake trades, lies, and
forged documents – the same strategy employed by most other rogue traders. Yet, like other financial institutions
that have suffered debilitating rogue trading losses, Société Générale ultimately
enabled those losses through its poor internal controls, faulty risk
management, and an organizational culture that tolerated, or even encouraged,
such behavior.
Meanwhile, in the trial’s most dramatic moment so far, Daniel
Bouton, the former chairman and chief executive of Société Générale, took the
stand yesterday, stating, “I cannot believe for one second any of Jérôme
Kerviel’s supervisors were aware [of his bets].” “I’m sorry, my dear fellow.” (Apparently,
this last bit was said with heavy sarcasm) (See the NY
Times and FT
stories)
Bouton was the last witness in the three-week trial, which
ends on Friday — the final three days will be spent on closing arguments. And that means that my series of posts
on the trial are about to come to an end.
My plan is to begin wrapping up over the next few days, returning to
some items in Bouton’s and other prosecution witness’s testimony, drawing some
lessons from the incident, and reiterating why we should care about such debacles
(remember the days when EUR 5 billion seemed like a big loss for a single
bank?)
All facts, figures, and calculations used in this post, and
the sources and citations from which they are derived, are detailed here.
Related
Posts:
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