SocGen Rock – The BackOffice Dirty Sex
October 13, 2008 – 5:24 pmNothern Rock had its leaked memo pop up on Scribed and now SocGen has their own rogue trader with unauthorized deals leading up to 7.2 Billion in losses.
Granted he is not a computer or trading genius, but the term “hacker” has no reason in this case. He was just an Excel VBA expert. At the very least, a certified MOS, maybe even a good Visual Basic programmer…
The press has reported his experience and friendships in the backoffice gave him an upperhand in this fraud, but we find it unbelievable that he manipulated them or gained access to the database to setup fictitious counterparties to offset his losses. If there was ever any type of internal control structure, he would not have direct access to such a database. The poor guy must have had a copy of “KeyPass” with so many passwords to remember.
From Excel VBA superstar to Backoffice SQL hacking genius…
A quick look at his resume on TheDeal.Com:
KERVIEL Jerome
Jeromekerviel@hotmail.comOBJECTIVE Reach a position as a retail listed derivative products trader, managing a volatility and Delta One book
EDUCATION
MASTERS in Finance (Organisation and Control of financial makets)
University of Lyon, September 2000Bachelor Degree in Finance
University of Nantes, 1996 1999WORK EXPERIENCE
Societe Generale S.A., Paris, France
Trader and Market Maker for Delta One Products
March 2004 – Today
Trading : Market making of Listed Delta One products
Including open end and closed end Turbos (Single Stocks, Index, Forex and Rate Futures), ETFs and secondary market for Certificates
ETFs structuration – Management of the collateral with Lyxor Asset Management
Development of managing tools (Excel VBA macro)
New Underlyings Study to develop the product range
Participation to the specification for the implementation of turbos to the Clickoptions platformSociete Generale S.A., Paris, France
Trader Assistant – Basket Trading and Delta One Products
August 2002 – February 2004
Valuation and Risk Analysis explanation for Basket Trading (Single
Arbitrage book) and Delta One Products
Strategies Backtestings
Short positions hedge
Process automation and managing tools developmentSociete Generale S.A., Paris, France
Middle Office – Referential Team
August 2000 – July 2002
Products modeling
Process automation
Excel macro Development for the exotic Desk
Participation to the single referential projectACTIVITIES
Judo – 8 years practice – Trainer for children
SailingSKILLS
English : working language
Microsoft Office Packge – Visual Basic
Licensed for EUREX, XETRA, EURONEXT
His attorneys state he never profited from his trades and his only intention was to raise his profile. His attorney’s remarks suggest not only were Kerviel’s activities commonplace, but that it was encouraged as means of self promotion within the firm. Jerome Kerviel allegedly named other traders that were trading in the same manner. Does this imply another possible series of bad trades of the same magnitude? Should investors be weary and flee at these initial developments? Given the lessons learned from Northern Rock, are there more skeletons in SocGen’s closets?
Double Down Bets
Could it be possible management at SocGen encouraged traders to take such exaggerated risks in a vain attempt to appear as knowledgeable and as prudent with respect to subprime bets as Goldman Sachs emerged in late 2007?
Behavorial economics demonstrates this behavior exists in gamblers and traders. “Gambler’s Conceit” is the mistaken belief that one will be able to stop a winning action while one continues to win. Jerome Kerviel was so fascinated by his successes he systematically hid his failures in fake counterparty transactions in order to believe his successes were based on his skill at trading, not deception. Had he really known the extent of his losses maybe he would have stopped, but maybe management blessed his behavior while he was in the black in late 2007. Maybe they also succumbed to the same Gambler’s Conceit, believing if and only if Jerome Kerviel was give more time he could win big for them and in effect raise the firm’s profile as well.
It is evident red flags were raised. In November, Eurex attempted to verify the size and nature of trades and Jerome Kerviel produced fake documents to explain away his positions. In fact, every time a question was asked Jerome would produce a fake email or fake document to explain away his actions. This practice is quite disturbing. Where did he learn to produce fake document to explain away his bad debts? Was this common practice at SocGen or is it routine practice everywhere?
