Jerome Kerviel’s not-so-excellent adventure in the futures market
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A cautionary tale gets added to market lore. This is going to make a good movie at some point…
In one of the banking world’s most unsettling recent disclosures, France’s Société Générale SA said Mr. Kerviel had cost the bank €4.9 billion, equal to $7.2 billion, by making huge unauthorized trades that he hid for months by hacking into computers. The combined trading positions he built up over recent months, say people close to the situation, totaled some €50 billion, or $73 billion.
Mr. Kerviel is no trading legend who let a transaction get out of hand. He was a low-level trader in the bank’s “Delta One” desk in western Paris, earning about €100,000 ($145,000) a year. His job was to make bets on how large European stock indexes would move, according to bank officials. His expertise was trading baskets of stocks such as the Euro Stoxx 50.
At $7.2 billion, this loss is larger than than the estimated 2006 GDP of 65 of the 183 countries tracked by the World Bank. It’s just about the entire output of Cambodia ($7.193 billion), and greater than the combined output of Seychelles, Liberia, Grenada, Gambia, Saint Kitts and Nevis, Saint Vincent and the Grenadines, Samoa, Comoros, Vanuatu, East Timor, Solomon Islands, Guinea-Bissau, Dominica, Micronesia, Tonga, Palau, Marshall Islands, São Tomé and Príncipe, and Kiribati ($6.846 billion).
I’ve noticed that the news coverage keep reporting “fraud”, which is apparently true (he made up fictitious trades with outside partners of the bank), but it mostly sounds like internal risk controls failed in more than one place.
Of course, if it had gone the other way and turned a profit, we never would have heard about it.
Tags: finance, risk management, futures, stock, trading, markets, culture
January 25th, 2008 at 4:56 pm
J. Kerviel was by no means a financial genius. He traded delta one products, which are the simplest on the market. He worked for a very large bank (120 000 employees) and he was very minor there. He had experience in back office and changed positions to front office. He kept the passwords from back office (the bank should have been more secure) and used these to make it look like he was taking positions on behalf of non-existent clients. Risk management would not have picked up that the bank was not neutral (his positions being non-covered) because of this. Because of losses due to margin calls he then increased his positions, hoping to recupe the money (this is terrible trading). He would not have gained anything from this. If anything he was a bad trader and also a rogue. This could have happened in many banks. They all work more or less in the exact same way. The bank and the trader both share blame.
January 26th, 2008 at 5:13 pm
It seems so unlikely that one guy could have done this. Maybe the bank set him up as a scape goat for their real sub-prime or other losses.