I’ve blogged a few times already about the made-for-television
Jerome Kerviel rogue trading trial that began on Tuesday in Paris (see the
links to related posts below). At
issue is whether Kerviel hid risks and positions from his employer, exposing Société
Générale to large unanticipated losses, as contended by the bank, or whether Société
Générale was complicit in the risky activities of Kerviel and other traders,
throwing aside risk management in the pursuit of trading profits.
During the trial, Kerviel has
contended that he “hid nothing” from his employer and that his actions were
visible and known to other traders and trading supervisors at the bank. Société
Générale meanwhile has branded Kerviel
“a liar” who took “inhuman” risks.
Over the next few posts, I’ll summarize some of the relevant
facts of the case, as disclosed in public documents prior to the trial,
especially the Mission Green report.
I’ll also compare the Kerviel facts to rogue trading incidents at other
banks, noting the many similarities and common patterns. I’ll also be keeping an eye on the trial
as best I can (shockingly, I do have a life beyond blogging and reading the
European financial press this summer, though, admittedly, not much of
one.) More than 40 witnesses have
been called and are expected to testify over the next three weeks, so additional
facts may emerge.
Although I would not paint Kerviel as the “pawn for profit”
his lawyers contend, I believe the evidence suggests that Société Générale was
determinedly ignorant of Kerviel’s activities and thus bears ultimate
responsibility for failing to prevent Kerviel’s massive losses. The firm turned a blind eye to trading
violations, failed to follow up on questionable trades and evasive
explanations, and ultimately created an environment in which risk management
was sacrificed to trading profits.
First hired from the back office onto the warrants trading
desk in 2005, Kerviel’s unauthorized trades began almost immediately. Though the amounts of his unauthorized trades
initially remained small (under EUR 15 million), they grew much larger beginning
in late January 2007. Kerviel
realized total trading profits of EUR 1.5 billion in 2007.
Between January 2 and January 18, 2008, Kerviel amassed a
EUR 49 billion long position on DAX futures, which the bank reportedly discovered
on January 20. These positions were unwound between January 21–23, 2008,
recognizing a loss of EUR 6.4 billion. (Subtracting Kerviel’s 2007 gain of EUR
1.5 billion leads to the loss of EUR 4.9 billion normally quoted in the press. I detail Kerviel’s trading positions here, for
those wanting more information).
As
previously noted, there’s no evidence (at least, none presented yet) of
direct knowledge by superiors at Société Générale of Kerviel’s overnight
directional trades. However, emails
confirm that Kerviel’s immediate superior was aware of, and acquiesced in, some
early intra-day unauthorized positions on equities and equity index futures.
But the important point, and one which I will expand on in
coming posts, is the extent to which supervisors and bank management ignored 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.
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
Kerviel
Trial Opens to Fanfare
Société Générale: Back In The Saddle Again
Jérôme Kerviel to Société Générale: Stand By
Your Man