The fake documents were not produced to circumvent internal controls; it allowed SocGen to develop a convenient explanation. The perfect excuse of blind ignorance was built upon layers of fake documents to ascertain plausible deniability about Kerviel’s actions when he did fail. Was management at SocGen doubling down every bet with a neat excuse to deny all practical knowledge or encouragement of such trades? Would we have heard of the fraud if Kerviel managed to win 7.2 Billion USD? Would we have heard of Jerome Kerviel even if he was successful?
French Trading Patterns
In order to comprehend French compliance and regulatory matters, an overview of recent French problems sheds light on a disturbing phenomenon. In September 2007, the same allegations about rogue trading were brought up against Richard “Chip” Bierbaum, CFA at Calyon, the investment banking unit of Credit Agricole. His alleged unauthorized trading led to $353 Million in losses.
As reported in Bloomberg:
“The bank maintains that this is an isolated incident and the work of an individual trader who did not respect our risk procedures and who breached our trading limits,” Calyon spokeswoman Anne Robert said in an interview last week in Paris. “The losses were the result of the cost to unwind these unauthorized positions.” (Bloomberg, Calyon Trader Fired for Losses Says He’s No Rogue (Update3), 10/10/2007)
Bierbaum resigned himself to the fact that no one would believe his story. Wall Street gave credence to Calyon’s explanation of events over Bierbaum’s insistence that he reported his trades on a daily basis and complied with all regulatory and internal compliance policies.
Have French Banks willingly doubled down bets in a systematic pattern, without alerting individual traders as to the composite pattern of all aggregate trading patterns the banks had put into place? When the managing directors failed in gaining enough trading profits or assumed losses, did they single out the one trader that would make a great target in the eyes of the media and public?
As the media and investigators begin to flush out the exact truths in the Kerviel incident, I do believe he will not be brought up with any charges. The issues will be settled discreetly and without causing much more embarrassment to SocGen. The truth of the matter is that Kerviel is the fall guy. Bierbaum was the fall guy. Many more fall guys will emerge as the cause of more losses. Many investors suspect foul play on the part of management. Confidence will be eroded until a justifiable explanation of events can indicate there was a greater widespread pattern of unauthorized trading at French banks. Quite simply, it’s the most sensible explanation of losses. The rogue trader theorem is fanciful and makes for a great story, bad the sad truth is these banks have poor risk management in place.
Resignations
The resignations should follow, but while the press may focus on Jerome Kerviel, management should not receive a slap on their wrists. Management allowed such actions and the rule bending atmosphere illustrates this activity was permitted and probably encouraged. Their complicity or lack of vigilance demonstrates a serious failure on their part to promote confidence in these markets.
5 Responses to “SocGen Rock – The BackOffice Dirty Sex”
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Susan Kishner
By Susan Kishner on Feb 3, 2008
The trick to the story is this: Monsieur Kerviel bet against SocGen’s offerings – and was wildly upside by €0.5bln mid 2007 (which is when Bear Stearns strted dumping junk on Wall Street and Lehman dumped junk on US School districts, nationwide). Traders and colleagues, as well as management and rivals, were becoming acutely aware of the illiquid quality on which the global market has now choked. His gains became embarassing, and mounted to €1.4bon…so embarassing that he dare not reveal them to lofty, highly-paid techspeaking SocGen derivatives moguls and began to try and lose all that smart money. If at all possible. He didn’t have to worry: SocGen did it for him, with knobs on, managing to quadruple his losses and almost to crash the market.
That was in fact the game. SocGen, we now recall with dismay, was the only bank in the world to guarantee the Romanov’s ponzi scheme, The Russian Railway Bonds, at the tail end of the 19th Century.
By Dion Per Sona on Feb 7, 2008
It seems impossible to me that the losses of the Rouge Trader weren’t seen by Soc Gen’s management. Soc Gen would have been getting margin calls to cover the losses and positions – that’s actual Euro that would have been lodged with Eurex.
You can lie about your trades but you can’t lie about the cash that’s covering them. This thing about invented counterparties is merde.
By Richard on Feb 16, 2008
I think the implode-o-meter has missed this one on its top-page list of losses:
“In France, Credit Agricole reported a €3.3bn write-down on US subprime debt and losses stemming from bond insurers. Fourth quarter losses reached €857m. Chief executive Clemence Bounaix, said there would be no further losses. “It’s disappointing but the risks and exposures are now known and the market feels it can turn the page,” he said.”
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/05/bcnitaly105.xml
By shtove on Mar 6, 2008