As Jérôme Kerviel continues his extraordinary metamorphosis into what The Times describes as “something of a global folk hero, with songs, videos and internet sites devoted to him,” the campaign by his lawyers to portray him as the victim of unscrupulous employers is gaining traction.
Unsurprisingly, questions are growing by the minute over who at Société Générale knew what and when about the “unauthorised trades” of Kerviel.
As the FT notes on Tuesday, ever since SocGen revealed its €4.9bn fraud last week, the French bank has offered increasingly detailed explanations of how Kerviel was able to conceal his deception:
Yet as facts emerge, observers are questioning whether SocGen’s risk management systems and financial controls had kept up with the break-neck growth in the bank’s giant equity derivatives business.
On Monday, the prosecutor investigating the alleged fraud raised further doubts when he announced Kerviel had been engaging in unauthorised trades since late 2005, and that Eurex, the derivatives exchange, had questioned the trader’s activities last November.
SocGen had previously suggested Kerviel started his allegedly fraudulent trades last year, and that the bank did not know about them before January 18. “Yet even if the apparent discrepancy can be explained, SocGen’s version of events still raises plenty of questions”, notes the FT.
Another key question, in the FT’s view, is “how Mr Kerviel’s activity did not show up in SocGen’s accounts”.
When share prices started to fall and Mr Kerviel’s bets lost money, SocGen was forced to make margin payments to cover the lost value on the futures contracts. If Mr Kerviel’s activity had been legitimate, this would have been matched by payments from counterparties to his hedging contracts. But as the contracts were fake, there was no cash coming in.
Given the size of SocGen’s equity derivatives business, it is possible the bank would not have immediately noticed the mismatch. But it should have become apparent at the end of the month, when the bank reconciled its trading and financial accounts.
The Times quotes Kerviel’s lawyers on Tuesday saying the decision by French judges not to grant the prosecutor’s full demands “reflected their doubts about the claims he was a lone villain who committed historic fraud against his bank”. One of his lawyers, Elisabeth Meyer, went so far as to describe Kerviel’s release from custody as “a beautiful victory and a just one”.
Indeed, notes the Times, “many experts and state officials continue to doubt that Mr Kerviel could have fooled SocGen’s security system for more than a year without internal complicity”.
Although the prosecution immediately appealed against the court’s ruling, the Times adds that even Jean-Claude Marin, the prosecutor, “implied that the bank may have turned a blind eye towards illicit trading by its staff”.
In more than 20 hours of questioning that ended Sunday night, the junior trader told prosecutors that he did not act for his direct personal profit when he breached his tight risk limits from late 2005, Mr Marin said. “He had no intention of plundering the bank. He wanted to be seen as an exceptional trader, an astute market player.”
The trader’s account to police, concludes the Times, “did little to bolster new claims from Daniel Bouton, the SocGen chairman, that he was a ‘terrible accident’ in a sea of rigour”.
Tackling the issue in a typically robust, Occidental way, Glenn Dyer, financial commentator at
Crikey.com, the Australian news-and-views site, points to a “large dollop of hypocrisy in much of the reporting” about SocGen’s losses.
“Kerviel is up there with the financial pariahs for his “unauthorised ” trading losses at the French banking giant - but how major were his losses?
Media reports refer to Kerviel’s losses as the biggest “fraud” in financial history, and the sum is certainly staggering. But, notes Dyer, “he didn’t take any money”.
Contrast his performance with that at some leading banks like UBS, Merrill Lynch and Citigroup where the losses from subprime mortgage related investments (and dud corporate deals) were much, much bigger… $100bn and counting….
Those responsible at US banks (and also UBS) have escaped unscathed, rewarded in the millions of dollars (tens of millions in some cases) and sacked in some circumstances, but are now apparently going on to bigger and better things.
Dyer notes an “interesting juxtaposition” of two reports in the New York Times at the weekend, which in his view perfectly illustrated the hypocrisy in the minds of many in the markets, “especially on Wall Street”.
There is the one about Kerviel; a mystery man, a “lone trader” etc. “An early partial explanation from his bosses at the bank was that he spoke “very good English” (that is, he was tainted with the Anglo-Saxon approach to business)”, notes Dyer.
Then there is one about two executives at Merrill Lynch and Citigroup, Dow Kim and Thomas G Maheras respectively, “who are being allowed to rebuild their careers after playing a major part in crippling their banks to the point where they had to be bailed out by foreign and other investors after losses that have dwarfed what Societe Generale has had to endure”.
Yes, what Kerviel did was wrong, but which was the greater crime? From all accounts Kerviel got in too deep and couldn’t extract himself at a profit. Yet we know that Dow and Maheras, as well as other senior officers at Bear Stearns, Morgan Stanley and Citigroup thought they knew what they doing, but they didn’t.
The result is the subprime crisis and credit crunch which has sent the US economy to the brink of recession and carved over $8,000bn off stockmarket valuations since the peaks of late October/early November.
Yet Kerviel will be the “face” of this crisis and the real culprits, those on Wall Street, in London, Germany, Japan, China, Australia, Canada, will escape with fat wallets and all but unknown. And, they should have known better because they claimed to know what they were doing.
This entry was posted by Gwen Robinson on Tuesday, January 29th, 2008 at 7:44 and is filed under M&A, Capital markets.
Tagged with Jerome Kerviel, SocGen.
