Tuesday, February 19, 2008

Kerviel's Profits

As I have speculated in past posts, Jérôme Kerviel did in fact earn profits--spectacular profits--for SocGen. And these were realized profits, not paper profits, so they had to have been credited to his trading account at the bank, which means that his superiors had to have known the large volumes of his trades. The one detail about which I was wrong was the timing: he made losses in 2007 and began to turn a profit only in the weeks before he was discovered. So in part this detail, if true, tends to diminish the responsibility of his superiors, since they may not have recognized his profits until rather late in the game, but we still do not know whether any of his losses were real rather than virtual. Real losses would certainly have gotten the attention of his bosses.


Anonymous said...

Unless Kerviel hid the profits, as he says he did, e.g., here. By these reports, he actually had a net profit of 1.4 billion euros by the end of 2007 (a turnaround from huge losses in the summer), but wanted to give the management a less "inquietant" figure while negotiating his bonus, so he cooked up a phony loss to cover it up. (Le Point gives these figures as well, and mentions the "camouflage" with a phony loss, though they give no reason for it.)

The upshot: the bank, unaware of the profits, did not report them as income, and according to the Wall Street Journal, now faces tax penalties...

Unknown said...

Thanks for this lead. I had read about the so-called "matelas" before, but I had assumed he was talking about hiding paper gains. It's not at all clear how one goes about hiding 1.4 billion euros in realized gains, when there is an actual cash flow, as the article in Le Point suggests there was. Surely even a bank as big as SocGen notices when that much cash flows into its coffers.

lisa said...

There's so many reports going around. Apparently Kerviel had made a big profit for SocGen, but his managers weren't willing to consider it part of the annual bonus. (You can read the article here.

I'm a little confused by the whole thing though. Did Kerviel make a 4.9 billion euro loss in 2007 or at the time that his trades were unwound - which was in 2008? If they were in futures trades, had the actual transactions taken place?

And is it a little suspicious that SocGen now say that their subprime losses are 2.6 billion euros rather than 2 billion euros? That's quite a big jump.

Anonymous said...

Lisa: The Le Point article that Arthur linked to in the main post goes through the figures. Kerviel finished 2007 with a net realized gain of 1.4 billion Euros. On to 2008, when his illicit positions were discovered --- and by the time they were all unwound, the loss on his trading activities for January was 6.3 billion Euros. Subtract off the earlier gain, and you get the reported net loss of 4.9 billion for Kerviel's activities taken as a whole.

As to the subprime losses --- lots of banks are announcing that their subprime losses are going up, and many by a lot more than SocGen. The latest is apparently Credit Suisse, which just now announced $1 billion in unexpected losses, much of it likely related to the U.S.-mortgage-backed securities that NYU economist Nouriel Roubini has taken to calling "toxic waste". (The Ph.D. economist who blogs as "Atrios" has an even more pungent name for it, but, like Paul Krugman, I'm not sure it meets every blog's standards of decorum.) And here's a rundown of some of the others, many up into the tens of billions. So, no, that's not a particularly big jump, and lots of banks are announcing bigger ones.

(What really irks me are people who still call it the "subprime" crisis, even though it's increasingly clear that many of the "prime" mortgages didn't really deserve that rating, and default rates there are also going up...)