RedWine
01-27-2008, 03:40 AM
By Friday, January 18, Jérôme Kerviel, a junior suit in the banking world, was on the hook for €50 billion - the equivalent of about half of all the gold and currency reserves held by France. The sum also exceeded the entire value of the bank at which he worked.
http://a123.g.akamai.net/f/123/12465/1d/media.canada.com/reuters/olcanat_iptc/2008-01-24t191918z_01_nootr_rtridsp_2_news-socgen-col.jpg
The 31-year-old trader at Société Générale, one of France’s most prestigious institutions, had secretly set up a series of deals that were going horribly wrong. So wrong that they threatened the survival of the bank and the health of global financial markets.
Yet senior executives at the bank, which initially claimed that it had no inkling of Kerviel’s activities, yesterday admitted that managers had missed several warning signs over many weeks that would have revealed the apparent fraud.
Inside the glitzy offices of Soc Gen - as it is known in the banking world - in La Défense, the business district of Paris, Kerviel had clandestinely placed numerous bets that stock markets would rise – but markets were heading down.
Although his alleged fraud started last year, it kicked into overdrive this month. From January 7 Kerviel had staked €50 billion and by January 18 - just 10 working days later - his losses were already €1.4 billion. They would balloon if the stock markets fell any further.
Kerviel, who had worked his way up from the bank’s “back office”, its administrative area, to a junior trading position, was desperately trying to find a way out.
He was rolling over “futures contracts” into new deals, creating fictitious transactions to disguise his tracks and praying that the markets would turn in his favour.
That Friday, according to the bank, a manager noticed an anomaly, believed to be a deal timed for the forthcoming Sunday night. Officials contacted the counterparty – the organisation with which Kerviel had struck the trade - and discovered that it knew nothing about the account. The trade appears to have been one of the fictitious deals intended by Kerviel to mask his mounting losses.
At 10pm the bank’s top executives were informed and a frantic process began, in which Kerviel’s superiors started to examine the hundreds of thousands of trades that they suspected were compromised.
“We spent hours, all night, evaluating the rogue trades,” said a senior Soc Gen executive. The finger of suspicion pointed at Kerviel and the bank began to fear the worst. Kerviel was summoned to the office.
When he arrived on Saturday, he was brought in front of a panel of executives headed by Jean-Pierre Mustier, chief of Soc Gen’s investment banking.
Christophe Mianne, head of global equities and derivatives, told Risk, a publication for financial trading: “He didn’t want to tell the truth immediately.” Other insiders say that Kerviel initially defended himself, arguing that he was operating a “brilliant trading strategy”.
One banker said: “Playing the trades was all that concerned him. It was obsessive.”
Mustier later said: “When we interviewed him he imagined that he had discovered methods able to win money on the markets.”
A board meeting had already been scheduled for Sunday evening because the bank was poised to announce a massive write-off of losses incurred from the global sub-prime debt crisis. The aim was to get bad news out of the way so that Soc Gen, whose shares had halved in value in six months, could begin a recovery.
Kerviel’s rogue trades threatened to capsize the carefully crafted plans. If news leaked out that Soc Gen was facing other huge hidden losses, it could destroy the bank’s most precious asset: the confidence of its customers.
The directors faced a stark choice. They could let Kerviel’s trades - essentially bets that the market would rise - run in the hope of markets recovering. But that risked even greater losses if shares continued to fall. Or they could close the positions and take the hit.
It was no choice really. The potential losses if shares continued downwards could destroy the bank. “I did my duty and decided to unwind these positions,” said Daniel Bouton, the chairman. The bank later accepted a lifeline from two big American banks to escape the financial black hole.
The timing could not have been worse. Fears of recession and the debt crisis had sent shivers through the stock markets. On Monday morning the Asian markets were already falling by the time trading started in Paris. Soc Gen was a forced seller in plummeting markets – during that day leading shares in London collapsed 5.5% and in Paris 6.8%. This only compounded Soc Gen’s losses.
