Unravelling at Société Générale

DAY by day the French have been watching the unfolding saga at Société Générale with a mix of horror and intrigue. This week has brought several twists to the tale of how a single trader, Jérôme Kerviel, whose desk was only authorised to take positions of up to €125m ($183m), could have lost the bank €4.9 billion. Each leaves managers at the French bank looking even more negligent. Read original article.

On February 4th Christine Lagarde, the French finance minister, published her hastily produced report into the affair. Two elements stand out. First, it says that SocGen managers acted in a “professional manner” when they wound up the bank’s unhedged exposure, which had reached €50 billion, in a tumbling stockmarket between January 21st and 23rd. Their actions, it said, did not push the markets lower: on no day did the volumes the bank offloaded go much above 8% of overall activity. And the managers correctly informed the financial authorities concerned.

When it comes to the bank’s control over its own staff, the report is a lot less forgiving. Daniel Bouton, SocGen’s boss, has argued that Mr Kerviel could easily conceal the vast positions he took because he had previously worked in the back office, so was familiar with the system of controls. Not good enough, says Ms Lagarde: the internal controls at the bank “did not function as they should have and those that did function were not always properly followed up”. The report shows that in November 2007, Eurex, a clearing house, raised questions about the trades. And it confirms that Mr Kerviel had started to make trades without his superiors’ approval back in 2005.

Ms Lagarde’s report identified no fewer than eight ways in which SocGen should have kept a tighter watch, including a more sceptical attitude to “atypical behaviour”, such as not taking any holiday. When asked by the parliamentary finance committee this week how the bank failed to detect this fraud, Christian Noyer, governor of the Bank of France, replied that it was indeed “unbelievable”. The governor went on: “Frankly, I can’t explain it.”

To back up this picture of carelessness, Mr Kerviel himself spoke out for the first time this week. He said that he was operating alone, admitted to having made fictitious entries to cover his tracks, and argued, with sublime understatement, that he “got carried away”. Although he acknowledged his part of the blame, he said that he was being made a “scapegoat” by the bank. Reports in the French press depict a young trader, from a small town in Brittany, keen to prove himself in a trading room dominated by members of France’s educational elite.

According to testimony to the financial police, leaked to Le Monde, Mr Kerviel said that the techniques he used to cover his tracks “are not sophisticated at all”, and that he was convinced his superiors knew what he was up to, as he had received “several questioning emails” in 2007. By the end of that year, Mr Kerviel’s unauthorised positions were €1.4 billion in profit; it was only in 2008 that his trades turned negative. “As long as we earn and it doesn’t show too much,” he said, “nobody says anything.”