In the October 20, 2008, issue of The New Yorker, in “The Omen", James B. Stewart uses police and psychological reports to tell the story of how the financial trader Jérôme Kerviel caused the French bank Société Générale to lose 4.9 billion euros, in what is “said to be the largest trading fraud in banking history.”
While some characterized Kerviel as an ambitious ﬂambeur (“high roller”) and joueur (“gambler”), Stewart writes that “now that the financial world is enduring its most serious turmoil since the Great Depression, and public outrage is focussed on financial chief executives and their multimillion-dollar incomes, Kerviel looks even less like an isolated rogue trader, and more like a harbinger of systemic failure: the sophisticated investing vehicles that few understood; the impotence of internal risk controls; the moral blindness in the face of mounting profits; and, above all, greed.”
Kerviel, who grew up in a small town in Brittany and attended a trade university instead of a prestigious grande école, began his career at Société Générale in the middle office, where he helped to administer the bank’s database and computerized trading systems. Soon, Stewart writes, he was transferred to the trading floor, where he showed “an unexpected aptitude for arcane derivative strategies and developed an avid interest in trading.”
Kerviel felt unusual pressure to prove himself to his colleagues and superiors, Stewart writes, telling the police, “I didn’t go straight to the front lines—I went through the middle office, and was the only one who did.” “Well versed in the accounting system from his time in the middle office,” Kerviel soon observed that it was possible to take unauthorized positions and offset them by entering false trades into the computer system, a strategy that proved immensely profitable.
Kerviel told the police that when he shared news of this profit with his supervisors, “Their first reaction was satisfaction, naturally, although they told me ... to avoid such positions, because I could just as easily have lost.” “Kerviel saw this as a ‘mild’ admonition, not meant all that seriously,” Stewart notes.
Over the years that followed, Kerviel continued this ambitious, unauthorized form of trading, covering his positions with fictitious trades. Whenever compliance officers within Société Générale questioned him about his trades, Kerviel managed to deflect them with lies and evasions.
Kerviel earned forty-three million euros for the bank in 2007, which accounted for ﬁfty-nine per cent of earnings for his department’s listed-products desk and twenty-seven per cent of earnings for the department as a whole. “His colleagues started calling him a ‘cash machine’ and a ‘star,’ ” Stewart writes.
Despite newly increased oversight, Stewart writes, “during the first half of January Kerviel amassed a large long position on futures, betting this time on a market recovery.…By mid-January, his exposure approached ﬁfty billion euros.” Eight fictitious trades that Kerviel had created to offset his 1.5-billion-euro gain for 2007 were uncovered by Société Générale’s compliance officials.
Kerviel was called in for questioning, and the extent of his positions was eventually revealed. “The magnitude of the problem was almost unimaginable, and there was a serious risk that the bank could fail,” Stewart writes. Société Générales’s rush to liquidate his fifty-billion-euro position “likely contributed to the global sell-off and the mounting sense of panic.”
When questioned by the police, Kerviel told his interrogators, “I admit having taken large positions that could be qualified…as outside the limits of my mandate, and which I masked by a fictitious transaction. I had several motivations in making those orders, but first and foremost I had in mind to make money for the bank.”
Kerviel says he assumed that he had the tacit approval of bank officials, as there had been, by his count, a total of ninety-three alertes, or official notices, generated by his trading. “My positions made money, so, in a way, I told myself that…it legitimized what I was doing,” Kerviel told a court-appointed psychologist. Of his wildly successful first unauthorized trade, Kerviel told the police, “It makes you want to continue; there’s a snowball effect.” “When you’re used to making five hundred thousand euros every day, at some point it becomes normal,” Kerviel told the psychologist. “The results, the numbers, become banal.”
While the report produced by Société Générale after investigating the Kerviel affair “concluded that Kerviel had essentially acted alone,” Stewart writes, it also “included a catalogue of supervisory failures that reflected the culture and the regulatory climate,” and “noted that Kerviel’s superiors knew of intra-day trading outside his normal purview.” Kerviel’s immediate supervisor later admitted that he was “unqualified to supervise a trading desk,” Stewart writes.
As Kerviel told the psychologist, “I accept my share of responsibility, which I don’t deny, but it must be acknowledged that I was not alone in this thing, that my superiors were indulgent toward my activities, and that the responsibility is not mine alone.”
The October 20, 2008, issue of The New Yorker goes on sale at newsstands beginning Monday, October 13th.