By the time it had managed to close out all Kerviel’s positions, the bank was down almost €5 billion. And Kerviel was being blamed for fuelling a stock market nosedive that spurred the American Federal Reserve into the biggest cut in interest rates for 25 years. He was described by the governor of the Bank of France as “a genius of fraud”.
For its part, Soc Gen at first portrayed it as triumph snatched from disaster. As Bouton said later: “Had we not acted swiftly, the loss could have been 10 times worse.”
Suspicions linger that the bank has not revealed the full story of the fraud. It initially claimed that Kerviel had so brilliantly manipulated its computer systems that he had completely covered his tracks.
Yesterday, however, Bouton admitted that some of Kerviel’s deals had triggered warning signs in recent months but the trader had “managed to convince the controllers that it was just a simple error on his part”.
It was a damning admission for a giant bank that a junior trader could have talked his way out of a €50 billion hole.
Is Kerviel really solely to blame? And could the same thing happen to other banks? THE son of a blacksmith and a hairdresser, Kerviel grew up in the town of Pont l’Abbé in Brittany. As a teenager he had a strong interest in judo and his former instructor remembers him as a “fighter”.
“He was a go-getter,” said Philippe Orhant. “His attitude was ‘I’ve got to win’. He wanted to take part in competitions.”
However, he was not a winner. “He had to stop because his knees were fragile,” said Orhant. “He was overweight and had a bad fall while playing basketball.”
Kerviel, nevertheless, kept on battling. About five years later, Orhant bumped into him and was amazed at the transformation: “He just planted himself in front of me and asked me if I knew who he was. He had lost so much weight that I didn’t recognise him. He looked very handsome and he was with a pretty girl.”
Kerviel had also discovered an enthusiasm for finance, although he is remembered by Gisèle Reynaud, who taught him at Lyons University where he took a master’s degree in finance, specialising in “organisation and control of financial markets”, as unremarkable. “He didn’t distinguish himself from the others,” she said.
Dominique Chabert, another teacher at the university, said: “If he’s a genius, we didn’t notice it here.”
Valérie Buthion, head of the department, noted that Lyons is not a place where whiz-kids of the financial markets study anyway. “People who want to be golden boys or clever in the market don’t come here,” she said. “The show-offs don’t come here. This is the hidden part of the iceberg.”
http://a123.g.akamai.net/f/123/12465/1d/media.canada.com/reuters/olcanat_iptc/2008-01-24t191918z_01_nootr_rtridsp_2_news-socgen-col.jpg
The 31-year-old trader at Société Générale, one of France’s most prestigious institutions, had secretly set up a series of deals that were going horribly wrong. So wrong that they threatened the survival of the bank and the health of global financial markets.
Yet senior executives at the bank, which initially claimed that it had no inkling of Kerviel’s activities, yesterday admitted that managers had missed several warning signs over many weeks that would have revealed the apparent fraud.
Inside the glitzy offices of Soc Gen - as it is known in the banking world - in La Défense, the business district of Paris, Kerviel had clandestinely placed numerous bets that stock markets would rise – but markets were heading down.
Although his alleged fraud started last year, it kicked into overdrive this month. From January 7 Kerviel had staked €50 billion and by January 18 - just 10 working days later - his losses were already €1.4 billion. They would balloon if the stock markets fell any further.
Kerviel, who had worked his way up from the bank’s “back office”, its administrative area, to a junior trading position, was desperately trying to find a way out.
He was rolling over “futures contracts” into new deals, creating fictitious transactions to disguise his tracks and praying that the markets would turn in his favour.
That Friday, according to the bank, a manager noticed an anomaly, believed to be a deal timed for the forthcoming Sunday night. Officials contacted the counterparty – the organisation with which Kerviel had struck the trade - and discovered that it knew nothing about the account. The trade appears to have been one of the fictitious deals intended by Kerviel to mask his mounting losses.
At 10pm the bank’s top executives were informed and a frantic process began, in which Kerviel’s superiors started to examine the hundreds of thousands of trades that they suspected were compromised.
“We spent hours, all night, evaluating the rogue trades,” said a senior Soc Gen executive. The finger of suspicion pointed at Kerviel and the bank began to fear the worst. Kerviel was summoned to the office.
