In my last post, I began blogging about the made-for-television Jerome Kerviel rogue trading trial taking place in Paris. 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, 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).
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.