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The Societe General Trading Scandal October 19, 2008

Posted by gordonwatts in France, life.
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Given the current mess of the financial markets, I wonder if anyone remembers Societe General from much earlier this year? It is a big French bank, with branches open all over in France. It was all over Marseille, for example, where I was all of last year. Remember that rouge trader who opened up 50 billion euros of unauthorized trades (Jerome Kerviel)? Living there at the time I definitely do. It was very much the topic of conversation at the lunch table (and probably bars, had I understood French better).

I managed to sqeeze in reading the current issue of the New Yorker today. It has a fascinating article on exactly this – but it was more told from Jerome’s point of view. What I’d not appreciated was that while that 50 billion was a bet gone wrong, he’d had many positions that had gained him huge amounts of money. His first big bet – betting that the subprime problem would affect things more than US government officials and everyone else was claiming they would. He made that bet late 2007! Guy had some foresight!

The funny thing is that when I say “gained him huge amounts of money” I’m not really being correct. It was the bank that got the money. The only way he extracted stuff from his successes was through bonuses. And being a mid-level employee those weren’t very big. So there is a big mystery around what motivated him to do it. He had to go to extraordinary lengths in order to accomplish this – because of the way his job performance was monitored he basically had to cover all of his positions every single day – so it must have added a huge amount of stress to his life.

When the scandal first broke most people were amazed that any single trader could actually have done this without their supervisor’s knowledge. Sure enough, his supervisor was fired and later said “I am not qualified to run a trading desk. I can build complex financial instruments – but run a trading desk? No.” And given the number of interactions Jerome had with SG’s trading compliance staff over trades the computer flagged as suspicious…

The article is fascinating. If you have a chance, I’d definitely recommend reading it. He almost made the bank go under – one of the biggest in France – and yet he seems refreshingly innocent. Though, clearly he is not.

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Comments»

1. Alejandro Rivero - October 20, 2008

Hmm, had the bank keeped with the positions stablished by Kerviel, what had the result been after last week crash? Better or worse? Had Kerviel hedged against the current crash?

2. gordonwatts - October 20, 2008

I’m not sure — he was betting the market was going to come back (ops!). So I don’t think he would have been in good shape.

His outstanding position was over 50 billion euros when it was revealed — way way larger a bet than the bank would want even its top traders to take. So no matter what they had to unwinde them. They did it in 3 days, which is pretty amazing if you think about it. Some people claim the mini-stock market crash that occured around the time was due to this.


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