Sunday, January 27, 2008


Francisco suggests:

I think you should devote some attention to the growth industry in Kervielogy...a fascinating phenomenon that is.

And he gives this link. Indeed, Francisco has an excellent point. The speculation about Jérôme Kerviel, the alleged perpetrator of the Société Générale fraud, is fascinating from many points of view. In the article Francisco cites, the Communist Party is said to have compared Kerviel to Alfred Dreyfus. That certainly races ahead of the evidence, though it does reflect the widespread belief that Kerviel has been made a scapegoat for the crimes or misdemeanors of others.

The aspect of Kervielology that has most interested me has to do with the frequency of comment on his relatively humble status at SG. He may have been making more than 100,000 euros a year, but he was "not a Golden Boy." Why? Because he hadn't attended a Grande École. He was not part of the old boy network of X or Normale Sup' or even HEC, but merely a graduate of a modest program in Financial Engineering in Lyon. How, then, could he have been admitted to the inner sanctum of the bank? The implication is that he wasn't admitted but hacked his way in, owing to his skills as a "computer genius." As is well known, hackers, unlike Golden Boys, can be self-taught. The necessary skills are often linked to a socially awkward personality, and Kerviel has been described variously as "reserved," "isolated," "given to working on his own." Although the bank's safeguards, designed by Golden Boys, should have rendered the treasure safe, there is no telling what a malevolent "genius" can accomplish in secret and by stealth.

Yet there is also a counter-narrative. Kerviel was "bright," some say, but "no genius." If he circumvented the bank's safeguards, it was indeed because of his antisocial nature and humble stature, which forced him to work late at night, when no one was around, and presumably thus to gain access to the secrets that reveal themselves only to surreptitious creatures of the night.

Of course we have no idea yet what actually happened, or what kind of person Kerviel is. There have been indications, however, that the bank's vaunted risk managers never indicated a problem and that the first sign of trouble came from counterparties to some of his option deals, who called for cash to be put up to cover margins when the market began to fall. It has begun to dawn on the financial press just how frightening this scenario is: who knows how many other Kerviels there are on the planet, trading desperately on behalf of their employers in the hope of getting ahead and attracting no attention at all until things go disastrously awry.


Anonymous said...

For what it's worth, Les Echos has the clearest version I've seen yet of the bank's version of the story.

Briefly, Kerviel was supposed to be doing a form of option arbitrage, which amounts, more or less, to taking both sides of a very large bet and pocketing the difference in the odds. (What you gain or lose from the "bets", called "options" in finance, can depend on market conditions after they're made, but that's the essence of it).

However, says the bank, he was actually taking only one side of the bet. To fake out the bank's control systems, he somehow put phony trades on the books which looked like they hedged the bet, except that they had never actually happened; they "corresponded to no economic reality". So, the bank's auditors thought they saw a complicated, but low-risk set of transactions --- but in fact, the bank was exposed to the whole, huge bet. And it lost.

The stunner here is that it was possible for "fictive operations" to get on SocGen's books, even though no trading system had ever actually done the trade. No one outside the bank, obviously, can say how that's possible --- but if anyone would know, it would be someone (like Kerviel) who had earlier worked in the group that does the audits that are supposed to catch this sort of thing.

PeakVT said...

I'm not buying SocGen's story. The guy had $70,000,000,000 worth of positions. That's about twice the bank's market cap as of last week. No way that went unnoticed until the last minute.