When he arrived on Saturday, he was brought in front of a panel of executives headed by Jean-Pierre Mustier, chief of Soc Gen’s investment banking.
Christophe Mianne, head of global equities and derivatives, told Risk, a publication for financial trading: “He didn’t want to tell the truth immediately.” Other insiders say that Kerviel initially defended himself, arguing that he was operating a “brilliant trading strategy”.
One banker said: “Playing the trades was all that concerned him. It was obsessive.”
Mustier later said: “When we interviewed him he imagined that he had discovered methods able to win money on the markets.”
A board meeting had already been scheduled for Sunday evening because the bank was poised to announce a massive write-off of losses incurred from the global sub-prime debt crisis. The aim was to get bad news out of the way so that Soc Gen, whose shares had halved in value in six months, could begin a recovery.
Kerviel’s rogue trades threatened to capsize the carefully crafted plans. If news leaked out that Soc Gen was facing other huge hidden losses, it could destroy the bank’s most precious asset: the confidence of its customers.
The directors faced a stark choice. They could let Kerviel’s trades - essentially bets that the market would rise - run in the hope of markets recovering. But that risked even greater losses if shares continued to fall. Or they could close the positions and take the hit.
It was no choice really. The potential losses if shares continued downwards could destroy the bank. “I did my duty and decided to unwind these positions,” said Daniel Bouton, the chairman. The bank later accepted a lifeline from two big American banks to escape the financial black hole.
The timing could not have been worse. Fears of recession and the debt crisis had sent shivers through the stock markets. On Monday morning the Asian markets were already falling by the time trading started in Paris. Soc Gen was a forced seller in plummeting markets – during that day leading shares in London collapsed 5.5% and in Paris 6.8%. This only compounded Soc Gen’s losses.
By the time it had managed to close out all Kerviel’s positions, the bank was down almost €5 billion. And Kerviel was being blamed for fuelling a stock market nosedive that spurred the American Federal Reserve into the biggest cut in interest rates for 25 years. He was described by the governor of the Bank of France as “a genius of fraud”.
For its part, Soc Gen at first portrayed it as triumph snatched from disaster. As Bouton said later: “Had we not acted swiftly, the loss could have been 10 times worse.”
Suspicions linger that the bank has not revealed the full story of the fraud. It initially claimed that Kerviel had so brilliantly manipulated its computer systems that he had completely covered his tracks.
Yesterday, however, Bouton admitted that some of Kerviel’s deals had triggered warning signs in recent months but the trader had “managed to convince the controllers that it was just a simple error on his part”.
It was a damning admission for a giant bank that a junior trader could have talked his way out of a €50 billion hole.
Is Kerviel really solely to blame? And could the same thing happen to other banks? THE son of a blacksmith and a hairdresser, Kerviel grew up in the town of Pont l’Abbé in Brittany. As a teenager he had a strong interest in judo and his former instructor remembers him as a “fighter”.
“He was a go-getter,” said Philippe Orhant. “His attitude was ‘I’ve got to win’. He wanted to take part in competitions.”
However, he was not a winner. “He had to stop because his knees were fragile,” said Orhant. “He was overweight and had a bad fall while playing basketball.”
Kerviel, nevertheless, kept on battling. About five years later, Orhant bumped into him and was amazed at the transformation: “He just planted himself in front of me and asked me if I knew who he was. He had lost so much weight that I didn’t recognise him. He looked very handsome and he was with a pretty girl.”
Kerviel had also discovered an enthusiasm for finance, although he is remembered by Gisèle Reynaud, who taught him at Lyons University where he took a master’s degree in finance, specialising in “organisation and control of financial markets”, as unremarkable. “He didn’t distinguish himself from the others,” she said.
Dominique Chabert, another teacher at the university, said: “If he’s a genius, we didn’t notice it here.”
Valérie Buthion, head of the department, noted that Lyons is not a place where whiz-kids of the financial markets study anyway. “People who want to be golden boys or clever in the market don’t come here,” she said. “The show-offs don’t come here. This is the hidden part of the iceberg.”