Business | Banking
SocGen spent days pushing files as Kerviel told lies
Internal probe censures compliance officers for working aimlessly.
- Bloomberg
- Published: 01:13 February 24, 2008
Paris: For five days in January, as European markets began to slide, Jerome Kerviel lied, stalled and used jargon to keep colleagues from discovering the phony bets that eventually brought him down and led Societe Generale to post a record trading loss.
The bank's internal probe, published on February 20, censures the controls that Societe Generale. It shows that compliance officers went through the motions of carrying out controls without challenging Kerviel's explanations or probing further when he changed counterparties or cancelled trades.
"It seems there was a consensual 'laissez-faire' within the bank," said Pierre Flabbee, an analyst at Landsbanki Kepler. "A trader wants to make money and can be intoxicated by success. There was apparently elasticity in the notion of limits."
Kerviel's job on the 'Delta One' trading desk was to use large volumes to arbitrage small price differences between equity index futures and forwards. Instead, he took bets on the market's direction while forging emails and documents to make it appear he'd hedged his positions.
The report says the bank failed to follow up 75 warnings about bets by Kerviel.
On January 9, a compliance officer twice asked Kerviel to clear up the matter. According to the report, the case was closed on January 9 when the 31-year-old trader said he had cancelled the trades and they "wouldn't appear again."
The matter resurfaced on January 15, as the bank went through its annual exercise of reconstituting its year-end exposure to calculate regulatory capital requirements. Kerviel's trades, which were opened in December, would have required three billion euros to back them up.
Late on January 17, Kerviel was summoned to a meeting where he told five bank officers that his supposed counterparty was just acting as a broker. He said the real counterparty was instead a large German bank that would have only required 390 million euros of capital to offset the trades. A court document says that bank was Deutsche Bank.
The next day, an officer described as 'Agent 26' went to see Kerviel. Soon after, Kerviel produced a fax purporting to be from Deutsche Bank, confirming the trade. Another agent, identified as '27', called his contacts at the German bank who were unable to confirm the trade.
Only then was Jean-Pierre Mustier, the head of Societe Generale's investment bank, contacted.
"You have two people: one makes the bank richer and one prevents the bank from earning because of risk of loss," said Tamar Frankel, a law professor at Boston University. "So guess who has the upper hand?"
Share this article
Popular in Business
-
Budget travel
Airlines in the region
Take a pictorial look at some of the budget airlines in GCC
Business Editor's choice
-
New law to protect investor rights
Dubai land department is studying legislation to protect property purchasers
-
Global Village
Revamped layout featuring four cultures to greet visitors this season
-
Cloud computing is here to stay
Managing security effectively is critical when sharing data over the internet
