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EVIL KERVIEL: He was a criminal but other bosses were criminally negligent
FRENCH ROGUE TRADER Jerome Kerviel of Société Générale has just been sentenced to three years in jail and has to pay back €4,9bn to the bank after being found guilty of fraud. How ironic, given that scores of bankers who put the world into jeopardy have been let off scot-free.
Kerviel, whose fraudulent trades were discovered in January 2008, must have watched with horrified fascination as Lehman Brothers closed its doors a few months later and the world was plunged into the worst crisis since the Great Depression. And the reason for the crisis was simple: bankers behaved recklessly. The word “sub-prime” became part of the vernacular as people learnt how bankers lent massively to un-creditworthy borrowers against the value of their homes. The world’s bankers collectively took a massive bet the property market in the United States would continue to rise for ever – and the bet went sour.
How is that bet different to the bets Kerviel took on the European markets, starting in 2005? Kerviel used to take genuine directional positions but created fictitious hedges, buying securities and warrants with deferred start dates and futures with a counterparty that didn’t require instant confirmation. Using other employees’ access details he was able later to delete trades from Société Générale’s systems – leaving him with massive exposures but fooling the monitoring tools into thinking his portfolio was relatively flat.
An internal investigation commissioned by the bank showed it had failed to follow up on at least 75 warnings on Kerviel’s positions. In November 2007 the derivatives exchange Eurex stressed Kerviel’s positions showed some irregularities. The bank’s internal report stated its compliance and the trader’s managers “were satisfied, without verification, with the trader’s explanations, in contradiction to Eurex’s assertions”.
The difference between Kerviel and the rest of the world’s bankers was that he created fictitious deals and covered up the real situation. But the same principle is involved: reckless trading by a banker using derivatives. In the one case, the bosses didn’t know, though Kerviel claims they did (the court found in the bank’s favour). In the other case, the bosses knew – but they didn’t understand what was going on. It’s no secret the big bosses in the banks where sub-prime mortgages went sour didn’t understand the instrument and allowed the market positions to continue because their underlings were making money. Not understanding your business is also criminal.
Take Sir Fred Goodwin, former CE of the Royal Bank of Scotland. He presided over a loss in 2008 of £24,1bn – the largest in Britain’s corporate history. The taxpayer picked up the tab. So angry were people with Goodwin that windows were smashed and a car vandalised at a property belonging to him in Scotland. The anger was largely because of the £700 000/year pension payout he received on leaving the bank.
Kerviel gets to repay €4,9bn – an impossible sum – and Goodwin gets a stipend of £700 000/year. Is there no justice in this world?
In all seriousness, Kerviel committed a crime: but the world’s banking bosses also acted in a criminally negligent way. Many of them are back on the gravy train, earning bonuses.
Meanwhile, the International Monetary Fund’s Global Financial Stability Report has found the financial sector remains the “Achilles heel” of global recovery. The report says banks in different parts of the world face distinct problems. In the US, weaknesses in real estate markets are an ongoing problem, while banks in some parts of Europe struggle with higher funding costs due to increased sovereign risks. Japanese banks suffer from low capital, weak profitability and are increasingly exposed to Japanese government bond markets.
The report cuts its estimates of crisis-related write-downs of bad loans and securities that banks in Europe, Britain and the US will have to take from US$2,3 trillion in April to $2,2 trillion at latest count. The report notes banking systems face several structural vulnerabilities.
FRENCH ROGUE TRADER Jerome Kerviel of Société Générale has just been sentenced to three years in jail and has to pay back €4,9bn to the bank after being found guilty of fraud. How ironic, given that scores of bankers who put the world into jeopardy have been let off scot-free.
Kerviel, whose fraudulent trades were discovered in January 2008, must have watched with horrified fascination as Lehman Brothers closed its doors a few months later and the world was plunged into the worst crisis since the Great Depression. And the reason for the crisis was simple: bankers behaved recklessly. The word “sub-prime” became part of the vernacular as people learnt how bankers lent massively to un-creditworthy borrowers against the value of their homes. The world’s bankers collectively took a massive bet the property market in the United States would continue to rise for ever – and the bet went sour.
How is that bet different to the bets Kerviel took on the European markets, starting in 2005? Kerviel used to take genuine directional positions but created fictitious hedges, buying securities and warrants with deferred start dates and futures with a counterparty that didn’t require instant confirmation. Using other employees’ access details he was able later to delete trades from Société Générale’s systems – leaving him with massive exposures but fooling the monitoring tools into thinking his portfolio was relatively flat.
An internal investigation commissioned by the bank showed it had failed to follow up on at least 75 warnings on Kerviel’s positions. In November 2007 the derivatives exchange Eurex stressed Kerviel’s positions showed some irregularities. The bank’s internal report stated its compliance and the trader’s managers “were satisfied, without verification, with the trader’s explanations, in contradiction to Eurex’s assertions”.
The difference between Kerviel and the rest of the world’s bankers was that he created fictitious deals and covered up the real situation. But the same principle is involved: reckless trading by a banker using derivatives. In the one case, the bosses didn’t know, though Kerviel claims they did (the court found in the bank’s favour). In the other case, the bosses knew – but they didn’t understand what was going on. It’s no secret the big bosses in the banks where sub-prime mortgages went sour didn’t understand the instrument and allowed the market positions to continue because their underlings were making money. Not understanding your business is also criminal.
Take Sir Fred Goodwin, former CE of the Royal Bank of Scotland. He presided over a loss in 2008 of £24,1bn – the largest in Britain’s corporate history. The taxpayer picked up the tab. So angry were people with Goodwin that windows were smashed and a car vandalised at a property belonging to him in Scotland. The anger was largely because of the £700 000/year pension payout he received on leaving the bank.
Kerviel gets to repay €4,9bn – an impossible sum – and Goodwin gets a stipend of £700 000/year. Is there no justice in this world?
In all seriousness, Kerviel committed a crime: but the world’s banking bosses also acted in a criminally negligent way. Many of them are back on the gravy train, earning bonuses.
Meanwhile, the International Monetary Fund’s Global Financial Stability Report has found the financial sector remains the “Achilles heel” of global recovery. The report says banks in different parts of the world face distinct problems. In the US, weaknesses in real estate markets are an ongoing problem, while banks in some parts of Europe struggle with higher funding costs due to increased sovereign risks. Japanese banks suffer from low capital, weak profitability and are increasingly exposed to Japanese government bond markets.
The report cuts its estimates of crisis-related write-downs of bad loans and securities that banks in Europe, Britain and the US will have to take from US$2,3 trillion in April to $2,2 trillion at latest count. The report notes banking systems face several structural vulnerabilities.
